1) The Role and Structure of Endowment: As of June 2000, the endowment managed by HMC totaled approximately $18.2 billion. The annual spending from the endowment represented approximately 27% of the total budget of the university. In fiscal year 2000, total endowment spending by the schools was $556 million (or 4% of the value of the fund at the end of previous fiscal year). Each year the University's operational governing body considers the overall financial situation of the University and decides the dividend amount to schools.
The Average Spending Ratio from the Endowment is 4.6% (low 3.3% and high 5.6%)
Desired Real Return for the Endowment is 6-6.5%.
Annual Gifts to endowment is 1.5 % of the fund.
Asset Allocation Policy: Policy Portfolio is constructed by the management and then approved by the Board. Policy Portfolio is constructed according to long-term return and risk assumptions. However, portfolio managers have got flexibility in the short term to decide the asset allocation. Risk Control: Risk Control was being made by stress testing method. The Optimal Portfolio Allocation: HMC uses optimal portfolio allocation while constructing their portfolios. They are trying to find the best combination of risky assets to be mixed with safe assets to form the complete portfolio. The advantages of this approach for HMC are:
It is based on the real return (relative to CPI), risk (standard deviations), and correlations of twelve assets.
It uses an optimization algorithm which specifies the "efficient frontier" of possible asset combinations according to set of portfolios that would provide the maximum expected return for a given level of risk.
It includes some untraditional asset classes which could give better return than the traditional ones. Besides the advantages of this approach there are also some disadvantages which are:
It is very tied to the current portfolio, allowing only plus or minus 10% deviation.
HMC made assumptions on 12...
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