Asset allocation in investment

6.2 Alpha case study

The case study below explores an actual investment management agreement and what constraints were imposed in terms of asset classes on the investment manager.

Activity 11 Investment management case study

Allow around 45 minutes for this activity.

This is an extract from the investment management agreement (IMA) for a British charitable foundation (endowment fund), code name Alpha, made in 2008.

The table below gives the benchmark portfolio and the risk constraints on the portfolio, imposed through maximum and minimum percentage values for the asset classes and also for the types of assets to be included in the portfolio. The stated investment objective was to outperform the benchmark portfolio over rolling three year periods.

Table 4: Benchmark asset allocation, benchmark indices and constraints for Alpha portfolio

Asset class Allocation (%) Ranges (%) Benchmark index
UK Equities 50.0   FTSE All Share
Global Equities 25.0    
  (33.4)   FTSE AW North America
  (33.3)   FTSE AW Developed Europe (ex UK)
  (33.3)   FTSE AW Developed Asia Pacific (inc. Japan)
Equities 75.0 60.0-85.0  
UK Bonds 25.0 15.0-40.0 FTSE A All Stocks
       
Total 100.0    
       
Overseas Assets   15.0-35.0  
Non-benchmark   0.0-20.0  
Higher Risk Non-benchmark 0.0-7.0  

Additional constraints

Bond investments are to be in investment grade A or higher. Higher risk non-benchmark assets (e.g. emerging market equity or debt, or securities investing in illiquid assets) should be limited to 0.0-7.0% of the portfolio, forming part of the 0.0-20.0% of the non-benchmark assets. Non-benchmark assets are assets which do not form part of the designated benchmark indices. Direct investment in illiquid assets is not allowed, e.g. hedge funds, real estate, private equity but is allowed if investment is made via a fund which provides liquidity.

What are the three main investment characteristics of this investment mandate?

Select the correct answers from the options below.