Assignment -
Family Supermarket Chain: A Case Study on Family Foundation Asset Allocation
Family Supermarket Chain (FSC) is a multi-billion dollar family owned supermarket chain headquartered in New England with 100 large supermarket stores located along the mid-Atlantic and New England states. The founder of the firm passed away in early 2007 leaving the management of the multi-billion-dollar family business to his very capable and dedicated son and grandchildren.
As the family business grow, ownership was passed from the founder and his wife to the next generations and to a select group of senior non-family employees.
While he was alive, the founder made several generous donations through the family foundation to local charities and private schools. When the founder died, he donated almost $100 million to the family foundation. He left no instructions as to how the money should be invested or how it should be spent. It was also not clear if the other younger family members would contribute to the family foundation or make contributions in their own name. The foundation is formally managed by the founder's son, the founder's 85-year-old wife, and the corporate lawyer. The son is very well known and is very active in the community. The founder's wife held a very modest role in the business or foundation, and the attorney, a close family friend for many years, was asked to manage the fund.
The attorney was not only a close family friend, he had risen to a very senior position in the corporate structure. He was very concerned about his new role on the foundation. He asked the company's Chief Financial Officer and the company's Vice President of Finance to join in the management of the foundation and he hired the investment consultant that the company used to help manage the company's 401(k) plan investments.
Issues for Consideration:
The attorney knew that the spending would be decided by the family, but the investing would be his responsibility. However, while he was not concerned with who would receive the funds, he was worried about how the money would be spent. Would the family decide to distribute a steady amount annually and keep the family foundation running for many years? Or, would the son decide to make a few large donations and liquidate the fund quickly with little advanced notice? No one including the family had an answer for this. The contribution to the foundation was not publicly known.
The attorney also did not want to lose any of the assets contributed to the fund. "My father donated $100 million, what do you mean I can't give $100 million to the local hospital? How much did you lose in the stock market?" He also knew he needed liquidity, as the son could easily ask for a large check to be delivered with just a few days' notice. As a result, he did not want to invest in any limited partnerships with multi-year commitments or lock-ups (no private equity, no hedge funds, not private real estate).
The Market Outlook
The donation was made in the summer of 2007. At that point, there was no hint of a world financial crisis. Markets had been strong and stable. Over the prior 5-years, the international equity indices outperformed the U.S. based indices. It is important to note much of that added performance came from a weak dollar. The MSCI EAFE Local Currency Index returning 4.29% less than the MSCI EAFE index.
|
Index
|
2003
|
2004
|
2005
|
2006
|
2007
|
5-years 12/31/17
|
|
S&P 500
|
12.86
|
10.88
|
4.91
|
15.79
|
5.49
|
9.91
|
|
MSCI EAFE
|
24.19
|
20.25
|
13.54
|
26.34
|
11.17
|
18.95
|
|
MSCI Emerging
|
28.47
|
25.55
|
34.00
|
32.18
|
39.38
|
31.83
|
|
Aggregate Index
|
4.44
|
4.34
|
2.43
|
4.34
|
6.97
|
4.49
|
|
90 Till Bills
|
1.02
|
1.14
|
2.88
|
4.76
|
4.91
|
2.93
|
The global markets were generally strong through 2007. While the Federal Reserve had been hawkish with 17 consecutive rate increases in since 2004, in 2007 the Federal Reserve began lowering rates. In July, S&P and Moody's begin downgrading securities backed by sub-prime mortgages. By the end of 2007, some banks and financial institutions began to show large losses as a result of their sub-prime portfolios.
As of December 31, 2007, foundation and endowment plans had the following asset allocation: (attached)
Although the attorney does not wish to "lose" money, he understands that the assets cannot all be invested in a money market or even a short duration bond fund.
Part I - Develop asset class assumptions for each of the asset classes above. Risk, return and correlation. Support your methodology. (See long term monthly asset class performance in excel). Your inputs are to be forward looking in nature. If you wish to use historical data to calculate input data, comment on any adjustments you have made for your analysis.
Calculate an efficient frontier with the above asset classes. Ranging from the least risky portfolio to the riskiest portfolio. Calculate expected rate of return and standard deviation for various portfolios along the efficient frontier.
Part II - Submit three portfolios to the attorney based on his concerns for liquidity and risk as he defined it. In your analysis, in addition to calculating the asset class allocations, the portfolio's expected return, expected risk, please calculate the probability of losing money, calculate the probability of losing more than 5%, and calculate the probability of not making more than 5% over a one-year time period for each suggested portfolio. Also, comment on how that allocation might change over time and market conditions.
Part III - Assuming the portfolio was conservatively constructed as of December 31, 2007, how would your recommendation change as of December 31, 2008 given the market declines and assuming industry asset allocation averages allocations remained the same. If you are recommending a change, comment how you would implement that change - immediately or over time?
|
Index
|
2008
|
|
S&P 500
|
(37.00)
|
|
MSCI EAFE
|
(43.38)
|
|
MSCI Emerging
|
(53.33)
|
|
Aggregate Index
|
5.24
|
|
90 Till Bills
|
2.10
|
Note - Further guidelines on the construction and analysis of the portfolios will be provided. All data should be maintained on Excel spreadsheets.
Attachment:- Assignment Files.rar