Rivermore College

Roberta Tyler consultants to several university investment offices around the country. She specializes in asset allocation studies. She has accumulated performance figures from a number of different university endowments, as well as information about the typical stocks/bonds/cash mixtures common in the endowment universe. She practices a broad policy approach which means that she makes recommendations about allocations across asset classes, rather than about which managers to chose, or which stocks to pick.

Rivermore College is a small mid-western school with a $130 million endowment as of Dec. 31, 1994. It has long had a fixed investment policy of 50% stocks, 20% Corporate Bonds 20% Government Bonds and 10% cash which has yielded a solid record of performance over the years 1970 through 1994. These are Reported in the table at the end of the document. Rivermore rebalances each year in order to maintain the fixed proportions. This requires, for instance, selling equities when they go up, and buying bonds after a down year. Their equity manager is a successful alumnus of the school who appears frequently on Wall Street Week, and is renowned as a cautious but consistent large-cap stock picker. The bond portfolio is managed by Stanley Morgan Capital, in New York. Most of Rivermore's assets are liquid. Occasionally, real estate donations have been made to the university, particularly in the form of bequests by wealthy alumni. These were generally liquidated in timely fashion, unless the property itself was useful to the college. The university itself is located in a prosperous residential section of town. Most of its buildings are neo-colonial, institutional structures, unsuited for conversion to homes. The university is in an unusual position of having a college art gallery with an extraordinary collection of Abstract Expressionist paintings. A 1988 valuation of the collection for insurance purposes estimated its worth at $200 million.

Enrollment at Rivermore has decreased steadily since its peak of 1550 students in 1983 to a low of 900 in 1994. Thus far, shortfalls in revenues caused by declining tuition have been offset by increased spending from endowment. Since 1970, the annual average spending from endowment has been 4% annually. In 1992 and 1993, the university had to spend 6% and 7%, respectively, and anticipate an additional $10 million for 1994. Contributions to the endowment have continued steadily at 2% per year. Since the role of the endowment has increased dramatically in the past few years, the university has decided to review its past performance and future contributions to the institution.

Howard Weaver is the chairman of the endowment committee for the board of trustees of Rivermore. He found out about Roberta Tyler from a friend of his who serves on the board of Nostradamus University. Nostradamus employed Tyler in 1992 to review the investment policy and to recommend an optimal portfolio mix. Tyler presented an asset mix for the Nostradamus endowment that changed their position in stocks from 50% to 60%, reducing their bond position to 40%. Should Rivermore consider a change in its long-standing investment policy? For that matter, how has the endowment, and its money managers performed over the period since 1970? Weaver decided to have Roberta Tyler and her company look into these issues.

Weaver was also concerned with how risks should be defined in the context of Rivermore's investments. He anticipated the need to continue the spending policy of 7% per year. He felt strongly that 7% represented a "floor" below which the portfolio return should not drop. He wanted Tyler to suggest a policy that minimized the probability of hitting this floor. Last, but not least, Weaver wanted to know whether the board should concern themselves with fundamental questions such as whether the endowment is adequate for the school's future needs. Can they continue their current policy? What if enrollment continues to decline?

In addition to these allocation decisions, Weaver wished to know whether the money managers closely followed the fixed stated objectives of the endowment. He asked Tyler whether there was a way to address this issue.

In preparation for his initial meeting with Tyler, Weaver prepared a list of basic issues he wished her to explore.

1) How well did the Rivermore portfolio perform over the 1970-1994 period? How should performance be measured? Are their managers performing well?

2) What benchmark return should they expect from their portfolio, given their current mix of assets? What benchmark return might they expect for their current level of risk? What is the lowest level of risk they should expect for their current level of historical return?

3) Should they consider changing their policy mix? What time period of estimation should they use as inputs to the optimization process?

4) What would be the long-term expected return of her recommended portfolio? How does this compare to the long term expected return of the current portfolio mix?

5) Use regression analysis to determine whether the historical weights on the asset classes match the policy weights.

When Roberta Tyler and Howard Weaver met, they discussed these basic issues in broad terms. She agreed to present the board with a preliminary report regarding past performance and future policy recommendations.


Prepare Tyler's preliminary report evaluating the policy mix of Rivermore, and succinctly address each of Weaver's questions. Include a preliminary asset mix in your report.

This will require calculating summary statistics and correlations for each series, as well as the use of a mean-variance optimizer. Use safety-first methods to recommend a portfolio that will meet the floor requirement.

Present a forceful argument for using your services, or for focusing on asset policy issues, rather than upon manager choices. Make a few succinct points that might help sway a board member skeptical of asset allocation methods.

Historical Data

S&P LTCBonds LTGBonds Tbills 50,20,20,10 Rivermore
Dec 1970 4.01 18.37 12.11 6.52 8.75 8.25
Dec 1971 14.31 11.01 13.23 4.39 12.44 11.61
Dec 1972 18.98 7.26 5.69 3.84 12.46 10.34
Dec 1973 -14.66 1.14 -1.11 6.93 -6.63 -7.33
Dec 1974 -26.47 -3.06 4.35 8.00 -12.18 -13.67
Dec 1975 37.20 14.64 9.20 5.80 23.95 21.96
Dec 1976 23.84 18.65 16.75 5.08 19.51 18.29
Dec 1977 -7.18 1.71 -0.69 5.12 -2.88 -3.51
Dec 1978 6.56 -0.07 -1.18 7.18 3.75 3.00
Dec 1979 18.44 -4.18 -1.23 10.38 9.17 7.18
Dec 1980 32.42 -2.76 -3.95 11.24 15.99 13.40
Dec 1981 -4.91 -1.24 1.86 14.71 -0.86 -0.91
Dec 1982 21.41 42.56 40.36 10.54 28.34 26.63
Dec 1983 22.51 6.26 0.65 8.80 13.52 11.88
Dec 1984 6.27 16.86 15.48 9.85 10.59 9.38
Dec 1985 32.16 30.09 30.97 7.72 29.06 27.30
Dec 1986 18.47 19.85 24.53 6.16 18.73 17.89
Dec 1987 5.23 -0.27 -2.71 5.47 2.57 3.11
Dec 1988 16.81 10.70 9.67 6.35 13.11 11.33
Dec 1989 31.49 16.23 18.11 8.37 23.45 21.29
Dec 1990 -3.17 6.78 6.18 7.81 1.79 0.75
Dec 1991 30.55 19.89 19.30 5.60 23.67 21.73
Dec 1992 7.67 9.39 8.05 3.51 7.68 6.34
Dec 1993 9.99 13.19 18.24 2.90 11.57 10.80
Dec 1994 1.31 -5.76 -7.77 3.90 -1.66 -2.36