Southwestern Community College (SCC) is a key player in the post-secondary landscape in Southwestern Canada. Since 2019, SCC has been aggressively competing for student enrolment by offering a comprehensive scholarship and bursary program. Investment and management of the scholarship and bursary endowment fund was outsourced to Jones West & Associates (JWA) from 1983 until 2018. Starting in 2019, SCC’s board of governors decided to manage the funds internally. The board has been reviewing the performance of the endowment fund. The board is concerned about the investment decisions and the performance of the fund, as it only receives sporadic reports.
Management of the endowment fund is the responsibility of the VP of Finance, but he has not been able to devote a significant amount of time to the fund. However, he insists on continuing to make all investment decisions. You, CPA, have just been hired as the manager of scholarship and bursary endowment services for SCC.
It is now late January 2022. The VP of Finance provides you with background information on the endowment fund’s management and historical performance based on the calendar year end in Appendix I. He asks that you prepare a comprehensive report to the board, evaluating the historical performance and risk profile of the endowment fund over the past six years. You will need to provide an analysis of the endowment fund’s performance and/or composition while under JWA management (2016 to 2018) compared to the period under SCC management (2019 to 2021), in each of the following areas:
- The overall net return of the portfolio, with comments on volatility and overall portfolio growth
- The asset mix of the portfolio and each asset class compared with industry benchmarks (Appendix II)
- Compliance with the Investment Policy Statement (IPS) (Appendix III)
He also asks you to forecast the endowment fund balance over the next three years and to look at the policies and procedures with respect to buying and selling investments and the oversight of the endowment fund. He would like you to outline any concerns or recommendations for improvement that you may have in your report.
Your response should be no longer than 3,600 words, excluding any Excel files.
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Appendix I
Background information on the endowment fund
Investment earnings are an important funding source for the college. Considering the growth in the net asset value (NAV) of the endowment fund, the board of governors established its IPS in 1981 and later updated it in November 2002. The IPS plays a pivotal role in determining the extent that the endowment fund will be able to sustain a stable flow of meaningful benefits to beneficiaries.
The NAV, investment return, and distributions over the past six years are as follows (in $’000s):
| ($‘000s, rounded) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| NAV, beginning | 3,200 | 3,223 | 3,287 | 3,297 | 3,354 | 3,143 |
| Gross investment return | 124 | 160 | 106 | 240 | –44 | 259 |
| Management fees / transaction costs | –54 | –48 | –46 | –33 | –7 | –6 |
| Scholarship distributions | –47 | –48 | –50 | –150 | –160 | –165 |
| NAV, ending | 3,223 | 3,287 | 3,297 | 3,354 | 3,143 | 3,231 |
| Investment return % | 3.9% | 5.0% | 3.2% | 7.3% | –1.3% | 8.2% |
| Management fee % | 1.7% | 1.5% | 1.4% | 1.0% | 0.2% | 0.2% |
Unless the board provides new direction, SCC does not plan to change the asset mix or distribution levels. Gross returns are anticipated to be 3.5% on the investments, less a 0.2% management fee over the next three years.
The asset mix of the endowment fund over the past six years is as follows:
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
| Cash and short-term paper | 14% | 13% | 12% | 3% | 2% | 1% |
| Canadian fixed income | 55% | 54% | 56% | 19% | 18% | 15% |
| Canadian large cap equity | 20% | 21% | 19% | 49% | 39% | 36% |
| Canadian small cap equity | 3% | 4% | 2% | 7% | 10% | 11% |
| Real estate | N/A | N/A | N/A | N/A | N/A | 10% |
| Foreign securities | 8% | 8% | 11% | 22% | 31% | 27% |
| 100% | 100% | 100% | 100% | 100% | 100% |
Appendix I (continued)
Background information on the endowment fund
The return on each asset class in the endowment fund over the past six years is as follows:
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
| Cash and short-term paper | 1.0% | 1.0% | 1.1% | 1.1% | 1.2% | 1.0% |
| Canadian fixed income | 4.1% | 3.5% | 4.0% | 3.7% | 4.0% | 4.2% |
| Canadian large cap equity | 6.1% | 10.2% | 1.0% | 9.2% | –2.0% | 9.8% |
| Canadian small cap equity | 6.5% | 10.0% | –1.5% | 12.0% | –3.0% | 6.5% |
| Real estate | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 6.0% |
| Foreign securities | 1.0% | 5.0% | 6.2% | 5.4% | –3.1% | 10.2% |
The following is a summary of the most significant investment activities over the past three years:
- In 2021, an investment was made in Genesis Genomes (GG). GG is a start-up company that was spun off from SCC’s innovation department. The investment cost is included in the small capitalization asset class and represents a third of the asset class’ value.
- The large cap Canadian equity asset class consists of an exchange-traded fund that tracks the top 15 dividend paying stocks in Canada.
- In 2019, SCC sold a significant number of its fixed income investments. The fixed asset class now consists of two investments: an exchange-traded bond fund that tracks high-quality Canadian corporate bonds and a 30-year bond of a large Canadian telecom company. These two investments are approximately equal in value in 2021.
- The foreign securities class consists of an exchange-traded fund that tracks the common stock of the 30 largest companies in the world.
Appendix II Benchmark asset class returns
The following are the historical benchmark returns for each asset class:
| Asset class | Benchmarks | Average historical return 2016-2018 | Average historical return 2019-2021 |
| Cash and short-term paper | Bank of Canada 91-Day Treasury Bills | 0.9% | 1.2% |
| Canadian fixed income | Bank of Canada Long-Term Bonds | 3.8% | 4.3% |
| Canadian large cap equity | S&P/TSX Composite Index | 4.6% | 6.2% |
| Canadian small cap equity | S&P/TSX SmallCap Index | 3.0% | 4.5% |
| Real estate | S&P/TSX Capped Real Estate Index | 5.5% | 6.0% |
| Foreign securities | S&P Global Index | 5.8% | 7.7% |
The risk-free rate for the six-year period is as follows:
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
| Cash and short-term paper | 1.0% | 1.0% | 1.1% | 1.1% | 1.2% | 1.0% |
Appendix III
Extracts from the Investment Policy Statement
1. Canadian fixed income securities
Not more than 5% of a portfolio shall be invested in debt issues of any one issuer.
2. Canadian equities
- An investment must be listed on a recognized Canadian exchange.
- Not more than 8% of a portfolio shall be invested in the equity of any one issuer.
- Not more than 15% of a portfolio shall be invested in “small capitalization” stocks, and not more than 1% of the portfolio shall be invested in a small capitalization issuer (market capitalization of less than $300 million).
3. Real estate
Real estate investments shall not exceed 10% of the value of any portfolio.
4. Foreign investments
Not more than 30% of the value of a portfolio shall be invested in foreign content. Securities must adhere to the same investment guidelines established for Canadian investments (sections 1 and 2).
5. Asset mix and rate of return expectation
- Asset mix
At no time shall the total equity component of the endowment portfolio exceed 80% of the total market value of the portfolio.
- Diversification
The endowment portfolio should always contain at a minimum: 3% Canadian cash equivalents, 15% Canadian fixed income securities, and 10% Canadian equities.
- Rate of return objective
Three-year annualized return in the order of 2.5% to 3.5% net of the investment management fees and transaction fees.
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