How hard is Level III?

Priya Raman, CFA, is chief investment officer of the Thornbury Hospital Foundation. The foundation's equity allocation is $480 million, held today in a single global index fund. The investment committee has asked Raman to review how the equity allocation is structured, whether it can earn extra income, and how the foundation should act as a shareholder.

Raman first divides the equity allocation into three segments and records what the committee learned from a year of manager due diligence.

Exhibit 1. Equity segments under review

Domestic large-cap: 55% of equities; on average 22 analysts follow each company; the committee found no active manager whose net-of-fee record it trusts

Domestic small-cap: 15% of equities; on average 4 analysts follow each company; the committee found one manager whose process and net-of-fee record it trusts

Emerging markets: 30% of equities; on average 7 analysts follow each company; the committee found two managers whose processes and net-of-fee records it trusts

The committee's policy is to use active management only where it believes prices are less efficient and where it has found a manager it trusts.

Next, Raman plans to move the large-cap holdings into a separately managed index account held in the foundation's own name, so that the foundation keeps the voting rights on its shares. The custodian has offered a securities lending program for this account.

Exhibit 2. Securities lending proposal

Expected average market value of shares on loan: $72 million

Lending fee paid by borrowers: 0.40% a year of the value on loan

Split of lending fees: 75% to the foundation and 25% to the custodian

Collateral: government securities (non-cash), so there is no collateral reinvestment income

To raise more income for grants, Raman also considers writing one-month call options with a strike price 5% above the current price on part of the large-cap holdings, renewing them each month.

Finally, two board members debate shareholder engagement. Board member Linton argues that, because the foundation will index its large-cap holdings, it cannot sell the shares of companies it dislikes, and so engaging with company boards is pointless. Board member Osei notes that the foundation owns a small stake in each company and that any improvement it achieves would also benefit every other shareholder, including those who do nothing.

Priya Raman, CFA, is chief investment officer of the Thornbury Hospital Foundation. The foundation's equity allocation is $480 million, held today in a single global index fund. The investment committee has asked Raman to review how the equity allocation is structured, whether it can earn extra income, and how the foundation should act as a shareholder.

Raman first divides the equity allocation into three segments and records what the committee learned from a year of manager due diligence.

Exhibit 1. Equity segments under review

Domestic large-cap: 55% of equities; on average 22 analysts follow each company; the committee found no active manager whose net-of-fee record it trusts

Domestic small-cap: 15% of equities; on average 4 analysts follow each company; the committee found one manager whose process and net-of-fee record it trusts

Emerging markets: 30% of equities; on average 7 analysts follow each company; the committee found two managers whose processes and net-of-fee records it trusts

The committee's policy is to use active management only where it believes prices are less efficient and where it has found a manager it trusts.

Next, Raman plans to move the large-cap holdings into a separately managed index account held in the foundation's own name, so that the foundation keeps the voting rights on its shares. The custodian has offered a securities lending program for this account.

Exhibit 2. Securities lending proposal

Expected average market value of shares on loan: $72 million

Lending fee paid by borrowers: 0.40% a year of the value on loan

Split of lending fees: 75% to the foundation and 25% to the custodian

Collateral: government securities (non-cash), so there is no collateral reinvestment income

To raise more income for grants, Raman also considers writing one-month call options with a strike price 5% above the current price on part of the large-cap holdings, renewing them each month.

Finally, two board members debate shareholder engagement. Board member Linton argues that, because the foundation will index its large-cap holdings, it cannot sell the shares of companies it dislikes, and so engaging with company boards is pointless. Board member Osei notes that the foundation owns a small stake in each company and that any improvement it achieves would also benefit every other shareholder, including those who do nothing.

Priya Raman, CFA, is chief investment officer of the Thornbury Hospital Foundation. The foundation's equity allocation is $480 million, held today in a single global index fund. The investment committee has asked Raman to review how the equity allocation is structured, whether it can earn extra income, and how the foundation should act as a shareholder.

Raman first divides the equity allocation into three segments and records what the committee learned from a year of manager due diligence.

Exhibit 1. Equity segments under review

Domestic large-cap: 55% of equities; on average 22 analysts follow each company; the committee found no active manager whose net-of-fee record it trusts

Domestic small-cap: 15% of equities; on average 4 analysts follow each company; the committee found one manager whose process and net-of-fee record it trusts

Emerging markets: 30% of equities; on average 7 analysts follow each company; the committee found two managers whose processes and net-of-fee records it trusts

The committee's policy is to use active management only where it believes prices are less efficient and where it has found a manager it trusts.

Next, Raman plans to move the large-cap holdings into a separately managed index account held in the foundation's own name, so that the foundation keeps the voting rights on its shares. The custodian has offered a securities lending program for this account.

Exhibit 2. Securities lending proposal

Expected average market value of shares on loan: $72 million

Lending fee paid by borrowers: 0.40% a year of the value on loan

Split of lending fees: 75% to the foundation and 25% to the custodian

Collateral: government securities (non-cash), so there is no collateral reinvestment income

To raise more income for grants, Raman also considers writing one-month call options with a strike price 5% above the current price on part of the large-cap holdings, renewing them each month.

Finally, two board members debate shareholder engagement. Board member Linton argues that, because the foundation will index its large-cap holdings, it cannot sell the shares of companies it dislikes, and so engaging with company boards is pointless. Board member Osei notes that the foundation owns a small stake in each company and that any improvement it achieves would also benefit every other shareholder, including those who do nothing.

Priya Raman, CFA, is chief investment officer of the Thornbury Hospital Foundation. The foundation's equity allocation is $480 million, held today in a single global index fund. The investment committee has asked Raman to review how the equity allocation is structured, whether it can earn extra income, and how the foundation should act as a shareholder.

Raman first divides the equity allocation into three segments and records what the committee learned from a year of manager due diligence.

Exhibit 1. Equity segments under review

Domestic large-cap: 55% of equities; on average 22 analysts follow each company; the committee found no active manager whose net-of-fee record it trusts

Domestic small-cap: 15% of equities; on average 4 analysts follow each company; the committee found one manager whose process and net-of-fee record it trusts

Emerging markets: 30% of equities; on average 7 analysts follow each company; the committee found two managers whose processes and net-of-fee records it trusts

The committee's policy is to use active management only where it believes prices are less efficient and where it has found a manager it trusts.

Next, Raman plans to move the large-cap holdings into a separately managed index account held in the foundation's own name, so that the foundation keeps the voting rights on its shares. The custodian has offered a securities lending program for this account.

Exhibit 2. Securities lending proposal

Expected average market value of shares on loan: $72 million

Lending fee paid by borrowers: 0.40% a year of the value on loan

Split of lending fees: 75% to the foundation and 25% to the custodian

Collateral: government securities (non-cash), so there is no collateral reinvestment income

To raise more income for grants, Raman also considers writing one-month call options with a strike price 5% above the current price on part of the large-cap holdings, renewing them each month.

Finally, two board members debate shareholder engagement. Board member Linton argues that, because the foundation will index its large-cap holdings, it cannot sell the shares of companies it dislikes, and so engaging with company boards is pointless. Board member Osei notes that the foundation owns a small stake in each company and that any improvement it achieves would also benefit every other shareholder, including those who do nothing.