Mr. Franklin’s IPS and Asset Allocation
$45.0 million cash (from sale of the private company interest, net of a $45 million gift to the
foundation)
$10.0 million stocks and bonds ($5 million each)
$9.0 million warehouse property (now fully leased)
$1.0 million value of his residence
$65.0 million total available assets
a. Formulate and justify an investment policy statement setting forth the appropriate
guidelines within which future investment actions should take place. Your policy
statement should encompass all relevant objective and constraint considerations.
Investment objectives:
From the given information, Mr. Franklin’s investment objectives will focus on:
1. Preservation of capital - Primary goal is capital preservation with steady growth rather
than aggressive appreciation.
2. Moderate growth – Aim to have a balanced portfolio which generates a return of 5-7%
annually for modest growth and to protect against inflation.
3. Maintaining sufficient liquidity – His returns should be enough to cover his living
expenses as well as his charitable contributions.
4. Minimizing taxes – Mr. Franklin will likely be in the highest tax bracket and as such
should allocate a significant portion of his fixed income to municipal bonds as well as
adding debt to his real estate allocation to take advantage of tax sheltered accounts.
b. Recommend and justify a long-term asset allocation that is consistent with the investment
policy statement you created in part (a). Briefly explain the key assumptions you made in
generating your allocation.
Asset Class
Stocks (Domestic &
International)
Bonds
Real Estate (Warehouse)
Cash
Alternative investments
(Private Equity, Hedge funds)
Total
Allocation
40%
Amount ($M)
26
30%
14%
10%
6%
19.5
9
6.5
4
100%
65
A mix of domestic and global equities will provide moderate growth potential while mitigating
inflation risk.
Bonds will ensure steady, risk averse income generation and portfolio stability, balancing out the
volatility from equities.
The warehouse will provide stable rental income and serves as a hedge against inflation. It can
also be a way to minimize the tax burden Mr. Franklin will be paying.
Cash ensures liquidity for expenses and potential future philanthropy.
Alternative investments diversifies risk and provides opportunities for returns and capital
preservation through private equity or hedge funds.