Identifying and Mitigating Unrecognized Risk

Background

While risk is a constant, mitigating an institution’s exposure to potential pitfalls is critical to the success of any investment strategy. Identifying and diminishing this exposure is not possible without an in-depth evaluation of current strategies, especially when it comes to institutions with multiple investment portfolios. An educational institution unknowingly facing this type of challenge hired LAMCO to oversee their overall investment portfolio, which was comprised of a long-term endowed portfolio and a short-term portfolio.

Solution

Following a thorough evaluation of their current strategies, which, at face, appeared to be conservative, LAMCO noted that the institution was actually underwriting a substantial risk. LAMCO advised that the unspent funds needed to be available on demand and at their full value (Book Value). Because those funds were invested, the market value could be lower than the Book Value at any time, and if this were the case when the funds were demanded, the foundation would have to make up that deficit. Because the foundation had not maintained any reserves for this purpose, nor were they intending on building any reserves, they were taking a substantial and unrecognized risk.

LAMCO worked with the foundation staff to help build various cash flow models. Using these models, we divided the short-term portfolio into two and a liquidity portfolio was established to fund cash flows expected to be required in the next 24 months. The risk level of this portfolio was reduced substantially from the then current short-term pool. The short-term pool maintained the same strategy, which was deemed to be appropriate for cash requirements that would be needed in 24 to 60 months.

Results

Heeding our advice, about 60 percent of the assets remained in the short-term pool while 40 percent transferred to the liquidity pool. The amount of money that was transferred to the liquidity pool underscores the magnitude of the unrecognized risk that was being assumed, helping create a more stable investment strategy for our institutional client.

Working Together to Build a Successful Strategy

Background

Facing unique challenges and working towards specific goals, building a successful institutional investment strategy requires a thorough understanding of what success looks like for these organizations. Our client had a clear vision of where they wanted to be financially, and the resources to make that vision a reality, however, they lacked a sound strategy.

Solution

LAMCO became actively involved in our client’s strategic planning process, which included understanding their organization at a granular level. We became familiar with the opportunities that existed, the challenges they faced, and the risks, both near-term and long-term, that could derail their plan.

LAMCO participated as an advisor to their strategic planning committee and worked with their other strategic advisors to develop a customized investment strategy that addressed short-term risks and focused on long-term opportunities.

We developed a bucketed approach, with each bucket targeting a unique investment objective and possessing different risk, return and liquidity parameters. The allocation amongst the buckets was determined not by investment metrics but by business success metrics unique to their institution, allowing the strategy to be adjusted as their needs and/or business risks change.

Results

The investment structure LAMCO helped develop was presented to their strategic planning committee, investment committee and board, and received unanimous approval. By seeking the professional advising of our experienced team, our client took the first step in making their desired future success a reachable reality.