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Empowering our Clients through Analytics A comprehensive volatility and liquidity assessment to understand the implications of asset allocation shifts in a university's portfolio

The Challenge

A university that was considering increasing their exposure to private equity—which was lower versus their peer group—approached our Endowments and Foundations group.
  • The client needed to demonstrate the liquidity impact in their portfolio to their Board of Directors.
  • The client was concerned about how their portfolio would be affected by a shift in the economic landscape, such as a repeat of 2008-like conditions.
  • We recommended a comprehensive analysis and scenario-planning to understand the risk of liquidity stresses.
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Jean Walshe
Jean Walshe

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Our Approach

We worked closely with our Institutional Solutions & Advisory group, an internal team focused on providing objective analysis and solutions for institutions.

The team worked with the client to understand their portfolio, including:

  • Intended Payout rate
  • Asset allocation strategy
  • "Uncalled" private market capital commitments
  • Potential re-balancing constraints and issues

We examined trade-offs between private equity returns and the respective costs of reduced liquidity in the client’s portfolio. Furthermore, we modeled the volatility implications of different asset allocation scenarios to help the client understand the potential impact to their balance sheet in the event of crisis-like macroeconomic conditions.

The Solution

The resulting analysis enabled the client to understand the liquidity and risk implications of including private equity in their portfolio.

We performed the following analyses:

  • 20 year asset value projection
  • Probability analysis (solvency crisis and liquidity stress)
  • Portfolio optimization (return, volatility and liquidity)
  • Back testing possible liquidity issues in a range of portfolios

We demonstrated trade-offs to help the client understand the interaction between target liquidity, volatility and return:

  • We helped the university’s investment staff to understand how an increased allocation to alternatives could maintain liquidity risk within pre-specified limits while offering expected returns above traditional asset classes.
  • In addition, we created a payout rate analysis that demonstrated the university’s ability to meet its return objectives given the desired asset allocation.
  • Ultimately, the client was able to present the case for private equity to their Board of Directors and therefore make an informed investment decision to benefit the long-term success of their institution.

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J.P. Morgan