Chartered Professional Accountants of Canada, CPA Canada, CPA
are trademarks and/or certification marks of the Chartered Professional Accountants of Canada.
© 2022, Chartered Professional Accountants of Canada. All Rights Reserved.
Les désignations « Comptables professionnels agréés du Canada », « CPA Canada » et « CPA »
sont des marques de commerce ou de certification de Comptables professionnels agréés du Canada.
© 2022 Comptables professionnels agréés du Canada. Tous droits réservés.
XXXXXXXXXX
Finance — Practice Case 2
Case (120 minutes)
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
een 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
eports.
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:
1. The overall net return of the portfolio, with comments on volatility and overall
portfolio growth
2. The asset mix of the portfolio and each asset class compared with industry
enchmarks (Appendix II)
3. 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
ecommendations for improvement that you may have in your report.
Your response should be no longer than 3,600 words, excluding any Excel files.
Finance — Practice Case 2 Case
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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 XXXXXXXXXX XXXXXXXXXX
NAV, beginning 3,200 3,223 3,287 3,297 3,354 3,143
Gross investment return XXXXXXXXXX –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:
XXXXXXXXXX XXXXXXXXXX
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%
Finance — Practice Case 2 Case
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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:
XXXXXXXXXX XXXXXXXXXX
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.
Finance — Practice Case 2 Case
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Appendix II
Benchmark asset class returns
The following are the historical benchmark returns for each asset class:
Asset class Benchmarks
Average
historical
eturn
XXXXXXXXXX
Average
historical
eturn
XXXXXXXXXX
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:
XXXXXXXXXX XXXXXXXXXX
Cash and short-term paper 1.0% 1.0% 1.1% 1.1% 1.2% 1.0%
Finance — Practice Case 2 Case
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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
a) 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.
c) 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
a) 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.
c) 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.
Finance — Practice Case 2
Case (120 minutes)
Chartered Professional Accountants of Canada, CPA Canada, CPA
are trademarks and/or certification marks of the Chartered Professional Accountants of Canada.
© 2022, Chartered Professional Accountants of Canada. All Rights Reserved.
Les désignations « Comptables professionnels agréés du Canada », « CPA Canada » et « CPA »
sont des marques de commerce ou de certification de Comptables professionnels agréés du Canada.
© 2022 Comptables professionnels agréés du Canada. Tous droits réservés.
XXXXXXXXXX
Finance — Practice Case 2
Case (120 minutes)
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
een 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
eports.