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*Trone, Donald B., Mark A. Rickloff, J. Richard Lynch, and Andrew T. From-
meyer. Prudent Investment Practices: A Handbook for Investment Fiduciaries.
Center for Fiduciary Studies, 2004.
*Yoder, Jay A. Endowment Management: A Practical Guide. Association of Gov-
erning Boards of Universities and Colleges, 2004.

*Books referenced in the footnotes.


154
Index


12(b)(1) fees, 4, 5 Board Designated endowment,
401(k) plans, xiii, 139 134“136
Bogle, Jack, 42, 104
Adviser, xv, 3 Bonds, see Fixed income
Alpha, 30, 84, 89“90, 106, 114 Book value, 22“23
Alternative asset classes, 68“70, Brokers, 4, 116
81“102 Buy-in funds, 68, 98
Ambachtsheer, Keith, 7, 24 Buyout funds, see LBO (leveraged
Arbitrage programs, 37, 69, 77, 79, buyout) funds
82“89
Armbruster, Mark, 105 Call options, 35
Asset allocation, 53“79, 132 Cash equivalents:
Policy Asset Allocation, 3, 6, 10, asset allocation to, 48, 51, 59, 76
18, 42“43, 72, 75, 103, 118, equitizing with index futures, 59
120, 128, 142, 143 Cash ¬‚ow rates of return, see
Asset classes, 44“45, 48“49, 53“79 Internal rates of return
alternative, 68“70, 81“102 Center for Fiduciary Studies, 2
Asset/liability studies, 75, 141“142 Chase High Yield Developed
Association of Governing Boards of Markets Index, 48
Universities and Colleges, 4, 12 Code of ethics, 18
Auditor, 19, 22 Commingled funds, 91, 114“115
Committee (fund™s decision-making
Banks, 116, 123 body), 1“20, 137
Barclay™s In¬‚ation-Linked Bond criteria for members of, xiv, 128,
Index, 48 143
BARRA RogersCasey, 108 education of, 9, 128, 145
Benchmark(s): Investment Policies of, 39“52
changing, 10 meetings of, 10“14, 18“19,
for illiquid assets, 49, 51 111“112
for investment managers, 9, new members of, 14
23“24, 110, 112, 119 number of members of, 8
risk, 30, 112“114 Operating Policies of, 3, 6, 17“20,
Benchmark Portfolio, 42“48, 145 128, 143
Bernstein, Peter, 113 recommendations to, 11“13
Beta, 30 reports by, 19“20
Biggs, Barton, 12 standards to meet, 1
Board of directors, role of, 1, 3 Commodity funds, 69, 88“89



155
156 INDEX


Commonfund Benchmark Study, 81, Emerging markets debt, 48, 61“62,
90, 96 77“79
Con¬‚icts of interest, 1, 18, 47, Emerging markets stocks, 44, 48,
144 67“68, 73, 76, 79, 115
Consultants, xv, 4“6, 116, 143 Endowment funds, xv
compensation of, 5, 116 owners of, 134“135, 137
Contributions, application of new, ERISA (U.S. Employee Retirement
48, 51“52 Income Security Act), xiii, 1, 17,
Convertible arbitrage, 85 139
Correlations, 29, 31“33 Event arbitrage, see Merger and
of alternative assets, 69 acquisition arbitrage
of arbitrage programs, 87 Expected correlations, 58, 76“77
example of, 54“55, 76“79 as manager selection criteria, 50,
expected, 58 108
of illiquid assets, 70 Expected return, 55“57, 72“74, 79
Currency risk, see Foreign exchange example of, 76“77
Custodian, 19, 123“126 as manager selection criteria, 50,
107
De¬ned bene¬t (DB) pension plans, Expected volatility (risk), 72“74,
139“142 79
De¬ned contribution (DC) pension of an asset class, 57
plans, 139 example of, 76“77
Derivatives, 34“37, 128 as manager selection criteria, 50,
Distressed securities, 69, 77, 79, 108
99“100 Exra, Don, 7, 24
Diversi¬cation, 73“75, 128,
144 Federal Reserve, 87
through alternative assets, 10, Fiduciary, xiii, 1“5, 17
68“70, 81“102 Files, 12, 18, 144“145
as ERISA requirement, 1 Fisher, David, 113
as ERISA standard, 1 Fixed income (bonds):
in illiquid investments, 49, 51, in asset allocation, 60“62, 71
93“94 emerging markets debt, 48, 61“62,
to increase return, 78“79, 144 77, 79
of investment managers, 115“116, interest rate futures, 77“79, 88“89
119 high-yield, 48, 73, 77, 79, 100
to mitigate risk, 38, 78“79 index funds, 106
in policy statement, 48, 51 in¬‚ation-linked, 48, 62
requirement for, 1 investment-grade, 45, 48, 60, 71,
by time, 49, 97 76, 106
Dividends, 22, 132 long-duration, 60, 77“79,
Donor Designated endowment, 141“142
134“136 non-U.S., 61, 76
Dow Jones Industrial Average, 45 Foreign exchange, 61, 66, 68, 88“89,
126
Ef¬cient Frontier, 9, 72“79, 128, Forward contracts, 35“36
141 Foundations, xv
Ellis, Charley, 104 Funds of funds, 91, 97
157
Index


Futures: Investment policy, 127, 143
index futures, 35“36, 59 committee and, 3, 39
interest rate, 71 sample statement of, 47“50
social, 15“17
GNMAs, 86 Investment return, 21“27
Growth stocks, 63“64, 83, 112, expected, 55“57
115 IRA (individual retirement account),
viii, 17
Hedge funds, 69, 90“91
J. P. Morgan Emerging Markets
Ibbotson Associates, 56 Bond Index Plus, 48
Illiquid investments (private Junk bonds, see Fixed income
investments): (bonds), high yield
as alternative investments, 69,
91“102, 111 LBO (leveraged buyout) funds, 68,
in Investment Policy statement, 98“100
47“49, 51 Legal concerns, 24, 50
Illiquidity, risk of, 30, 87“88 Lehman Aggregate Bond Index, 45,
Imputed Income approach, 131“134, 60, 68, 114
136“138 Lehman Government/Corporate
Indexes, 21, 44“45 Long-Term Bond Index,
Index funds, 50, 82, 104“106, 128, 48
144 Lending, see Securities lending
Index futures, 35“36, 59, 89“90 Leverage, 33
In-house investment management, in arbitrage strategies, 85“87
20, 49, 52, 96, 106“107 in LBOs, 98
Interest rate arbitrage, 86“87 Liabilities of a pension fund,
Internal rates of return: 140“142
calculation of, 25“27 LIBOR, 90
in measuring performance, 49, 51, Limited partnerships, 91
92“93, 95, 97“98 Liquidity, in Investment Policy
Investment managers: statement, 47, 50“51
commingled funds of, 114“115 Long/short programs, 82“84
committee consideration of, 3, Long-Term Capital Management,
12“14, 53 87“88
as committee members, xiii
evaluation of, 11, 23“24, 145 Managed futures, see Commodity
fees of, 18 funds
internal, 20, 49, 52, 96, Market neutral programs, 48, 73,
106“107 81“89, 91
measuring performance of, Market timing, 43, 52, 68
23“24 Merger and acquisition (M&A)
number of, 115“117, 122 arbitrage, 84“85
performance of, 106 Micro-cap stocks, 45, 63“64
quantitative, 108, 110 Mid-cap stocks, 65
selecting, 18, 49“50, 107“122 Miller, Merton, 35
terminating, 6, 10, 24, 118“120, MLM index of commodity futures,
126, 145 88“89
158 INDEX


Money market fund, see Cash Rates of return:
equivalents dollar-weighted (internal rates of
Monte Carlo methods, 9, 75, 141 return), 25“27, 49, 51, 92“93,
Morningstar, 104, 117 95, 97“98
Mortgage-backed securities, 86 time-weighted, 25“27
MSCI All-Country Index, ex U.S., Real estate, 48, 77, 93“96
44 Rebalancing, 48, 51“52, 78,
MSCI EAFE Index, 44, 66 120“122, 128
MSCI EAFE Small-Cap Index, 48, Records, see Files
67 REITs (real estate investment trusts),
MSCI Emerging Markets Free Index, 48, 65, 73, 94“96
44, 48 Reversion to the mean, 105
MSCI World Index, 68 Risk, 27“32, 130
MSCI World Index, ex U.S., 44, benchmark, 28, 112“114
48 diversi¬able, 30, 95
Mutual funds, xvi, 4, 5, 23“24, in Investment Policy statement,
116“117 40“42
kinds of, 28“30
NAREIT real estate index, 48 in objectives, 21, 127
NCREIF real estate index, 94“95 systematic, 30, 95
No-load mutual funds, 5 Risk-adjusted returns, 32“34
Nortel, 113 Russell 1000 Index, 44, 45, 48,
63
Objectives of investment fund, 6, 21, Russell 2000 Index:
39, 46, 52, 103, 127“128, de¬nition of, 45, 63
132 historical returns of, 63“64
Oil and gas properties, 49, 69, 79, index fund, 105“106
101“102 use as benchmark, 44, 48
Owners of an endowment fund, Russell 3000 Index, 44, 49
134“135, 137
Securities lending, 126
Peers, 46, 78“79 SEC (U.S. Securities and Exchange
Pension Bene¬t Guaranty Commission), 6, 86
Corporation (PBGC), 140 Sensitivity tests, 74, 128
Pension funds, xv, 46, 61, 71, Sharpe, Dr. William F., 32“33,
139“142 82
Portable alpha, 84, 89“90 Sharpe ratio, 32
Predictive value of historical Short sales, 82“91
performance, 7, 24, 56, Small stocks:
108“110 non-U.S., 48, 67
Proxies, 14, 16“17 U.S., 48, 63“64
Prudence, 1“3, 145 Social investing, 15“17
Prudent expert rule, 2 Staff, plan™s investment, xv
Put options, 35 advantage of, 4
chief investment of¬cer of, 8, 12,
Quantitative investment managers, 18“20
108, 110 Standard deviation, 27, 29, 78
159
Index


S&P 500 (Standard & Poor™s 500 UBIT (unrelated business income
Index): tax), 34, 85, 87, 101
as benchmark, 44 Uniform Management of
futures, 35 Institutional Funds Act, 2
historical returns of, 41, 56“57, Uniform Prudent Investors Act,
63“66, 94, 114 4
index funds, 68, 89“90, 104“105 Use-restricted endowment,
S&P index futures, equitizing cash 135“136
with, 59
Stocks: Valuations of illiquid assets, 69
emerging markets, 44, 48, 67“68, Value stocks, 63“64, 83, 112,
73, 76, 79, 106, 115 115
long/short, 82“84 Venture capital, 49, 68, 96“98
non-U.S., 44, 48, 65“67, 73, 76, Volatility:
79, 106, 115 in asset allocation, 55, 57
U.S., 44, 48, 62“65, 76, 79, of emerging markets stocks,
104“105, 108, 115 67
Structured notes, 35 expected, 50
Style of investment management, in illiquid investments, 69“70
63“64, 83, 112, 115, 119 in Investment Policy statement,
Swaps, 35 41“42
Swensen, David, 46, 66, 92, 109, measures of, 27“28
120, 131, 134 portfolio™s aggregate, 37, 54,
Systematic risk, 29, 95 78
in real estate, 95
Tactical asset allocation, 66, 89 in selecting managers, 32“34,
Tax returns, 125 50
Timberland, 49, 69, 77, 79, 100“101 of stocks, 31
Time horizon, 39“40
Time-weighted rates of return, 25“27 Warrants, 98
TIPS (Treasury In¬‚ation-Protected Wilshire 5000 Index, 104“105
Securities), 62 Withdrawal of assets, 48, 51“52,
Total return, 21“22 59, 131“134, 136“138
Total Return approach, see Imputed
Income approach Yale University, 46
Transaction costs (trading costs), 22, Yoder, Jay, 4, 12
35, 121“122
Treasury bills, 32, 35, 54, 82“85, 89, Zero-coupon bonds, 25-year,
141 77“79
About the Author


usty Olson, a consultant on institutional investing, retired in 2000 as
R Director of Pension Investments, Worldwide, for Eastman Kodak Com-
pany. Olson had overseen Kodak™s pension funds since 1972. Over the
1980s and 1990s (and through 2003), Kodak™s pension fund was one of the
best performing pension funds in the United States. Kodak made contribu-
tions to its pension fund in only two of the 22 years, 1983“2004, and as of
year-end 2003 Kodak™s was one of few corporate pension funds that was
essentially fully funded. Olson was named one of America™s nine best pen-
sion of¬cers by Institutional Investor magazine in 1987 and was Invest-
ment Management Institute™s ¬rst “Plan Sponsor of the Year” in 1993.
Olson began serving on an endowment investment committee in 1972
and remains a member of half a dozen endowment investment committees
with whom he has served for 15 to 20 years.
He holds a B.A. degree in journalism from Rutgers University and an
M.B.A. from the Harvard Business School.
Olson is the author of:

The School of Hard Knocks: The Evolution of Kodak™s Pension Invest-
I

ment Management (Rochester Institute of Technology™s Cary Graphic
Arts Press, 2005)
Investing in Pension Funds and Endowments: Tools and Guidelines for
I

the New Independent Fiduciary (McGraw-Hill, 2003)
The Independent Fiduciary: Investing for Pension Funds and Endow-
I

ment Funds (John Wiley & Sons, 1999)

The web site for his books is: www.theindependent¬duciary.com.




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