The search for Property- Institutional Investment in Real Estate Harvard Case Solution & Analysis

The search for Property- Institutional Investment in Real Estate Case Study Solution


This pension fund company is falling under the umbrella of institutional investors who invest the pool of funds in other securities so that the money of employees can be maximized and they get enough return to pay back the money to the pension holders. For this, company needs to diversify their portfolio by investing in those securities which provide optimum return. And, as we already know that higher return is only possible if an investor is willing to take high risk,it will give him/her a title of risk taker.But some investors are not willing to take high risk and they tend to be happy by taking less and safe returns.

As an institution which is investing the money of pension needs to generate money and return for future.So it needs capital gain more than the annual payments but it also needs to keep a certain reserved amount so that it can make payments on demand. For this purpose, it needs to forecast and evaluate the average age of the pension holders and time duration of their investments.

In this case, the company is only investing their money into riskier and volatile assets which are stocks and bonds and which provide uncertain returns. In stocks, return is given in two forms, first is the annual payment in the form of dividends and the other is capital gain which arises by the increase in share price. Individual investors normally get attracted by the dividends but for an institutional investor, he will be more willing to invest in those stocks which have high capital gains or high growth prospects so that he can make payments quickly on demand.

Moreover, in case of bonds, return is given at a fixed rate and the money is invested for a fixed period of time which is known as maturity date. Return for a bond is known as coupon payments which can be given daily, weekly, monthly, quarterly, semi-annually and annually as well. So, company needs to evaluate whether they need to invest their funds in short term bonds, medium term bonds or long term bonds as per their requirements.

Furthermore, if a company is choosing to invest in short-term bonds, they will have to face reinvestment risk because after the expiry of short term maturity, they will have to invest in other bonds and at that time, the rate may be lower than before. However, in case of long-term bonds, company may face interest rate risk because they will be bound to get same rate of return for a long period of time and in market, the rate may be higher than what the company is getting at the moment so the company also needs to evaluate this risk while deciding to invest in bonds. The third category of asset is the real estate, while taking the decision to invest in the real estate company needs to evaluate whether to invest in commercial, private or public real estate.(Macy, 2014)

The search for Property- Institutional Investment in Real Estate Harvard Case Solution & Analysis



Analysis by Desoto:

For the maximization of returns, Desoto has tried to diversify the portfolio of the company Overton Pension Fund (OPF). As it is already discussed in the case that company is investing the whole amount in either stocks or bonds and is of the opinion to invest the money in real estate so that the portfolio risk is minimized and the company get optimum portfolio returns to meet their obligations.

At this moment, company is having more portfolio liabilities than their assets which makes the portfolio underfunded by the ratio of 7% which is an alarming sign for the company and to eliminate this, company has hired Desoto as managing director of their funds. Before hiring Desoto, company’s investment was around 34% in domestic equities which were giving 8% return and around 66% investment in domestic fixed income securities which tend to be very high and risky for the company to manage their portfolio......................

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