WaterEquity: Alternative Investment

In September 2018, WaterEquity, a US-based investment vehicle for both financial and social returns, had to raise US$50 million in total funding capital. The sales team had to propose sales pitches for alternative investments for three types of investors. From a financial perspective, the investment was essentially a risk-free asset with an annual return of 3.5 per cent. However, this investment could also positively affect four developing countries—India, the Philippines, Indonesia, and Cambodia—by providing clean water solutions for billions of people. Through the lending facilities of the local microfinance institutions of these four countries, WaterEquity could offer support to the poor and empower more women, generating both financial and social returns. Different groups of investors might be attracted by different levels of these social returns as well as the financial returns. The sales team planned to use a simple extension of the standard Markowitz portfolio theory framework to incorporate social returns and account for two distinct types of returns, customizing the sales pitches for each of three groups of investors.

This strategic asset allocation case can be used in undergraduate- and graduate-level courses on investment management or portfolio management. After working through the case and assignment questions, students will be able to<ul><li>apply the Markowitz efficient frontier analysis and optimal portfolio allocation models to real-time market data;</li><li>describe the effect of diversification on portfolio risk and return;</li><li>delineate the differences between financial and social returns; and</li><li>rationalize an investment strategy recommendation when standard utility functions are modified.</li></ul>

• social return
• portfolio theory
• asset allocation
• utility function