Assignment task:
Sparkling Waters Ltd. is a South African based manufacturer. Sparkling Waters Ltd sponsors a defined- benefit pension plan. The plan's assets are invested in a broadly diversified portfolio of government and investment grade corporate bonds. Pension plan participants include both active workers and retirees. Pension benefit payments are not adjusted for inflation. The duration and market value of the pension plan's assets are equal to the duration and market value of the plan's projected benefit obligation (PBO). Sparkling Waters Ltd believes that it has adequate financial strength and profitability to maintain annual pension contributions based on the pension plan's features and Sparkling Waters' workforce characteristics.
Sparkling Waters Ltd recently established the Mago Anoruma Foundation (MAF), a company-sponsored foundation. MAF's mandate from Sparkling Waters Ltd is to promote sustainable living through education and research on renewable resources. MAF employs one person to administer grant applications but does not employ full-time investment professionals. Sparkling Waters Ltd donated R10 million to MAF. Sparkling Waters does not plan to make additional donations to MAF in the foreseeable future, although MAF is permitted to accept donations from others. MAF is not restricted to spending only investment income. MAF's board retains Erika Mashanda, an investment advisor, to make recommendations for its endowment fund. After meeting the board, she summarizes her understanding of MAF's investment objectives and related information as follows:
MAF's board intends to make annual distributions equal to 6.5% of its average asset market value.
The board adopted a goal to increase the value of the endowment by seeking a rate of return exceeding the rate needed to maintain the real purchasing power of the portfolio.
MAF's investment policy limits the amount that can be invested in any single issuer's securities to no more than 4% of the portfolio.
MAF's annual investment management expenses are 0.77% of assets.
The annual rate of inflation is expected to be 6% for MAF's overheads and costs in the fields of education and research that MAF supports.
a) Formulate MAF's return objective for next year. Show your calculations.