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transcript
Five Years After the Financial Crisis: Did the Endowment Model Fail Us or Did We Fail the
Endowment Model?
NACUBO Endowment and Debt Management ForumFebruary 5, 2014
S T R A T E G I C A D V I C E & P L A N N I N G | I N V E S T M E N T M A N A G E M E N T | M E R C H A N T B A N K I N G
Casey Whalen Sellers, Chief Investment Officer
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I n t r o d u c t i o n
Casey D. Whalen Sellers, CFA – Chief Investment Officer
• Former CIO, The New York Public Library, responsible for building the investment office
• Former Director of Public Investments (hedge strategies, equities & fixed income), The Rockefeller
University
• Former Investment Director of Brookdale Realty Partners, commercial real estate development &
acquisition
• Former Senior Analyst of Yale University Investments Office, responsible for various asset classes
including foreign equities and fixed income
Roundtable Investment Partners
• A shared investment office for a select set of institutions and institution-sized families
• Designed to provide investment capabilities to mid-sized clients that have historically been
accessible to large universities and charitable foundations
• Pride ourselves in providing a service that feels and acts like an in-house investment office. We
understand that every institution and family is unique.
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C o n t e n t s
The Endowment Model
Drivers of Return
Measuring Risk
Unique Institutional Attributes
Conclusions
Takeaways
3
The Endowment Model
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The endowment model is a philosophical approach to investing, not a defined
asset allocation.
D e f i n i t i o n o f t h e e n d o w m e n t m o d e l
Portfolio StrategyPortfolio Strategy Investing StrategyInvesting Strategy ManagementManagement
• Broadened asset allocation
• Long time horizon
• Total return
• Disciplined spending rules
• Aligned with operating
budget
• Equity bias
• Fundamental underpinnings
• Expert manager selection
• Blend of liquid and illiquid
investments
• Analytical rigor
• Principal orientation
• Dedicated, experienced team
• Institutional philosophical
alignment
Endowment Model
THE ENDOWMENT MODEL
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There is no ‘magic’ model
• Similar asset allocations can produce very different results
• Results achieved by successful investment offices are not easily replicated
• Incorporating alternative assets alone does not guarantee success
One size does not fit all
• Each institution is unique
• Revenue and expense compositions differ
• Institutions should leverage their unique strengths and understand their limitations
Asset allocation is often viewed as the primary driving force behind returns. However,
if you analyze the leading endowments, implementation and performance attribution
vary and are often reflective of the CIO’s knowledge base, needs of the institution and
natural intellectual capital base affiliated with the institution.
THE ENDOWMENT MODEL
W h y d o e s t h e d e f i n i t i o n o f t h e m o d e l m a t t e r ?
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Committed resources
• Experienced investment professionals
• Dedicated full-time team (internal or external)
• Sufficient capital support
Softer, qualitative factors have contributed to success
• Culture
• Character
• Governance
• Alignment of interests
Implementation is key to success. Therefore, internal or external resources need to be
matched appropriately to the complexity of the portfolio.
THE ENDOWMENT MODEL
W h y d o e s t h e d e f i n i t i o n m a t t e r ? ( c o n t i n u e d )
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THE ENDOWMENT MODEL
C r i t i c s p o i n t t o 2 0 0 9 a s e v i d e n c e t h a t t h e m o d e l i s f l a w e d
Systemic crisis
• Went beyond a specific asset class; global in nature and structurally damaging
• Paralyzing for many investors, even veterans
• Fear overrode greed
Negative implications for endowments
• Risk framework shifted quickly and dramatically
• Normal rebalancing was difficult to implement
• Illiquidity from private alternatives and leverage left some handcuffed
• Some were forced to “sell low” (creating permanent loss of capital)
• Operating budgets were severely impacted
The impact of the 2008 financial crisis was pervasive across many asset classes. Unlike
previous downturns, there were few places to hide, especially for long-term, equity
oriented capital. Most endowment portfolios experienced stress during this period and
many were surprised by the drawdowns in the equity oriented portfolios.
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THE ENDOWMENT MODEL
O t h e r h e a d w i n d s l e a d i n g u p t o t h e c r i s i s
Alternative asset class markets maturing
• Large amounts of capital flowing into alternatives
• Number of alternative investment managers grew dramatically, but alpha is a zero sum game
• Agency issues develop as fund assets grew larger
Large revenue sources were highly correlated
• Philanthropic support and endowment market values both suffered
Increased tension between current spending and long-term intergenerational growth
• Spending rates at many institutions were raised during the 2005 to 2007 time period
• Endowment spending became an increasingly important source of revenue at schools
Governance and staffing did not evolve with increasingly sophisticated investment portfolios
• Underappreciated need for communication and shared philosophy among constituents
• A “fill the bucket” approach lowered the bar on manager selection
• Experience, skill and time necessary to manage a multi-asset class portfolio were undervalued
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THE ENDOWMENT MODEL
R e s u l t s m a d e h e a d l i n e s , b u t w e r e p r o b a b l y e x a g g e r a t e d
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THE ENDOWMENT MODEL
Let’s take a step back to review the origins of the
endowment model
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THE ENDOWMENT MODEL
T h e o r i g i n s o f t h e e n d o w m e n t m o d e l
The original thesis challenged conventional wisdom, but did so by taking a bottoms-up
approach and building an asset allocation that accounted for all of the factors that were
unique to the institution, the nature of the endowment assets and the opportunity set in
the marketplace.
Total return approach – supported the short-term spending needs and the long-term compounding
goals of endowment growth
Diversification – Markowitz mean-variance portfolio theory demonstrated that adding higher risk and
higher return asset classes could still reduce the overall volatility of the portfolio
Long-term approach – enabled portfolios to weather short-term volatility moves and earn
incremental returns
Illiquidity premium – due to the long-term nature of endowment assets, universities could earn an
outsized premium for taking on illiquidity
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Identifying the approach and defining a process were the initial building blocks.
Equally important was the willingness of the institution to fund the resources
necessary to manage the portfolio, hire professional talent and create a governance
structure that supported those efforts.
Longer term, the colleges and universities that experienced the most success
where those that had the following characteristics:
• An understanding of their own strengths and weaknesses (e.g. size, liquidity needs)
• A governance structure that was supportive of the approach
• Buy-in across staff, university leadership and trustees
• A long-term mindset
• A rigorous analytical approach
• Skilled investment teams
THE ENDOWMENT MODEL
O r i g i n s o f t h e e n d o w m e n t m o d e l ( c o n t i n u e d )
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$3,001
$11,644
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
60 / 40 Portfolio 4 Largest Endowments
Growth of $1,00020 Years Ended 06/30/13
THE ENDOWMENT MODEL
Over the last twenty years, the four largest endowments have seen significant
appreciation as a result of investment returns, well in excess of a traditional 60 / 40
portfolio.
13% CAGR
7% CAGR vs.
Note: 4 largest endowments by assets includes Yale, Harvard, Stanford and Princeton as of FY2013. 4 largest endowment returns calculated using average annual return for the
4 largest endowments, non-asset weighted, from 06/30/93 to 06/30/13. 60 / 40 portfolio represents a 60% allocation to the MSCI All Country World Index and a 40% allocation to
the Bank of America Merrill Lynch US Corporate/Government/Mortgage Index.
Sources: Bloomberg, University annual reports, press releases and websites.
L o n g - t e r m r e s u l t s a r e q u i t e s t a g g e r i n g …
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THE ENDOWMENT MODEL
…but are they repeatable?
15
Drivers of Return
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DRIVERS OF RETURN
S u c c e s s f u l m a n a g e r s e l e c t i o n h a s b e e n u n d e r a p p r e c i a t e d
Source: Yale Endowment Update 2012
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DRIVERS OF RETURN
A c t i v e m a n a g e m e n t i s k e y t o o u t s i z e d r e t u r n s
0
5
10
15
20
25
30
35
40
45
50
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Upper Quartile
Median
Source: Cambridge Associates, U.S. Private Equity Index
U.S. Private Equity Vintage Year IRRs
IRR
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E x a m i n i n g t h e e n d o w m e n t m o d e l ’ s p e r f o r m a n c e
To isolate where the endowment model succeeded or fell short over the past 12
years, we can separate the horizon into two six year periods and disaggregate the
performance by asset class and passive/active investing.
US, International Developed, Emerging Market Equities and Fixed Income are represented by the S&P 500 TR, MSCI EAFE TR, MSCI EM TR and ML US Corp, Gov’t,
and Mortgages Index, respectively. Hedge Funds are represented by the median manager performance in the TASS database minus an annual 2% for survivorship
bias. Private Equity and Real Estate are represented as the median manager return within the Cambridge Associates Private Equity and Real Estate Indices.
Alpha is defined as the difference between the top quartile and the median manager annualized returns over the specified periods. Active Equities and Fixed Income
are based on the Russell database. Hedge Fund alphas are calculated using the TASS database. Private Equity and Real Estate quartiles are based on Cambridge
Associates Private Equity and Real Estate Indices.
4.9%
4.8%
13.2%
-1.9%
25.1%
0.7%
5.2%
5.5%
8.0%
2.1%
13.8%
6.1%
19.2%
-6.5%
-10% -5% 0% 5% 10% 15% 20% 25% 30%
US Equities
Int’l. Dev. Equities
EM Equities
Fixed Income
Hedge Funds
Private Equity
Real Estate
Beta:Passive Annual Returns
Alpha (Top Quartile – Median):Excess Annual Returns
1.3%
0.5%
1.9%
1.0%
1.9%
2.4%
0.3%
1.7%
6.8%
6.2%
8.7%
6.8%
7.9%
5.4%
0% 2% 4% 6% 8% 10%
DRIVERS OF RETURN
Asset Class Time Period 1: July 2001 – June 2007Time Period 2: July 2007 – June 2013
Beta Alpha
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E x a m i n i n g t h e e n d o w m e n t m o d e l ’ s p e r f o r m a n c e ( c o n t i n u e d )
The data supports the assertion that if you cannot add value through manager
selection, the addition of alternative asset classes may not be worthwhile.
DRIVERS OF RETURN
60/40 Global Equities/Fixed Income portfolio is allocated 60% Global Equities (50% US, 40% Int’l Dev. and 10% Emerging Markets) and 40% Fixed Income using the passive
asset class returns
Endowment Portfolio (passive and active) asset allocations are 30% Global Equities (50% US, 40% Int’l Dev. and 10% Emerging Markets), 10% Fixed Income, 25% Hedge
Funds, 17.5% Private Equity and 17.5% Real Estate
Passive asset class performance for US, International Developed, Emerging Market Equities and Fixed Income are represented by the S&P 500 TR, MSCI EAFE TR, MSCI EM
TR and ML US Corp, Gov’t, and Mortgages Index, respectively. Passive Hedge Fund returns are represented by the median manager performance in the TASS database
minus an annual 2% for survivorship bias. Passive Private Equity and Real Estate returns are represented as the median manager return within the Cambridge Associates
Private Equity and Real Estate Indices.
Active asset class performance is defined as the top quartile annualized returns over the specified periods. Active Equities and Fixed Income are based on the Russell
database. Hedge Fund quartiles are calculated using the TASS database. Private Equity and Real Estate quartiles are based on Cambridge Associates Private Equity and
Real Estate Indices.
Time Period 2: July 2007 – June 2013 Time Period 1: July 2001 – June 2007
0
50
100
150
200
250
300
350
400
Ju
n-0
1
Oct-
01
Feb
-02
Ju
n-0
2
Oct-
02
Feb
-03
Ju
n-0
3
Oct-
03
Feb
-04
Ju
n-0
4
Oct-
04
Feb
-05
Ju
n-0
5
Oct-
05
Feb
-06
Ju
n-0
6
Oct-
06
Feb
-07
Ju
n-0
7
Oct-
07
Feb
-08
Ju
n-0
8
Oct-
08
Feb
-09
Ju
n-0
9
Oct-
09
Feb
-10
Ju
n-1
0
Oct-
10
Feb
-11
Ju
n-1
1
Oct-
11
Feb
-12
Ju
n-1
2
Oct-
12
Feb
-13
Ju
n-1
3
60/40 Global Equities/Fixed Income Endowment Portfolio (Passive/Median) Endowment Portfolio (Active/Top Quartile)
60/40 Global Equities/Fixed Income
Endowment Portfolio(Passive/Median)
Endowment Portfolio(Active/Top Quartile)
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A c t i v e m a n a g e m e n t i s e v e n m o r e i m p o r t a n t i n a l o w - r e t u r n e n v i r o n m e n t
Low yields in fixed income and somewhat elevated PE multiples in equities create
headwinds for future returns.
Adding value through security selection will become a more important driver of returns
1 Fixed income index represents the Bank of America Merrill Lynch US Corporate/Government/Mortgage Index. The index is comprised of a mix of high grade U.S.-
listed bonds across corporate, government and mortgage markets.2 June 2001 price to earnings multiples are trailing figures for MSCI EAFE and MSCI EM due to lack of information.3 Data as of January 16, 20144 Yield to Worst as defined in Bloomberg
Source: Roundtable, Bloomberg
DRIVERS OF RETURN
Today3
2.38%
Today3
15.6x
14.2x
9.4x
Fixed IncomeYield4 June '01 June '07 June '13
Fixed Income Index1
6.06% 5.66% 2.34%
EquitiesForward Price to Earnings June '01 June '07 June '13S&P 500 20.4x 16.1x 14.6x
MSCI EAFE 18.9x2
14.9x 13.0x
MSCI EM 9.5x2
14.2x 10.4x
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A c t i v e m a n a g e m e n t i s e v e n m o r e i m p o r t a n t i n a l o w r e t u r n e n v i r o n m e n t … b u t r e m e m b e r t h a t t h i n g s c h a n g e
Impact of central bank quantitative easing --
parallel shift downward in frontier
Source: GMO, Roundtable
DRIVERS OF RETURN
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DRIVERS OF RETURN
T h e i m p o r t a n c e o f s t a y i n g t h e c o u r s e …
Note: 4 largest endowments by assets includes Yale, Harvard, Stanford and Princeton as of FY2013.
Source: 2012 NACUBO-Commonfund Study of Endowments, annual reports of Yale, Harvard, Stanford and Princeton Universities, Roundtable calculations
0%
2%
4%
6%
8%
10%
12%
14%
3 YR 5 YR 10 YR
Trailing Fiscal Year Returns (For periods ending June 30, 2012)
25th - 50th Percentile (All) 50th - 75th Percentile (All) Largest Endowments Mean (>$1 B)
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DRIVERS OF RETURN
… b u t d o n ’ t f o r g e t a b o u t r i s k !
Before implementing an asset allocation and an investment approach, ensure that
the institution can weather the downturn.
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
FY 2009
2009 Fiscal Year Returns
25th - 50th Percentile (All) 50th - 75th Percentile (All) Largest Endowments Mean (>$1 B)
Note: 4 largest endowments by assets includes Yale, Harvard, Stanford and Princeton as of FY2013.
Source: 2012 NACUBO-Commonfund Study of Endowments, annual reports of Yale, Harvard, Stanford and Princeton Universities, Roundtable calculations
24
Measuring Risk
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Q u e s t i o n s
How do you define risk?
How do you measure risk?
How can you manage risk?
MEASURING RISK
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The complexity of endowment portfolios requires quantitative and qualitative rigor
around risk analysis.
MEASURING RISK
A p p r o a c h e s t o r i s k m a n a g e m e n t
There is no single risk measure that is comprehensive in nature. A multi-dimensional
approach to risk analysis and the understanding of where quantitative measures fall short is
essential.
• Multiple measures of risk
• Modeling correlation matrices
• Non-normal distributions
• Stress scenarios
• Tail risk
• Factor analysis
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P i t f a l l s o f t a r g e t i n g a s i n g l e r i s k a n d r e t u r n m e a s u r e
Sample Portfolio 11
Index Allocation
US Equities 10%
Emerging Markets 30%
Fixed Income 35%
Cash 25%
Total: 100%
(Jan 1990 – Dec 2013)
Ann. Return 10.3%
Ann. Volatility 15.2%
Sharpe Ratio (r.f. = 1%) 0.55
Sample Portfolio 22
Index Allocation
US Equities 80%
Fixed Income 20%
Total: 100%
(Jan 1990 – Dec 2013)
Ann. Return 10.2%
Ann. Volatility 15.1%
Sharpe Ratio (r.f. = 1%) 0.55
Appears to have a similar risk/return
profile
Relying on single risk/return data points can lead to unexpected results. In the
example below, we observe two portfolios with similar risk/return measures, but
with very different asset allocations.
MEASURING RISK
1Portfolio 1: 10% S&P 500 TR Index, 30% MSCI Brazil TR USD Index, 35% Barcap Aggregate TR Bond Index, 25% 3 Month US T-Bills
2Portfolio 2: 10% Russell 2000 TR Index, 70% REIT TR USD Index, 20% JP Morgan Global Aggregate TR Bond Index
Source: Roundtable, Bloomberg
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O b s e r v i n g t h e r a n g e s o f o u t c o m e s
MEASURING RISK
Despite having similar annual return and volatility over the period from January 1990
to December 2013, Portfolio 2 experienced significantly greater downside risk.
1Portfolio 1: 10% S&P 500 TR Index, 30% MSCI Brazil TR USD Index, 35% Barcap Aggregate TR Bond Index, 25% 3 Month US T-Bills
2Portfolio 2: 10% Russell 2000 TR Index, 70% REIT TR USD Index, 20% JP Morgan Global Aggregate TR Bond Index
Source: Roundtable, Bloomberg
-20%
-10%
0%
10%
20%
30%
40%
5% 25% 50% 75% 95%
12
Mo
nth
Ro
llin
g R
etu
rns
Percentiles
Portfolio 1 Portfolio 2
-60%
-50%
-40%
-30%
-20%
-10%
0%
Dec-8
9
May-9
1
Oct-
92
Mar-
94
Au
g-9
5
Jan
-97
Ju
n-9
8
No
v-9
9
Ap
r-01
Sep
-02
Feb
-04
Ju
l-05
Dec-0
6
May-0
8
Oct-
09
Mar-
11
Au
g-1
2
Dra
wd
ow
ns
Portfolio 1 Portfolio21 2 1 2
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M e a s u r i n g r i s k b e y o n d v o l a t i l i t y a n d e x p l o r i n g t h e r a n g e s o f e x p e c t a t i o n s
Risk can be defined in many different ways and no single risk measure is sufficient.
Portfolio 1Portfolio 2
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0% 5% 10% 15% 20% 25% 30% 35%
Exp
ecte
d A
nn
ual
Ret
urn
Expected Annual Volatility
Portfolio 1Portfolio 2
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0% 10% 20% 30% 40% 50%
Exp
ecte
d A
nn
ual
Ret
urn
Modified 3 Month VaR @ 99%
Portfolio 1Portfolio 2
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0% 20% 40% 60% 80% 100%
Exp
ecte
d A
nn
ual
Ret
urn
Probability Annual Return is Less Than 5%
Portfolio 1: 10% S&P 500 TR Index, 30% MSCI Brazil TR USD Index, 35% Barcap Aggregate TR Bond Index, 25% 3 Month US T-Bills
Portfolio 2: 10% Russell 2000 TR Index, 70% REIT TR USD Index, 20% JP Morgan Global Aggregate TR Bond Index
Efficiency Frontier are based on varying allocations to Russell 2000, S&P 500, MSCI Brazil, REIT Index, US 3M T-Bills, Barcap Agg Index, and JPM Global Bond Index;
Data from Jan 1990 – Dec 2013
Source: Roundtable, Bloomberg
MEASURING RISK
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N o n - n o r m a l d i s t r i b u t i o n s a r e c l o s e r t o r e a l i t y
MEASURING RISK
The simplicity and universality of normal distribution has led to its faulty application
in asset allocation.
Source: Bloomberg
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MEASURING RISK
W h e n c o m b i n g a s s e t c l a s s e s , t a k e i n t o a c c o u n t t h e d y n a m i c n a t u r e o f c o r r e l a t i o n s
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
Jan
-78
Ap
r-79
Ju
l-80
Oct-
81
Jan
-83
Ap
r-84
Ju
l-85
Oct-
86
Jan
-88
Ap
r-89
Ju
l-90
Oct-
91
Jan
-93
Ap
r-94
Ju
l-95
Oct-
96
Jan
-98
Ap
r-99
Ju
l-00
Oct-
01
Jan
-03
Ap
r-04
Ju
l-05
Oct-
06
Jan
-08
Ap
r-09
Ju
l-10
Oct-
11
Jan
-13
Asset Class Correlations24 Month Rolling Correlations (Jan 1978 – Dec 2013)
S&P 500 vs Barcap Agg Bond Index S&P 500 vs GSCI
While much has been said about correlations in the recent past, they have never
been static. Therefore the single static correlation matrix used in asset allocation
models is not sufficient.
Source: Bloomberg, Roundtable
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I n c o r p o r a t i n g s h i f t i n g r e g i m e s
MEASURING RISK
By combining the two stress and stable regimes, as a weighted average, we lose
the high correlation and higher probability for large drawdowns. Instead we
should switch between the regimes in order to express a more accurate model of a
stress environment.
Stress Stable
Long Term
Source: Roundtable
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A s s e t a l l o c a t i o n c o m b i n e d w i t h f a c t o r a n a l y s i s
MEASURING RISK
While asset allocation provides the starting point for the risk framework of the
portfolio, examining risk factors within asset classes is useful to further understand
areas of risk, sensitivity and intended/unintended bets.
Source: Roundtable
Equity Managers Hedge Fund ManagersFixed Income Managers
Private Equity Managers Real Asset Managers
Manager 1 2, 3, . Manager 1 2, 3, . Manager 1 2, 3, … Manager 1 2, 3, … Manager 1 2, 3, …
Interest Rate Sensitivity X X X
Inflation X
Equity Beta X X X
Credit Beta X X
Liquidity X
Momentum X X
Volatility X
. . . .
34
Unique Institutional Attributes
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UNIQUE INSTITUTIONAL ATTRIBUTES
I n s t i t u t i o n s a r e u n i q u e
Each academic institution necessitates a customized investment policy.
Strategic Goals
Nature of Operating Budget
Level of Endowment Assets
Governance Structure
Culture
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A s s e t a l l o c a t i o n n e e d s t o m a k e s e n s e f o r t h e s c h o o l
UNIQUE INSTITUTIONAL ATTRIBUTES
33%
27%
40%
INSTITUTION A
Endowment
Income
Private
Gifts
Grants
23%
18%
25%
35%
INSTITUTION B
Endowment
Income
Private
Gifts
Grants
Tuition
The mix of revenues should be factored into the risk/return profile of an institution.
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UNIQUE INSTITUTIONAL ATTRIBUTES
I m p o r t a n c e o f g o v e r n a n c e
“Every approach works well sometimes and poorly other times. In order for the
approach and investment staff to survive these periods, the governance structure needs
to understand and believe in the process.”*
Structure
• Distinction of roles between the investment committee and investment team (internal or external)
• Clearly defined relationship between board/trustees, university leadership and investment
professionals
Philosophical alignment
• Portfolio cannot be up for grabs every quarter
• Ability to stay the course during difficult market environments
• Willingness to stray from the herd and not feel pressure to perform in line with peers
• Minimize agency risks
*Source: Uncorrelated, LLC, 2013, The Portfolio Whiteboard Project, September 2013
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UNIQUE INSTITUTIONAL ATTRIBUTES
C u l t u r e e n c o u r a g e s a s p e c i f i c m i n d s e t
“We simply attempt to be fearful when others are greedy and to be greedy only when
others are fearful.” -Warren Buffet
A culture of intellectual honesty fosters fact-based decision making and minimizes behavioral
pitfalls.
Analytical rigor
• Greater conviction
• Better ability to withstand difficult periods
• Ability to admit mistakes (which every investor makes) and reverse course
• Conducive to maintaining a long-term investment approach
Contrarian viewpoint
• Ability to drown out the noise
Sense of mission
• Investment results impact the short and long-term needs of a nonprofit institution
• Socially responsible investing
• Loyalty and passion
39
Conclusions
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It is a philosophical approach to investing not a defined asset allocation.
Implementation influenced results
• Emphasis on manager selection
• Multi-dimensional approach to risk
• Investment policy suited specifically to the needs of the institution
• Skilled and resourced investment team
• Well defined governance
• Collaborative culture
There were definitely some missteps
• Increased spending
• Private alternatives allocation modeling
• Mixed results in manager selection
The endowment model did not fail but, in some cases, we failed the endowment model.
CONCLUSIONS
T h e e n d o w m e n t m o d e l d i d n o t f a i l
41
Takeaways
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TAKEAWAYS
I m p l i c a t i o n s f o r u n i v e r s i t y l e a d e r s h i p a n d i n v e s t m e n t c o m m i t t e e s
Endowment revenue is increasingly important to institutions
• Tuition pressures
• Government revenue pullbacks
• Inflation
Need to develop expertise to deal with growing and complex endowment portfolios
• Multi-asset class approach requires a dedicated full-time investment team
• Large endowment donors are increasingly demanding sophisticated investment capabilities
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TAKEAWAYS
M o r e o p t i o n s t o d a y t o f u l f i l l i n v e s t m e n t g o a l s
In-house investment team
• Culture is critical to attracting and retaining talent (high turnover in recent history)
• Clear, shared investment philosophy between university leadership, investment committee and
investment team is essential
• Strategic about initial expense
• Long-term commitment
External solutions – OCIO
• Increased options today, but tread lightly as many players are entering the market
• Success stories have limited number of relationships and prior in-house experience at nonprofits (actual
experience combined with a deep understanding of the mindset)
• Understand potential conflicts (e.g. allocation of ideas) and the incentives of various providers
Passive management
• Some institutions may decide based on their size, governance structure and goals, that paying for an
internal or external team is not viable
• These groups should feel confident in adopting a passive portfolio approach and, from a fiduciary
perspective, it may make the most sense
Understanding their unique attributes, governance structure and culture should lead
institutions down a specific path.
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“The trustees of an endowment institution are the guardians of the
future against the claims of the present. Their task is to preserve
equity among generations.”-JAMES TOBIN, 1981 Nobel laureate, Sterling Professor of Economics, Yale University
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