54
1 Mason Investment Advisory Service Corporate Showcase Using Efficient Market-Based Strategies to Select Fund Managers July 20, 2015
1
Mason Investment Advisory Service Corporate Showcase
Using Efficient Market-Based Strategies to Select Fund Managers
July 20, 2015
2
Speakers
Scott George, MBA, President and Chief Investment Officer
Mason Investment Advisory Services, Inc.
Tom Pudner, CFA, CPA, CFP®, MST, Director of Research
Mason Investment Advisory Services, Inc.
John Palmucci, MBA, Senior Vice President for Finance & Administration
Valpariaso University, Valparaiso, Indiana
Alexander Yuchvid, MBA, CPA
Director of Investments and Financial Analysis
Indiana University, Bloomington, Indiana
3
Scott George, MBA
President and Chief Investment Officer
Mason Investment Advisory Services, Inc.
Reston, Virginia
4
Mason Investment Advisory Services, Inc.
Founded 1982 – Financial Planning Roots
55 Employees
Independent, no proprietary products
Clients in 42 states
Investment Advisory Summary Total Institutional
Assets under management $4.6B $2B
Focus on Non Profit/Institutional Clients
Higher Education
Community Foundations
Religious Entities
Retirement Plans
Arts Organizations
5
Session Topics
Mason Study of Active and Passive Investment Vehicles
Purpose of the Study
Study Milestones
Results of the Study
Practical Applications of Active and Passive Implementation
6
Purpose of the Mason Study
To discover whether or not additional passive exposure would benefit
portfolio performance through:
Improved risk adjusted returns
Lower overall fees and trading costs
7
Mason’s EMB Study
Portfolio Implication of This Study
1. Utilize more EMB funds
2. Identify more effective active funds
What is an EMB Fund?
The label EMB (Efficient Market Based) is our term, not an industry term. Efficient Market Based (EMB) funds are managed in a manner consistent with a belief that markets are mostly efficient. EMB includes index funds as well as other funds that overcome problems with indexing with both equities and fixed income – some of these funds are often referred to as “enhanced index funds”. We will use a combination.
8
APRIL
• Evaluated EMB space and determined top EMB families
JULY
• Analyzed “EMB Biased” vs. actual vs. category averages
SEPT
• Performed EMB Intra Fund Family Analysis
OCT
• Determined the Priority of Asset Class Reviews
DEC
• Performed Active Fund Family Analysis (Intra and Inter)
EMB Biased. This portfolio incorporates our best
thinking regarding the implementation of a mostly
EMB portfolio.
Actual. This portfolio measures performance of
actual active managers which we have utilized
over time.
Category Averages. This portfolio incorporates
category average performance. In other words it
measures the aggregate performance had we
consistently hired the “average” manager.
The listed investment committee meetings
were those where official votes were taken.
Each was preceded by at least one
subcommittee meeting. Numerous additional
subcommittee and investment committee
meetings were held between many of these
investment committee meetings in order to
thoroughly evaluate all relevant analysis.
Mason Investment Committee -Study Milestones
9
Improved Returns from “EMB Biased” Portfolio
Active Managers Vs. All EMB Portfolio
Vs. Category Averages
Geometric
Mean (%)
Standard
Deviation (%)Sharpe Ratio
3 Years Ended 3-31-13
"EMB Biased" Portfolio 10.10 11.44 0.89
Active Manager Portfolio 8.94 10.97 0.83
Category Average Portfolio 8.01 11.01 0.75
"EMB Biased" Portfolio vs Category Average 2.09 0.43 0.14
Active Manager vs. Category Average 0.93 -0.04 0.08
5 Years Ended 3-31-13
"EMB Biased" Portfolio 5.59 15.61 0.41
Active Manager Portfolio 4.78 15.07 0.37
Category Average Portfolio 3.72 14.81 0.30
"EMB Biased" Portfolio vs Category Average 1.87 0.80 0.11
Active Manager vs. Category Average 1.06 0.26 0.07
10 Years Ended 3-31-13
"EMB Biased" Portfolio 9.36 11.94 0.68
Active Manager Portfolio 8.52 11.52 0.63
Category Average Portfolio 7.71 11.44 0.57
"EMB Biased" Portfolio vs Category Average 1.65 0.50 0.11
Active Manager vs. Category Average 0.81 0.08 0.06
10
Tom Pudner, CFA, CPA, CFP ®, MST
Director of Research
Mason Investment Advisory Services, Inc.
Reston, Virginia
11
Characteristics of the Best EMB Managers:
A. Competitive cost (not necessarily lowest cost)
B. Appropriate level of analytical talent
C. Targets holdings which best fit investor’s portfolio model
D. Not necessarily lowest tracking error
Mason Study Conclusions - EMB Manager Selection
12
Characteristics of Best Active Managers:
A. Competitive cost (not necessarily lowest cost)
B. Appropriate level of analytical talent
C. Long term approach
D. Not necessarily high tracking error
Mason Study Conclusions - Active Manager Selection
13
When evaluating broad fund families has past performance
been indicative of future performance?
Fund Family Evaluation
14
• Evaluated funds across twenty-seven fund families
• Evaluated both terminated and open funds
• Identified three or four superior active fund families
• Identified two superior EMB fund families
• Fund family performance has persisted
Fund Family Analysis
15
Multiple Fund Family Analysis
15
January 1,
2009 thru
October 31,
2013
January 1,
2008 thru
December
31, 2012
January 1,
2007 thru
December
31, 2011
January 1,
2006 thru
December
31, 2010
January 1,
2005 thru
December
31, 2009
January 1,
2004 thru
December
31, 2008
January 1,
2003 thru
December
31, 2007
January 1,
2002 thru
December
31, 2006
Fund Family 1 32.23 146 30.36 43.89 53.05 43.18 40.20 40.35 28.90 20.35 5
Fund Family 2 37.30 1,069 39.95 41.83 43.03 41.53 38.44 35.92 33.21 30.28 99
Fund Family 3 37.96 540 36.46 35.52 36.40 37.85 39.61 40.60 38.04 38.04 147
Fund Family 4 38.35 1,860 42.46 41.07 40.88 41.04 40.79 35.50 34.87 34.02 181
Fund Family 5 39.25 400 39.09 40.03 40.48 40.03 40.03 39.73 38.85 38.04 103
Fund Family 6 39.71 208 40.34 42.60 46.31 42.29 44.56 41.77 37.34 34.06 83
Fund Family 7 40.36 147 38.76 37.07 38.93 40.13 41.17 39.34 42.50 42.53 124
Fund Family 8 41.53 99 44.59 45.09 41.36 35.76 32.91 34.57 35.92 40.81 139
Fund Family 9 42.07 424 42.59 43.69 43.32 43.15 42.91 41.08 40.32 40.22 149
Fund Family 10 42.10 92 40.93 42.81 43.43 40.92 41.75 43.28 39.16 42.31 180
Fund Family 11 42.44 1,120 43.06 45.68 44.79 44.05 42.59 43.39 40.86 40.38 533
Fund Family 12 42.94 555 42.90 44.57 48.29 48.60 47.32 43.21 41.67 38.67 149
Fund Family 13 43.08 98 43.33 43.80 41.43 39.40 40.32 40.98 42.45 45.87 43
Fund Family 14 43.70 103 39.93 43.74 44.94 42.97 44.19 46.23 41.97 43.93 117
Fund Family 15 43.73 189 47.34 45.92 43.43 43.24 42.20 39.98 39.73 42.29 148
Fund Family 16 43.80 184 44.14 44.61 44.78 41.16 42.46 42.13 43.52 43.16 222
Fund Family 17 43.94 214 45.04 44.98 43.44 41.75 42.31 40.92 41.43 43.73 526
Fund Family 18 44.49 163 49.97 47.97 46.80 45.11 39.01 40.03 41.95 39.97 92
Fund Family 19 44.50 78 49.61 47.74 43.79 46.56 45.21 41.06 42.72 43.41 197
Fund Family 20 45.52 96 46.66 46.63 46.40 45.72 43.83 44.05 42.60 44.02 277
Fund Family 21 45.80 140 45.72 45.23 44.51 44.76 46.58 46.29 45.85 46.26 479
Fund Family 22 46.26 99 46.81 49.23 52.93 51.14 48.52 45.83 44.37 42.06 192
Fund Family 23 46.74 79 47.29 46.55 46.52 46.80 42.01 43.87 44.45 47.31 19
Fund Family 24 48.00 82 43.88 49.29 55.07 55.38 56.56 56.95 47.72 42.63 63
Fund Family 25 48.50 75 43.11 43.91 47.76 45.87 45.79 48.56 49.28 52.47 123
Average 42.57 99 42.97 44.14 44.88 43.53 42.85 42.23 40.79 40.67
Rolling 5 Years
AUM (Billions)
as of 10/31/13
Average
Percentile
Rank All
Years
# of
Funds
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ETF Fund Family Performance Analysis
Vanguard All ETFs 3 Year 5 Year 10 Year
Average Percent Return Category Rank (among ETFs in same
categories)36 39 1
Number of Funds 46 37 2
ETF Fund Family #1 All ETFs 3 Year 5 Year 10 Year
Average Percent Return Category Rank (among ETFs in same
categories)52 56 47
Number of Funds 200 154 78
ETF Fund Family #2 All ETFs 3 Year 5 Year 10 Year
Average Percent Return Category Rank (among ETFs in same
categories)51 44 51
Number of Funds 91 68 22
Please see disclosures for prospectus information on funds and fund families mentioned in this presentation.
17
EMB Fund Family Performance Analysis
Vanguard and DFA superior to largest ETF Fund Families.
Vanguard Mutual Funds (Index Funds) 3 Year 5 Year 10 Year
Average Percent Return Category Rank (among mutual funds in
same categories)26 27 27
Number of Funds 30 27 19
DFA Mutual Funds 3 Year 5 Year 10 Year
Average Percent Return Category Rank (among mutual funds in
same categories)36 35 22
Number of Funds 69 62 42
Vanguard Mutual Funds (All - Active and Index Based) 3 Year 5 Year 10 Year
Average Percent Return Category Rank (among mutual funds in
same categories)30 29 27
Number of Funds 54 51 42
Please see disclosures for prospectus information on funds and fund families mentioned in this presentation.
18
When evaluating individual managers has past performance
been indicative of future performance?
Individual Manager Selection
19
Intra-Fund Family Evaluation
2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002
PIMCO GNMA Instl 6.83 24.50 24 34 11 9 12 57 14 3 3 11 3 7PIMCO Mortgage-Backed Securities Instl8.33 47.00 38 74 72 19 42 37 15 1 20 3 9 2PIMCO Real Return Instl 13.33 36.17 61 6 56 6 4 84 10 27 20 4 12 7PIMCO Total Return Instl 17.50 39.33 54 12 87 26 46 11 1 47 5 12 29 11PIMCO Total Return III Instl 18.83 42.00 61 16 91 23 46 15 2 56 12 7 22 14PIMCO NY Municipal Instl 19.33 41.83 1 58 95 3 26 68 60 6 13 14 19 4PIMCO Global Bond (Unhedged) Instl26.83 39.00 81 48 1 10 30 64 33 41 67 18 1 1PIMCO Real Return Asset Instl 27.33 35.33 99 1 1 2 9 100 8 80 62 7 4 3PIMCO Low Duration Instl 28.50 34.83 71 10 43 25 18 42 1 66 43 16 30 15PIMCO Total Return II Instl 30.67 46.33 64 31 84 43 46 10 3 54 34 39 39 15PIMCO Low Duration III Instl 31.00 35.50 73 12 23 18 35 52 2 66 39 25 44 10PIMCO Short-Term Instl 32.83 25.17 15 12 41 40 16 27 29 58 37 19 11 43PIMCO Moderate Duration Instl 36.67 38.33 14 27 90 30 52 17 3 59 71 41 31 15PIMCO High Yield Instl 40.33 50.83 69 52 38 45 63 38 8 65 6 59 53 51PIMCO StocksPLUS Instl 41.83 28.17 34 4 23 9 6 93 40 43 83 43 19 23PIMCO Low Duration II Instl 42.00 44.33 76 32 28 54 43 33 3 80 42 33 73 21PIMCO Municipal Bond Instl 43.33 41.83 23 21 89 3 23 92 69 13 18 75 27 58PIMCO Emerging Markets Bond Instl44.33 38.50 32 67 9 39 51 33 34 78 44 57 17 36PIMCO Convertible Instl 44.33 49.33 84 73 9 44 19 67 40 18 90 51 15 52PIMCO Long-Term US Government Instl45.50 39.00 44 13 67 25 7 78 69 47 65 53 14 25PIMCO CA Intermediate Muni Bd Instl48.33 40.17 36 26 88 1 20 70 85 10 24 39 52 80PIMCO Short-Duration Muni Income Inst52.50 53.33 28 58 93 34 11 96 96 1 19 67 43 89PIMCO Global Bond (USD-Hedged) I67.50 29.17 31 24 4 21 34 61 78 84 8 78 84 73PIMCO Foreign Bond (USD-Hedged) I68.17 23.00 14 16 11 18 18 61 83 84 5 71 87 79
Identified Strong Fund
Family (All Funds Within
Fund Familiy Incepted in
2002 or Earlier)
Annual Return Percentage Rank12/31/12
Thru
10/31/13
2nd 5.83
Years1st 6 years
Please see disclosures for prospectus information on funds and fund families mentioned in this presentation.
20
EMB Fund Families – Intra Fund Analysis
Within EMB fund families, past performance has not been
indicative of future results.
Decile Ranking
First Period
Decile Ranking
2nd Period
First 6
Years
Next 5
7/12
years
1 3 21 38
2 6 26 40
3 1 29 36
4 8 33 44
5 7 35 42
6 10 37 45
7 5 39 39
8 2 43 37
9 9 45 44
10 4 54 38
Average Top 5 Deciles 29 40
Average Bottom 5 Deciles 44 40
Total Number of Funds 92
(Of All Vanguard Funds) (Of All Funds)
Decile Ranking
First Period
Decile Ranking
2nd Period
First 6
Years
Next 5
7/12
years
1 9 15 47
2 6 22 41
3 7 29 43
4 5 36 37
5 3 39 33
6 8 41 43
7 1 44 31
8 4 47 36
9 2 48 32
10 10 68 51
Average Top 5 Deciles 28 40
Average Bottom 5 Deciles 50 39
Total Number of Funds 29
(Of All DFA Funds) (Of All Funds)
Please see disclosures for prospectus information on funds and fund families mentioned in this presentation.
21
Investment Fundamentals
22
Market Efficiency
Markets efficient over short term
Markets rapidly incorporate new information
However, markets not completely efficient
Insider information often not reflected in stock price
Segmented markets can lead to inefficiencies which
persist
23
Market Efficiency – Segmented Markets
Segmented markets can lead to inefficiencies Example #1: Long term municipal bonds.
Example #2: Time horizon arbitrage – Many investors
underemphasize long term fundamentals
Example #3: Small Cap Premium
24
Segmented Markets: Example #1 – Long Term Municipal Bonds
Treasury and municipal yield curves:
1. 04/28/06 - 04/28/09 - 04/28/14
On each date 10-20 year municipal curve is steep
Segmented demand for short term munis
Example of a market inefficiency
25
Mason’s Small Cap Allocation (EMB)
DFA and Vanguard superior
EMB fund families
Holdings analysis guides EMB
fund selection
DFA funds access smallest
companies
Smallest companies have
provided superior returns
Please see disclosures for prospectus information on funds and fund families mentioned in this presentation.
26
Mason Small Cap Exposure
5 Active Managers4 EMB Managers
• Charts plot each manager’s holdings
• EMB = more targeted and diversified exposure
27
Active vs. Passive Study – Results – Performance
When Compared to Morningstar Category Averages
The Mason active biased portfolio improved the potential performance by:
3 year – 0.93%
5 year – 1.06%
10 year – 0.81%
The Mason EMB biased portfolio improved the potential performance by:
3 year – 2.09%
5 year – 1.87%
10 year – 1.65%
Approximate Risk Adjusted Performance was the Highest with the EMB
Biased Portfolio in the 3, 5 and 10 year periods studied
28
1. No reversion towards mean across fund families
2. Strong reversion to the mean within each individual fund family
3. Best approach is to construct portfolio utilizing managers from superior
fund families
Key Findings
29
1. Harness the market to achieve your goals
2. Implement appropriate long term strategy
3. Utilize superior EMB funds
4. Utilize superior Active funds
Conclusion
30
Disclosures – Improved Returns from EMB Portfolio Slide
Historical MIMS Managers Performance versus category averages and all EMB portfolio:
We analyzed performance of our historically approved active managers relative to category averages and the proposed "all index"
portfolio. In each case we assumed a C allocation. We constructed series which reflect performance for approved managers during
the dates when the managers were approved. For example within taxable intermediate bonds, Columbia Intermediate bond was
approved from the beginning of 2000 through August of 2004 while Harbor Bond was approved from January 2000 through present
so is included for the entire period. For purposes of constructing a taxable intermediate bond series we assumed an equal allocation
among all approved funds in the category incorporating Columbia Intermediate bond fund through August 2004 and Harbor Bond
from 2000 through present etc.
We then combined these series in the allocations of the MIMS C reflecting how the manager mix evolved over time. Similarly, we
constructed a MIMS C portfolio assuming allocations to each respective Morningstar Category Average. For each asset class we
use the appropriate Morningstar Category Average except for:
-Long Term Taxable is split between the category average and the BarCap US Credit A+ Long TR
- International Bonds is split between the BarCap Gbl Agg Ex USD TR USD, the Citigroup US$ Hedged Non-US$ Gvt TR index,
and the category average for World Bonds
- Small Cap International Stock uses the S&P Dvlp ex. US < $2 billion
- Commodities uses the Dow Jones – UBS Commodity TR index
A third series was constructed assuming utilization of the proposed "all EMB" portfolio detailed on the following page. The last two
rows of each section show the difference between our active manager allocation and the other two scenarios. Green indicates
outperformance while red indicates under performance.
In each portfolio we began including commodities in July 2006, Global Real Estate in May 2008 and TIPS in January 2009. In the
case of the “all EMB” portfolio we included a 1.27% allocation to SPDR Global Natural Resources from January 2009 forward. For
earlier periods we assumed this portion was allocated to Vanguard Energy Index.
Please see disclosures for prospectus information on funds and fund families mentioned in this presentation.
31
Disclosures – Improved Returns from EMB Portfolio Slide
Fund Ticker Morningstar Category MIMS C Allocation
Prime Management Obligation Capital Shares Money Market Fund 2.00%
Vanguard Ltd-Term Tx-Ex Adm VMLUX US OE Muni National Short 3.63%
Vanguard Interm-Term Tx-Ex Adm VWIUX US OE Muni National Interm 3.75%
Vanguard Long-Term Tax-Exempt Adm VWLUX US OE Muni National Long 1.25%
Vanguard Short-Term Investment-Grade Adm VFSUX US OE Short-Term Bond 3.63%
Vanguard Interm-Term Investment-Grde Adm VFIDX US OE Intermediate-Term Bond 3.75%
Vanguard Long-Term Investment-Grade Adm VWETX US OE Long-Term Bond 1.25%
DFA Inflation-Protected Securities I DIPSX US OE Inflation-Protected Bond 5.75%
T. Rowe Price Instl Intl Bond RPIIX US OE World Bond 2.50%
PIMCO Foreign Bond (USD-Hedged) I PFORX US OE World Bond 2.50%
DFA US Large Cap Value I DFLVX US OE Large Value 9.25%
Vanguard Value Index Adm VVIAX US OE Large Value 9.25%
Vanguard Growth Index Adm VIGAX US OE Large Growth 8.00%
Vanguard International Value Inv VTRIX US OE Foreign Large Value 8.00%
Vanguard International Growth Adm VWILX US OE Foreign Large Growth 5.50%
Vanguard REIT Index Signal VGRSX US OE Real Estate 5.50%
DFA Global Real Estate Securities I DFGEX US OE Global Real Estate 5.50%
DFA US Small Cap Value I DFSVX US OE Small Value 2.50%
Vanguard Small Cap Value Index Admiral VSIAX US OE Small Value 2.50%
Vanguard Small Cap Growth Index Admiral VSGAX US OE Small Growth 2.00%
DFA US Micro Cap I DFSCX US OE Small Blend 1.00%
DFA International Small Company I DFISX US OE Foreign Small/Mid Blend 1.25%
DFA International Small Cap Value I DISVX US OE Foreign Small/Mid Value 1.25%
Vanguard Energy Index Adm VENAX US OE Equity Energy 2.98%
SPDR S&P Global Natural Resources GNR US ETF Natural Res 1.28%
PIMCO Commodity Real Ret Strat Instl PCRIX US OE Commodities Broad Basket 4.25%
Please see disclosures for prospectus information on funds and fund families mentioned in this presentation.
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Disclosures – Fund Manager Prospectus Links
https://personal.vanguard.com/us/literature/prospectus/mutualfunds
https://investments.pimco.com/Literature/Pages/MutualFunds.aspx
https://us.dimensional.com/other/prospectuses
http://corporate.troweprice.com/ccw/html/content/prospectuses/prospectuses.html?van=prospectus
https://www.spdrs.com/resources/materials/productLiteratureOverlay.seam
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John Palmucci, MBA
Senior Vice President for Finance and Administration
Valparaiso University
Valparaiso, Indiana
34
Valparaiso University - Profile
Students
3,264 Undergraduate
1,256 Law and Graduate
Teaching Faculty
220 Full-Time
90% hold Ph.D or terminal degree in their field
13:1 student-faculty ratio
21 average class size
Freshman Class Academic Profile
26 – average ACT Score
1643 – average SAT Score (2,400 scale)
3.67 – average GPA (4.0 scale)
35
Endowment Fund Governance Structure and Investment Policy
Board of Directors
•Sets and maintains overall authority for the policy
•Policy follows UPMIFA provisions
•Delegates authority to the CPIC
Capital Planning and Investment
Committee (CPIC)
•Responsible for directing the management of the policy and monitoring compliance
•Delegates certain responsibilities to third parties
Investment Consultant
•Consultant’s role is non-discretionary
•Provides research and makes recommendations on policy
•Monitors managers and provides ongoing reporting
Investment Managers
•Managers have full discretion to manage to their mandate
•Report results on a quarterly basis
•Communicates with consultant and committee
36
Valparaiso University – Capital Planning and Investment Committee (CPIC)
Currently Redrafting the Investment Policy Statement
Key Considerations for the New Policy
1) Spending Policy
2) ESG
3) Liquidity
Newly Approved Policy Expected Soon
37
Valparaiso University –Current vs. Target Allocation3-31-15
Asset Classes Current Target
Cash 4.3% 0.0%
Core Bonds 12.4% 18.0%
Global Bonds 1.0% 0.0%
Total Fixed 17.7% 18.0%
Large Cap Equity 24.5% 21.0%
International Equity 23.5% 16.0%
Emerging Market Equity 3.7% 5.0%
Private Captial 18.2% 23.0%
Total Equity 69.8% 65.0%
Commodities 1.4% 6.0%
Private Natural Resources 4.8% 5.0%
Total Real Assets 6.2% 11.0%
Hedge Fund Strategies 6.3% 6.0%
Total Directional and Relative Value 6.3% 6.0%
TOTAL 100.0% 100.0%
Allocation
38
Valparaiso University Endowment Portfolio Highlights - 3-31-15
Change in Market Value through 3/31/2015
QTD FYTD
Beginning Market Value 196,479,308$ 199,796,389$
Net Transactions (23,025)$ (5,034,846)$
Investment Growth 5,480,010$ 7,174,750$
3/31/2015 Market Value 201,963,293$ 201,936,293$
Performance Summary*
Time Weighted Returns After Fees through 3/31/2015
Performance Item QTD 1 Year5
Years
10
Years
Since
12/2002
Total Portfolio 2.79 7.18 9.28 6.10 7.88
Policy Benchmark 0.39 3.51 8.08 6.31 7.89
Variance 2.40 3.67 1.20 -0.21 -0.01
Attribution Summary*
Performance Item QTD 1 Year5
Years
10
Years
Since
12/2002
Allocation 1.14% 0.66% -1.06% -0.40% -0.55%
Selection 1.94% 1.95% 0.66% -0.41% -0.40%
Interaction -0.68% 1.06% 1.60% -0.60% 0.58%
Total 2.40% 3.67% 1.20% -0.21% -0.01%
* All private programs had not yet been priced when the report was generated
39
Valparaiso University – Current vs. Target Allocation3-31-15
Portfolio – $202M
Within Traditional Equity
63.6% Active
36.4% Passive
Passive Managers Utilized in:
Domestic Bonds (Investment Grade)
Large Cap Equities
Non US Developed Equities
Commodities
40
Valparaiso University – Evolution of Active vs. Passive
Role of Passive Investments
Active Versus Passive Debate within the CPIC
Role of Passive Investments Going Forward
41
Alexander Yuchvid, MBA, CPA
Director of Investments and Financial Analysis
Indiana University
Bloomington, Indiana
42
Indiana University Investment StrategyJuly 21, 2015
Off
ice o
f th
e S
r. V
ice P
resi
dent,
CFO
and T
reasu
rer
43
Fast Facts about Indiana University (Fall 2014)
INDIANA UNIVERSITY is a major multi-campus public research institution
• Founded in 1820
• Indiana University (IU) is a public university in
the state of Indiana
• IU has eight campuses
• Total living alumni: More than 604,000,
including nearly 303,000 Indiana residents
• Annual operating budget: ~$3.3 billion
• Research centers and institutes: More than 200
• Endowment: ~$2 billion
• Operating Funds: ~$2 billion
• Debt ~$1 billion
• Monthly payroll and benefits ~$150MM
• Credit rating Aaa by Moody’s and AA+ by S&P
82%
11%
4% 3%
Student population: 114,370
Undergaduate
Graduate
Doctoral-Research
Doctoral-Practice
46%
3%
51%
More than 20,400 employees
Academic Staff
Executive/Admin
Support Staff
44
Cash Flow Forecast
Long-term planning and disciplined business practices have allowed us to optimize the investment of operating
cash balances
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
Cash Balances
Monthly Low - Actual FY13-14 Monthly Low - Act/Fcst FY14-15
Higher education industry is characterized by predictable business cycles/ cash flow
45
IU Operating Funds - Background
Strong governance and policy frameworks help to make good investment decisions
Treasurer’s office
Oversight of IU Operating
Funds(~$2 billion)
CFO and Treasurer
Custodian Bank
Investment CommitteeInvestment Managers
Investment Consultant
Board of Trustees
Statutory Environment:
• Article XI, Section 12 of the Indiana Constitution precludes IU to invest in equity
• IU’s available funds can only be invested in fixed income securities
• Indiana University has no statutory authority to borrow for operating purposes
Governance:
46
Investment Management Priorities
Increase total return while maintaining an adequate level of reserves and risk
Additional Priorities
• Maintenance of an adequate level of reserves for unexpected changes in the market value or to meet unanticipated spending requirements.
• Management of costs to administer and manage the investments.
• Compliance with all statutory requirements of the State of Indiana.
Preservation
of Capital
Minimizing the risk
of losing principal
Liquidity
The University is prohibited
by state constitution to
borrow money for
operating needs
Interest Income
Income
maximization
47
Investment Policy Statement
Appropriately conservative investment guidelines
• Securities guidelines
• Fixed Income securities
• Portfolio minimum average credit rating - “A”
• Investments in high-yield, non U.S. emerging market and debt
securities are permitted (exposure limited to 25% high-yield, 25%
non U.S. with combined exposure not to exceed 40%)
• Limitations on individual holdings
• Thorough Investment Strategy selection due diligence
• Clearly defined reporting and communication requirements
• Formal watch list procedures
• Link to the IU Investment Policy:
http://policies.iu.edu/policies/categories/financial/treasurers-office/FIN-
TRE-VI-150-investment-policy.shtml
48
Investment Portfolio
Well defined investment structure
Operating Funds
• Tier 1 - Liquidity Pool: provides for daily and monthly operating cash
• Liquidity Reserves: provides for self liquidity and consists of variable rate fixed income
• Tier 2 - Core: reserves to replenish liquidity, if necessary
• Tier 3 - Core Plus, Absolute/ Unconstrained: emergency reserves; seeks to
maximize total return
49
Continuous Examination of Asset Allocation (Cont.)
Appropriately conservative fixed income portfolio; ~55% allocation to defensive strategies
12.7%
20.7%
21.6%
22.4%
22.6%
Asset Allocation 03/31/2015
Money Market Liquidity Reserves Defensive Bond Core Plus Bond Unconstrained Bond
50
Tier History
New Investment Strategies Funded; Diversification Enhanced
3/3
1/2
00
1
9/3
0/2
00
1
3/3
1/2
00
2
9/3
0/2
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2
3/3
1/2
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3
9/3
0/2
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3
3/3
1/2
00
4
9/3
0/2
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4
3/3
1/2
00
5
9/3
0/2
00
5
3/3
1/2
00
6
9/3
0/2
00
6
3/3
1/2
00
7
9/3
0/2
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7
3/3
1/2
00
8
9/3
0/2
00
8
3/3
1/2
00
9
9/3
0/2
00
9
3/3
1/2
01
0
9/3
0/2
01
0
3/3
1/2
01
1
9/3
0/2
01
1
3/3
1/2
01
2
9/3
0/2
01
2
3/3
1/2
01
3
9/3
0/2
01
3
3/3
1/2
01
4
9/3
0/2
01
4
3/3
1/2
01
5
Investment Strategies
Liquidity Enhanced Cash Core Core Plus Absolute Return/ Unconstrained
51
Tier History (Cont.)
New Investment Managers Funded; Diversification Enhanced
Investment Managers
52
Risk Profile Relative to a Broad Fixed Income Index
Given the asymmetric risk of fixed income investing, diversification is paramount
Barclays Aggregate Index
Mortgage-Backed (Prepayment)
Corporates (Credit/Default)
Corporates (Credit/Default)
Duration (US Interest Rates)
Non-US (FX)
Asset Backed (Credit/Call)
Duration (US Interest Rates)
IU Operating Fund
Mortgage-Backed (Prepayment)
Relative to a Broad Fixed Incomeproxy, Indiana University OperatingFunds display:
• Lower overall risk
• Higher diversification of risk
• More flexible exposure to risks
• Similar yield
• Similar quality (AA- vs. the Index atAA+)
vs.
Tier I Tier II Tier III Total IUOF Barclays Agg. Index
Duration (yrs.) 0.8 1.7 3.0 2.1 5.6
Yield 1.0% 1.3% 3.0% 2.1% 2.3%
Fixed Income Sources of Risks
Portfolio Characteristics
The IUOF investment portfolio has been carefully constructed to seek return throughvarious sources of risk, with an emphasis on overall liquidity
53
IUOF Performance vs. Index
During the long term IUOF portfolio has outperformed its benchmark
Average Annual Total Returns ending December 31, 2014
1 Year 3 Years 5 Years
Tier 1 0.79% 1.38% 1.35%
Tier 2 0.92% 1.64% 2.50%
Tier 3 4.31% 4.40% 6.31%
Net Total 2.48% 2.96% 4.45%
Blended IUOF Benchmark 3.44% 1.77% 3.11%
Barclays Aggregate Index 5.97% 2.96% 4.45%
Over three- and five-year periods, the IUOF portfolio has outperformed its custom
benchmark and performed in-line with the broader Barclays Aggregate Index, despite
exhibiting a lower and more diversified risk profile.
54
IUOF Performance vs. Similar Investment Strategies
Identifying and Hiring Top Active Managers is Essential for Good Investment Performance
Performance Rankings vs. Callan Associates Investment Database as of 3/31/15
Expectations from active managers:
• Exceed the appropriate market index
• Total return and risk-adjusted return are consistently in the top 50th percentile versus an appropriate peer group
Last 5 Years Last 10 YearsInvestment Strategy 1 67 41Investment Strategy 2 22 26Investment Strategy 3 40 18Investment Strategy 4 15 11Investment Strategy 5 14 1Investment Strategy 6 52 10Investment Strategy 7 32 66Investment Strategy 8 28 20Investment Strategy 9 4 N/AInvestment Strategy 10 31 N/AInvestment Strategy 11 91 N/AInvestment Strategy 12 6 17Investment Strategy 13 46 55
