Report on Investment Performance for the fiscal year ending June 30, 2011
The market value of the Long-Term Investment Pool ("LTIP") as of June 30, 2011 was $1.66 billion, an increase of more than $190 million for the fiscal year. Performance for the year was 17.7%, net of all fees and expenses, compared with the benchmark return of 23.3%. Performance of the LTIP's public equity allocation, as well as the performance of the fixed income allocation, exceeded their benchmarks for the fiscal year, as well as for 3 and 5 year periods. Net performance of the LTIP exceeded the benchmark for 5 and 10 year periods by 0.7% and 1.8% per annum, respectively. The 10 year net performance of fixed income was 0.1% below the benchmark and 10 year net performance of public equities was 2% above the benchmark, annualized. The alternative investment program continues to augment performance of these "traditional" investment categories while offering very significant hedging against downturns in public equity markets. Alternative investments also dampen performance in equity market rallies, as was evident in fiscal 2011.
Asset Allocation and Performance
The attached schedule shows the allocation to major asset classes and asset class performance for the periods ending June 30, 2011. Asset allocation was held relatively constant throughout the year. Small reductions in public equity exposure, to rebalance toward targeted allocations, were made as equity prices increased.
The chart below shows asset allocation ranges and targets for the LTIP during fiscal year 2011. All asset classes were within these policy portfolio ranges throughout the year.
University of Rochester
Long Term Investment Pool Asset Allocation (in %)*
As of 6/30/2011
|Portfolio||Actual||+ / -||Range|
|U.S. publicly-traded long equities||15||16||1||14 - 16|
|Non-U.S. publicly-traded long equities||15||16||1||14 - 16|
|Total, publicly-traded long equities||30||32||2||28 - 32|
|Fixed Income||10||8||-2||8 - 12|
|Total, Traditional Investments||40||40||0||38 - 40|
|Hedge Funds||25||22||-3||20 - 25|
|Private Equity / Distressed||20||23||3||20 - 25|
|Real Assets||15||15||0||15 - 20|
|Total, Alternative Investments||60||60||0||60 - 65|
|Cash (not held by managers)||0||0||0||0 - 2|
|Note: Numbers may not foot due to rounding. Excludes impact of letter of credit.|
|* Committee approval on 8/4/2009|
The LTIP has an allocation of 60% to alternative investments, consisting of hedge funds and partnerships that invest in real assets and equities of private companies. This allocation is near the mean allocation to alternatives of the largest educational endowments. The net average annualized ten year return of 7.6% per annum from the LTIP's well-diversified alternative program is significantly above the performance of public equities, as shown on the enclosed performance chart. The LTIP's alternative investments also provide long-term performance that is consistent with the return target of the portfolio (currently 8% per annum) while reducing volatility of year-to-year returns and producing returns that have low correlation to public equities.
The domestic equity allocation was held slightly above the 15% target for much of the fiscal year. The group significantly outperformed its benchmark for all times periods, returning 34.1%, net for fiscal 2011 compared to 32.4% from the Dow Jones U.S. Total Stock Market Index.
International equity represented 16% of the LTIP for much of the year, slightly above target. The allocation was held constant throughout the year. Net performance for the year was below the benchmark for the year (28.1% compared to 29.7% from the benchmark) but ahead of the benchmark over ten years by more than 3% per annum. Certain firms within the international equity allocation are permitted flexibility in setting portfolio's "beta" exposure, to allow for defensive positioning. Defensive positioning was the primary factor in the small underperformance in 2011.
Hedge funds represented 22% of the LTIP at the end of the year. The allocation was held constant throughout the year. The hedge fund portfolio returned 9.7% net for the year, consistent with the return expectations for the low volatility and low leverage funds selected for the LTIP. The hedge fund program is designed to reduce volatility and preserve capital in equity market downturns, and as a consequence performance will fall short of equity benchmarks in market rallies. Performance of the hedge funds in the LTIP exceeded public equity market performance for five and ten year time periods, with annualized net returns of 5.3% and 7.3% respectively.
Partnerships investing in real assets (real estate, energy and natural resources) represented approximately 15% of the portfolio, equal to the targeted allocation. The real assets portfolio returned 10.8% net for the fiscal year. The annualized real asset return for three years is -7.1% due to the impact of recession-driven real estate valuations. Five and ten year annualized performance is 0.5% and 11.5%, respectively. Investing in real assets requires a long term view, as evident in the difference between Rochester's shorter-term and longer-term performance. Real assets are also likely to generate attractive relative returns in periods of high or increasing inflation. Deployment of real asset capital commitments in an environment of lower prices, such as experienced in 2008 through 2011, bodes well for performance in the coming years.
The LTIP's private equity positions, consisting of partnerships investing in buy-out, venture and distressed companies returned 18.3% for the fiscal year. The ten-year net annualized return of 6.3% in private equity, while below expectations, is well above the 2.7% annual return of the S&P 500 index for that period. The venture capital component of the private equity portfolio exhibited a particularly strong return in fiscal 2011, at 31.2%, as the IPO markets were receptive to new offerings by technology companies. The private equity portfolio represented 22% of the LTIP at the end of the fiscal year and may increase toward the upper end of the allocation range in the coming year as commitments are drawn.
The allocation to fixed income and cash was held constant during year at approximately 8% of the LTIP. The LTIP's fixed income managers returned 6.0%, net, compared to 3.9% for the Barclays Aggregate. For three and five years, the portfolio has outperformed the benchmark; it is slightly behind for ten years at 5.6% (net) vs. 5.7%. Duration remains at approximately one-half the benchmark, to help protect the fixed portfolio from the possibility of rising interest rates.
The LTIP has very good liquidity, with 60% of assets available within one year. 2011 has seen a significant increase in return of capital and realizations from private equity and real estate investments. The line of credit was not accessed during the year.
Planning and Process
The University's long term investment program has carefully adjusted allocations and portfolio construction in response to conditions and opportunities over the past decade. To assure this continues the Investment Committee conducts in-depth "comprehensive evaluations" of public equity, private equity, hedge funds, and real assets. These evaluations help guide decisions on allocation, strategy and selection of investment firms. The Investment Policy Statement and Policy Portfolio will continue to be evaluated by the Committee at its September meeting. Extensive evaluation of risks and scenario testing also remain an integral part of the Committee's planning.