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The Endowment

Report on Investment Performance for the fiscal year ending June 30, 2013

The market value of the LTIP as of June 30, 2013 was $1.81 billion.  Performance for the year was 12.0%, net of all fees and expenses, compared with the benchmark return of 12.9%.  Net performance of the LTIP exceeded the benchmark for 3, 5 and 10 year periods.  Rochester’s annualized 10 year net return is 8.2%, 1.5% per annum above the benchmark and above the targeted net average annual return of 8%. 

Asset Allocation and Performance

The chart below shows fiscal 2013 asset allocation targets for the LTIP.  The Investment Committee will review asset allocation and risk at its September 2013 meeting and decide on changes to asset allocation at that time.

University of Rochester
Long Term Investment Pool Asset Allocation (in %)*
As of 6/30/2013

 

Recommendation for FY 2013
"Neutral Position"

Traditional Investments
Consisting of:

Policy Portfolio

Actual

+ / -

Range

Total, Publicly-traded long equities
37
36
(1)
34 - 37
Fixed Income
4
4
(0)
4 - 6
Cash (not held by managers)
3
4
1
(3) - 5
Total, Traditional Investments
44
44
0
35 - 48
         
Alternative Investments
Consisting of:
       
Hedge Funds
18
22
(4)
17 - 20
Private Equity / Distressed
19
19
(0)
18 - 23
Real Assets
19
16
(3)
17 -22
Total, Alternative Investments
56
56
(1)
52-65
 
TOTAL
100
100
(0)
*Committee approval in September 2012


The LTIP has an allocation of 56% 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 9.2% per annum from the LTIP’s well-diversified alternative program is above the performance of public equities, as shown on the enclosed performance chart.  Importantly, the LTIP’s alternative investments generate attractive returns with low correlation to public equities and also reduce volatility of year-to-year returns.

Public Equities:

The publicly-traded equity portfolio represented 36% of the total portfolio, slightly below the target allocation of 37%.  The publicly-traded equity portfolio returned 17.8% for the fiscal year, in excess of 16.6% for the MSCI All Country World Index (“ACWI”).

Opportunistic funds represented 20% of the LTIP at the end of the fiscal year.  The group returned 23.3%, nearly 7% above the ACWI’s return of 16.6%.  The group also outperformed the ACWI for all longer time periods.

International equity represented 16% of the LTIP at the end of the fiscal year.  Performance was 10.7%, underperforming the benchmark return of 13.6%.  Although the international equity managers underperformed during the strong markets of the past 12 months, the group has protected capital well over time, outperforming its benchmark for all longer time periods.  Emerging markets represent more than half of the international public equity allocation.

Hedge Funds:

The hedge fund allocation was 22% at the end of the fiscal year, above the target allocation of 18%.  The allocation was temporarily above the upper limit in the allocation range of 20%, as a result of the reclassification of a manager with a broad mandate, from the public equity category into the hedge fund category.  Additionally, shortly after fiscal year end, redemptions and side pocket distributions reduced the hedge fund allocation toward the target. 

The hedge fund portfolio returned 13.7% for the fiscal year, above the 12.9% return by the LTIP benchmark.  The ten-year net annualized return was 7.9%.  Thirteen of the LTIP’s sixteen hedge fund managers had returns above 10% for the fiscal year.  Hedge fund managers in the LTIP successfully dampened volatility for the year, and the positive impact of this was especially notable in the final months of the fiscal year.

Real Assets:

Partnerships investing in real assets (real estate, energy and natural resources) represented 16% of the LTIP at the end of June, below the target allocation of 19%, and slightly below the lower limit in the allocation range of 17%.  The allocation was below the range as a result of distributions in excess of forecasts and modest commitments to new funds.  The real assets portfolio returned 3.4% for the fiscal year.

The real estate portfolio returned 6.0% for the year; the ten-year net annualized return was 5.4%.  Domestic real estate managers performed well in fiscal 2013, at 8.9% for the period; international managers returned 1.3%. 

The natural resources portfolio returned -1.5% for the year; the ten-year annualized return was 17.9%.  Within natural resources, energy-focused managers, with 3/4ths of the assets in the LTIP’s natural resources allocation, returned 3.4%.  Mining and commodities managers (11% of the natural resources allocation, and less than 1% of the LTIP) had a difficult year, at -28.4%.  During the year many commodity prices declined sharply stemming from lower demand from China and other resource-importing countries.  While the LTIP’s natural resources portfolio has low direct correlation to commodity prices, the impact of decreased demand and valuation declines for companies in that sector impacted performance.  Additionally, many of the LTIP’s natural resource funds remain in the j-curve.

Private Equity:

The LTIP’s private equity positions, consisting of partnerships investing in buy-out, venture-stage and distressed companies, represented 19% of the LTIP at the end of the fiscal year. 

The LTIP’s private equity partnerships returned 13.6% for the year.  The ten-year net annualized return was 12.3%.  Several buy-out and distressed managers continue to achieve a high rate of distributions from successful sales of portfolio positions and are focused on selling into what is perceived to be a highly priced market.  Venture capital was the best performing sub-segment within private equities, driven by continued strong performance from the manager holding the largest venture capital allocation in the LTIP.

Fixed Income:

Fixed income and cash equivalents allocation represented 8% of the LTIP.  For the fiscal year, the LTIP’s fixed income and cash investments returned 2.2% compared to -0.7% for the Barclays U.S. Aggregate.  Duration remains at approximately one-half the benchmark in order to protect the fixed income portfolio from the possibility of rising interest rates. 

The manager of the largest bond allocation had difficulties late in the fiscal year, failing to position properly for the market’s reaction in May to the Federal Reserve’s mention of tapering bond purchases.  The fund has since been redeemed in favor of an unconstrained fund.

Liquidity

The LTIP has very good liquidity, with 65% of assets available within one year.  The comparable figure at fiscal year-end 2012 was 60%.  The LTIP continues to receive significant distributions from private equity and real estate investments and has not drawn upon the line of credit to meet commitments.

Investment Reports for Previous Years