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The Endowment

Report on Calendar Year 2013 Performance

February 2014

The market value of the Long Term Investment Pool (LTIP) as of December 31, 2013 was $1.97 billion.  Performance for the year was 15.7%, net of all fees and expenses, compared with the benchmark return of 17.5%.   Performance of the LTIP has exceeded the benchmark by 1% or more, net annualized, for 3- and 10-year periods.  LTIP underperformance during periods, such as the past 5 years when equity markets experienced a significant rally, is not unexpected, given the diversification of the LTIP. Rochester’s annualized 10-year net return was 7.9%, 1.5% per annum above the benchmark. 

Asset Allocation and Performance

The chart below shows asset allocation targets for the LTIP and actual allocations at calendar year end.


University of Rochester
Long Term Investment Pool Asset Allocation (in %)*
As of 12/31/2013

 
Policy Portfolio
Actual
+ / -
Range
Traditional Investments
Consisting of:
Total, Publicly-traded long equities
38
39
1
35 - 42
Fixed Income
4
3
(1)
3 - 6
Cash (not held by managers)
2
4
2
(3) - 3
Total, Traditional Investments
44
46
2
35 - 51
   
 
 
 
Alternative Investments
Consisting of:
 
 
 
 
Hedge Funds
22
23
1
20 - 25
Private Equity / Distressed
17
18
1
15 - 20
Real Assets
17
14
(3)
14 - 20
Total, Alternative Investments
56
54
(2)
49 - 65
 
TOTAL
100
100
0
100

*committee approval in September 2013

The LTIP’s alternative investment allocation was 54%, which consists 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 10-year return of 9.1% per annum from the LTIP’s alternative program exceeds the return on the LTIP, with lower volatility.  Importantly, the LTIP’s alternative investments generate relatively attractive returns in periods of weak performance by public equities and bonds.

Public Equities:
The publicly-traded equity portfolio represented 39% of the total portfolio, slightly above the target allocation of 38%.  The publicly-traded equity portfolio returned 21.8% net for the calendar year, slightly below the 22.8% return for the MSCI All Country World Index (“ACWI”).  The public equity portfolio has outperformed the benchmark for all longer time periods.

Opportunistic funds represented 23% of the LTIP at the end of December.  The group returned 32.3% net, exceeding the return for the ACWI.  The group also outperformed the ACWI for all longer time periods.

International equity represented 16% of the LTIP at the end of December.  Performance for the calendar year was 9.2% net, underperforming the 15.3% return of the benchmark, MSCI ACWI ex US, but outperforming the benchmark for 5- and 10-year time periods.  Emerging markets, which represented more than half of the international public equity allocation, returned -1.4% net, outperforming the -2.6% return of the benchmark, MSCI Emerging Markets.

Hedge Funds:
The hedge fund allocation was 23% at the end of the calendar year, above the target allocation of 22%.  The hedge fund portfolio returned 17.3% for the year, slightly below the 17.5% return of the LTIP benchmark.  In 2013, multi-strategy hedge funds lagged equity markets, as would be expected, and long/short hedge funds also lagged due to their short positions and lower net exposures.  The 10-year net annualized return was 8.1%, outperforming the 6.5% return of the LTIP benchmark and with lower volatility. 

Real Assets:
Partnerships investing in real assets represented 14% of the LTIP at the end of December, below the target allocation of 17%.  The real assets portfolio returned 5.3% net for the calendar year.  As noted in prior reports, real assets are very long-lived holdings and in some cases have been slow to recover from the impact of the recession, accounting for the disappointing net return of -1.0% over the most recent 5-year period.  The 10-year net return of 10.3%, annualized, is more representative of the expected return from this investment category.  Real assets also serve an important role in the LTIP by stabilizing performance during periods of volatility in public equity prices. 

The real assets portfolio consists of partnerships investing in both real estate and natural resources.  Real estate, a 9% allocation within the LTIP, returned 8.2% net for the year; the 10-year net annualized return was 5.6%.  Natural resources, a 5% allocation within the LTIP, returned 0.1% net for the year; the 10-year net annualized return was 15.6%.  Within natural resources, energy-focused managers returned 3.6% net for the year, mining and commodities managers returned -28.1% net, and timber managers returned 6.8% net.  Many of the LTIP’s natural resource funds remain in the j-curve, which, along with a global decline in commodity prices, negatively impacted performance.

Private Equity:
The LTIP’s private equity portfolio consists of partnerships investing in buy-out, growth, venture and distressed companies, and represented 18% of the LTIP at the end of the calendar year.  The LTIP’s private equity partnerships returned 19.2% net for the year; the 10-year net annualized return was 12.3%.  The LTIP’s buy-out, growth, venture and distressed managers continue to achieve a high level of distributions from sales or mergers of portfolio positions and are focused on selling into what is perceived to be a fully-priced market.  Venture capital was the best performing sub-segment within private equities in 2013.  Although new commitments to private equity have been reduced in recent years due to concerns about the significant capital overhang and potentially lower returns, commitments to high quality managers continue at a measured pace.

Fixed Income:
The allocation to fixed income and cash equivalents represented 7% of the LTIP, above the target allocation of 6% combined.  For the calendar year, the LTIP’s fixed income and cash investments returned -0.6% net compared to -2.0% for the Barclays U.S. Aggregate.  Returns over all longer periods are above the benchmark.  Duration remains below one-half of the benchmark in order to protect the fixed income portfolio from the possibility of rising interest rates. 

Liquidity

The LTIP has very good (and increasing) liquidity, with 68% of assets available within one year.  The LTIP continues to receive significant distributions from private equity and real assets investments and has not drawn upon the line of credit to meet commitments.