Fiscal 2015 Report

Report on Investment Performance for the fiscal year ending June 30, 2015

The market value of the University of Rochester’s Long-Term Investment Pool (“LTIP”) as of June 30, 2015 was $2.2 billion. Performance for the year was 4.3%, net of all fees and expenses, compared with the benchmark return of 1.0%. Performance of the LTIP has exceeded the benchmark, net annualized, for one, three, five and ten year periods. Ten year LTIP performance of 7.5% net annualized is 1.6% annualized above the 5.9% return on the benchmark and representative of the expected results from the LTIP over longer time periods.

Asset Allocation and Performance

The chart below shows asset allocation targets and ranges (“policy portfolio”) compared to actual allocations on June 30, 2015.

The LTIP’s 54% alternative investment allocation consists of hedge funds and partnerships investing 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 8.6% per annum from the LTIP’s alternative program exceeded the return on the LTIP, with significantly lower volatility (4.4% for the ten years ending June 30, 2015, compared to 7.1% for the LTIP). Importantly, the LTIP’s alternative investments generate attractive returns in periods of weak or negative performance by public equities and bonds.

Public Equities

The publicly-traded equity portfolio represented 36% of the total portfolio, in line with the target allocation of 36%. The publicly-traded equity portfolio returned 0.9% net for the fiscal year, above the 0.7% return for the MSCI All Country World Index (“ACWI”). The publicly-traded equity portfolio outperformed the benchmark for one, three, five and ten year periods.

Opportunistic funds represented 19% of the LTIP at the end of June. The group returned 6.6% net for the fiscal year, ahead of the 0.7% return for the ACWI. The group outperformed the ACWI for one, three, five and ten year periods.

International equity represented 17% of the LTIP at the end of June. Performance for the fiscal year was -5.3% net, in line with the -5.3% return of the benchmark, the MSCI ACWI ex-U.S. The group outperformed the benchmark for the ten year time period but underperformed for the three year period. Emerging markets, which represented slightly less than half of the international public equity allocation, returned -7.6% net for the fiscal year, underperforming the -5.1% return of the benchmark, the MSCI Emerging Markets Index. For longer periods, the emerging group outperformed the Index.

Hedge Funds

The hedge fund allocation was 25% at the end of June, above the target allocation of 24%. The hedge fund portfolio’s net return was 4.6% for the fiscal year, below the 5.6% return of the Hedge Fund Blend Index, comprised of 50% Credit Suisse Multi-Strategy Index and 50% Credit Suisse Long-Short Equity Index. For the fiscal year ended June 30, 2015, multi-strategy managers returned 1.1% net, equity-oriented managers returned 9.6% net, and the liquid diversifier manager returned -1.4% net. The hedge fund ten year net annualized return was 7.5%, above the 5.9% return of the LTIP benchmark. The ability of hedge funds to deliver returns comparable to those of the overall LTIP with lower volatility has been a key component of the LTIP’s attractive long-term risk-adjusted return profile.

Real Assets

Partnerships investing in real assets represented 10% of the LTIP at the end of June, below the target, and lower limit in the allocation range, of 14%. The allocation fell below the range as a result of significant distributions, highly selective commitments to new funds, and the relatively faster growth rate of the LTIP corpus. The real assets portfolio returned -3.2% net for the fiscal year. The net return of 4.9% for the most recent five year period is disappointing, but the ten year net annualized return of 4.6% is approaching the expected level of return from this investment category. Real assets serve an important role in the LTIP by stabilizing performance during periods of volatility in public markets.

The real assets portfolio consists of partnerships investing in both energy/mining and real estate/agriculture. Energy and mining, a 3% allocation within the LTIP, returned -22.4% net for the fiscal year largely due to mark to market losses on private positions that are linked to prices of public securities in the energy sector (as opposed to actual realized losses). The ten year net annualized return for energy and mining was 4.1%. Real estate and agriculture, a 6% allocation within the LTIP, returned 10.9% net for the fiscal year. The ten year net annualized returns for real estate and agriculture were below expectations at 4.0% and 4.4%, respectively.

Private Equity

The LTIP’s private equity portfolio consists of partnerships investing in buyouts/growth, distressed/credit, and venture capital, and represented 19% of the LTIP at the end of the fiscal year, slightly above the target allocation of 18%. Private equity returned 19.1% net for the fiscal year; the ten year net annualized return was 13.8%. The LTIP’s private equity managers continued to distribute cash and marketable securities at a high rate through sales of portfolio companies to strategic buyers and by initial public offerings.

Buyouts, the largest strategy allocation within private equity at 9%, returned 15.4% net for the fiscal year. Venture capital, representing 8% of the LTIP, returned 26.2% net for the fiscal year, driven by continued strong performance from the firm with the largest allocation in the program. Distressed, a 2% allocation within the LTIP, returned 8.5% net for the fiscal year. Ten year returns for these subcategories were 11.6%, 16.9% and 11.3%, respectively.

Fixed Income

The allocation to fixed income and cash equivalents represented 10% of the LTIP, above the target allocation of 8%. For the fiscal year, the LTIP’s fixed income and cash investments returned 0.3% net, compared to 1.9% for the Barclays Aggregate. Duration remains well below the benchmark to protect the fixed income portfolio from the potential of rising rates; this contributed to the relative underperformance for the year, as longer duration fixed income assets outperformed. The ten year annualized return for fixed income was 4.4%, in line with a return of 4.4% for the Index.

Liquidity

The LTIP has ample liquidity, with 71% of assets convertible into cash within one year.

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