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Transcript of Anders Hall, CFA Vice Chancellor for Investments & Chief Investment Officer The Vanderbilt Endowment...
Anders Hall, CFA
Vice Chancellor for Investments
& Chief Investment Officer
The Vanderbilt Endowment
August 11, 2015
Agenda• Endowment Background• Office of Investments• Asset Allocation• Beta Factors• Capital Market Research• Manager Selection• Ongoing Due Diligence• Termination Decision• Recent Activity
August 11, 2015
ENDOWMENTBACKGROUND
August 11, 2015
Background: Endowment Overview
August 11, 2015
• Vanderbilt’s endowment is not one singular, homogeneous fund
• It is comprised of approximately 2,500 different funds supporting a variety of institutional needs and purposes• Athletics • Chairs • Fellowships/stipends• Graduate support (aid,
stipends) • Lectureships• Plant, equipment, and facility operations
• Prizes and awards• Professional financial
aid• Programs• Research• Student loans• Undergraduate financial
aid • Unrestricted
Background: Endowment Categories
August 11, 2015
Gift Category Size Percentage
Athletics financial aid $58 million 1.3%
Chairs $968 million 22.0%
Fellowships/stipends $27 million 0.6%
Graduate support (aid, stipends) $48 million 1.1%
Lectureships $19 million 0.4%
Loans $3 million 0.1%
Other $17 million 0.4%
Other financial aid $42 million 0.9%
Pending designation $33 million 0.8%
Plant, equipment, and facility operations
$44 million 1.0%
Prizes and awards $13 million 0.3%
Professional financial aid $278 million 6.3%
Programs $236 million 5.4%
Research $71 million 1.6%
Undergraduate financial aid $999 million 22.7%
Unrestricted $1.5 billion 35.0%
Total $4.3 billion 100.0%
Background: Endowment Structure
August 11, 2015
• The endowment is run similar to a mutual fund or common trust, with each internal beneficiary “owning” units (similar to shares of a mutual fund) of the endowment
• At December 2014, the endowment had 43.9 million units valued at $98.32/unit
• Spending from the endowment is based on 4.5% of a trailing three-year unit value• The payout for FY 2015 (based on 12/31/12,
12/31/13, and12/31/14 unit valuations) was $4.09/unit
Background: Largest 25 EndowmentsEndowment Size (as of
6/30/14)
Harvard $35.9 billion
Texas 25.4
Yale 23.9
Stanford 21.4
Princeton 21.0
MIT 12.4
Texas A&M 11.1
Northwestern 9.8
Michigan 9.7
Penn 9.6
Columbia 9.2
Notre Dame 8.0
Chicago 7.5
California 7.4
Duke 7.0
Emory 6.7
Washington U. 6.6
Virginia 5.9
Cornell 5.9
USC 5.6
Rice 5.5
Dartmouth 4.5
Vanderbilt 4.1
Ohio State 3.5
Pitt 3.5
August 11, 2015
Background: Endowment Growth
August 11, 2015
$0
$500,000,000
$1,000,000,000
$1,500,000,000
$2,000,000,000
$2,500,000,000
$3,000,000,000
$3,500,000,000
$4,000,000,000
$4,500,000,000
$5,000,000,000Total Market Value
Background: Endowment Additions
August 11, 2015
True Corpus (Book Value) Additions (in millions)
9
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
$0
$10
$20
$30
$40
$50
$60
$70
$0$4
$15
$9
$26
$8
$1$3
$6
$3 $4 $4 $4 $5 $5$7
$26
$9$7 $7 $7
$15$1
9$1
9
$32
$24
$4
$14
$12
$56
$21
$32
$28$3
3$34
$16
$46$4
5
$41
$34$3
7
$51
$29
$60
$55
$11M5-yr avg.
$4M5-yr avg.
$4M5-yr avg.
$11M5-yr avg.
$18M5-yr avg.
$22M5-yr avg.
$29M5-yr avg.
$36M5-yr avg.
$47M5-yr avg.
$75M 10-yr total $78M 10-yr total $202M 10-yr total
$414M 10-yr total
$232M 5-yr total$330M 10-yr total
Background: Endowment Additions
August 11, 2015
Sources of Endowment Growth (in millions)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$1,800
$2,200
$2,600
$3,000
$3,400
$3,800
$4,200
Endowment that existed at the end of FY00
True endowment additions (and growth) since FY00
Quasi-endowment additions (and growth) since FY00
$4,046
$2,9
90$8
86$1
70
10%
51%
39%
$1,731 of growth
% ofgrowth
$2,315
August 11, 2015
Background: Endowment Dependency
Prince
ton
Rice
Harva
rdYal
e
Notre
Dame*
Dartm
outh
Brown
MIT
Colum
bia
Stanfo
rd*
Northwes
tern
*
Chicag
o
Was
h U.
Cornel
l
Duke
Georg
etown
Cal T
ech*
UVA
Emory
Upenn
USC
Carneg
ie M
ello
n
Vander
bilt
Johns H
opkins
UCLA*
Berkel
ey*
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%52.5%
38.7%
34.9%33.5%
26.4%
21.8%
17.6%16.5%
13.9%12.7%12.1%11.1%
10.0%7.8%
6.1%5.8%5.4%5.0%5.0%4.4%3.7%4.5%4.0%2.7%
1.6%1.0%FY
20
13
En
dow
men
t d
istr
ibu
tion
÷ O
pera
tin
g
reve
nu
es
* Includes health system
August 11, 2015
Divinity
OwenBlair
A&SLaw
Peabody
Engineering
Nursing
Athletic
s VU
Medicine0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
77%
33%
23%19% 18%
13%10% 10%
4% 4% 4%
(1) Not including the hospitals and clinics, Vanderbilt’s endowment dependency is approximately 8%(2) Endowment dependency is defined as endowment distributions as a percentage of operating revenues, net of financial aid(3) Includes Vanderbilt Medical Group
Perc
en
tag
e o
f re
ven
ues
deri
ved
fro
m
en
dow
men
t
FY 2015 budget (1,2)
(3)
Background: Endowment Dependency
August 11, 2015
Background: Endowment Returns
08-09 0190-9180-8273-75
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
-20%
-10%
0%
10%
20%
30%
40%
18
.4%
12
.1%
0.5
%
-14
.1%
7.2
% 10
.0%
5.1
%
3.3
%
10
.2%
12
.4%
12
.1%
1.7
%
30
.0%
1.6
%
25
.0%
31
.4%
14
.9%
0.8
%
14
.8%
12
.2%
5.0
%
10
.9% 14
.1%
5.5
%
15
.7% 1
9.2
%
20
.6%
17
.0% 19
.8%
31
.9%
-4.7
%
-5.8
%
3.8
%
16
.9%
17
.9%
14
.0%
21
.9%
2.1
%
-16
.3%
8.9
%
13
.6%
1.3
%
9.3
%
13
.3%
Endowment return (%) Recessions
Payout
rate (%)
4.3
%
3.1
%4
.3%
4.9
%5
.2%
5.6
%5
.5%
5.6
%5
.3%
5.4
%
3.7
%
5.5
%5
.4%
5.6
%5
.3%
4.5
%4
.6%
4.9
%5
.1%
5.1
%5
.1%
5.0
%4
.5%
4.6
%4
.3%
3.9
%3
.7%
3.7
%
3.5
%3
.9%
4.6
%6
.1%
5.1
%4
.7%
4.2
%4
.0%
4.0
%4
.8%
5.3
%4
.8%
4.4
%
FY
3.1
%3
.0%
4.1
%
Positive in 40 of Past 44 Fiscal Years
OFFICE OFINVESTMENTS
August 11, 2015
Office of Investments
August 11, 2015
Asset Allocation
Manager Selection
Operations
Office of Investments
August 11, 2015
• Staff of 24• Chief Investment Officer: 1• Investment Team• Public Investment Team: 6• Private Investment Team: 5• Risk Management: 1
• Operations Team: 8• Assistants: 3
ASSETALLOCATION
August 11, 2015
Asset Allocation: Typical US Endowment/Foundation
• Among endowments and foundations:• Largest allocation to public equities• Second largest allocation to hedge
funds
August 11, 2015
Source: Cambridge Associates
Asset Allocation: US Endowment/ Foundation Fund
Flows• Decreased flows to bonds and US equity• Increased to hedge funds and global ex-
US equity
August 11, 2015
Source: Cambridge Associates
Asset Allocation: As of 6/30/2015
August 11, 2015
Asset Class Amount Percentage
Global Equity $1,423 million 32.8%
Hedged Strategies 909 21.0
Commodities 144 3.3
Fixed Income 225 5.2
Private Capital 1,220 28.2
Real Estate 197 4.6
Natural Resources 299 6.9
Cash/Leverage -85 -2.0
Total $4,332 million 100.0%
BETAFACTORS
August 11, 2015
Beta Factors: Rationale
• Most endowments focus solely on traditional asset classes
• Shortcomings of this framework• Diversification complacency• Asset classes versus legal structures
• Beta factors provide additional perspective on a portfolio’s exposures
August 11, 2015
Global Equity
(32.5%)
Hedged Strategies
(22.1%)
Fixed Income(2.4%)
Private Capital(28.7%)
Real Estate(5.9%)
Natural Resources
(8.1%)
Ass
et
Cla
sses
As of February 28, 2013
Beta Factors: Methodology
Equity
Global Equity
(32.5%)
Hedged Strategies
(22.1%)
Fixed Income(2.4%)
Private Capital(28.7%)
Real Estate(5.9%)
Natural Resources
(8.1%)
85%
Eq
uit
y: M
SC
I A
ll C
ou
ntr
y W
orl
d I
nd
ex
(US
D)
Ass
et
Cla
sses
As of February 28, 2013
Beta Factors: Methodology
Equity (27.6%)
Global Equity
(32.5%)
Hedged Strategies
(22.1%)
Fixed Income(2.4%)
Private Capital(28.7%)
Real Estate(5.9%)
Natural Resources
(8.1%)
85%
Eq
uit
y: M
SC
I A
ll C
ou
ntr
y W
orl
d I
nd
ex
(US
D)
Ass
et
Cla
sses
As of February 28, 2013
Beta Factors: Methodology
Equity (54.6%)
Global Equity
(32.5%)
Hedged Strategies
(22.1%)
Fixed Income(2.4%)
Private Capital(28.7%)
Real Estate(5.9%)
Natural Resources
(8.1%) Cre
dit
: B
arc
lays
Corp
ora
te B
on
d a
nd
Hig
h Y
ield
In
dic
es
Com
mod
ity:
S
&P
GS
CI
Tota
l R
etu
rn I
nd
ex
Real E
state
: F
TS
E N
AR
EIT
US
Real
Est
ate
In
dex
Cash
: C
itig
rou
p 3
-mon
th T
reasu
ry B
ill
+ 5
0b
ps
85%
9%
0%
87%
0%
0%
71%
0%
11%
11%
12%
0%
0%
0%
0%
0%
0%
0%
86%
Eq
uit
y: M
SC
I A
ll C
ou
ntr
y W
orl
d I
nd
ex
(US
D)
3%
Inte
rest
Rate
:
Barc
lays
US
Ag
gre
gate
Tre
asu
ry
Ind
ex
Ass
et
Cla
sses
0%
8%
99%
0%
1%
12%
1%
2%
As of February 28, 2013
Beta Factors: Methodology
Equity (54.6%)
Credit(19.9%)
Commodity(9.1%)
Real Estate(8.5%)
Interest Rate
(4.1%)
Cash(3.8%)
Global Equity
(32.5%)
Hedged Strategies
(22.1%)
Fixed Income(2.4%)
Private Capital(28.7%)
Real Estate(5.9%)
Natural Resources
(8.1%) Cre
dit
: B
arc
lays
Corp
ora
te B
on
d a
nd
Hig
h Y
ield
In
dic
es
Com
mod
ity:
S
&P
GS
CI
Tota
l R
etu
rn I
nd
ex
Real E
state
: F
TS
E N
AR
EIT
US
Real
Est
ate
In
dex
Cash
: C
itig
rou
p 3
-mon
th T
reasu
ry B
ill
+ 5
0b
ps
85%
9%
0%
87%
0%
0%
71%
0%
11%
11%
12%
0%
0%
0%
0%
0%
0%
0%
86%
Eq
uit
y: M
SC
I A
ll C
ou
ntr
y W
orl
d I
nd
ex
(US
D)
3%
Inte
rest
Rate
:
Barc
lays
US
Ag
gre
gate
Tre
asu
ry
Ind
ex
Ass
et
Cla
sses
0%
8%
99%
0%
0%
1%
12%
1%
2%
3%
0% 5% 64% 30% 0% 1%
As of February 28, 2013
Beta Factors: Methodology
Strategic Targets
Strategic Ranges
Equity 55.0% 25% to 75%Commodity 10.0% -5% to 30%Credit 20.0% -5% to 30%Real Estate 10.0% -5% to 30%Interest Rates 12.5% -5% to 30%
Cash-7.5% -10% to
10%Total 100.0% Non-US Dollar 25.0% 0% to 50%
Beta Factors: Targets/Ranges
August 11, 2015
Strategic Targets
Strategic Ranges
6/30/15 Exposures
Equity 55.0% 25% to 75% 69.3%Commodity 10.0% -5% to 30% 4.6%Credit 20.0% -5% to 30% 4.8%Real Estate 10.0% -5% to 30% 5.8%Interest Rates 12.5% -5% to 30% 3.5%
Cash-7.5% -10% to
10%11.9%
Total 100.0% 100.0%Non-US Dollar 25.0% 0% to 50% 31.4%
Beta Factors: Targets/Ranges
August 11, 2015
CAPITALMARKET RESEARCH
August 11, 2015
Research: Markets
• Understanding the market microstructure, especially cross-sectional volatility, can help identify markets with the highest return dispersion
August 11, 2015
Research: Tools
August 11, 2015
MANAGERSELECTION
August 11, 2015
Selection: Core Beliefs
• Healthy level of skepticism• Alpha is scarce
• Not easy to deliver superior risk-adjusted returns
• Beta (hidden/unhidden) can be a large part of managers’ portfolios
• Large inflows into an asset class or a manager decrease the ability to deliver alpha
• True skill is rare• Manager selection is key to success
August 11, 2015
Selection: Flowchart
August 11, 2015
Structureinvestments toprotect VU &align interests.
Use futures overlayto access marketswith limited alphaopportunities &/or
express tacticalviews.
Identifymarkets withthe highest
alphaopportunities.
Find activemanagers inattractivemarkets.
Understand &analyze risks in
attractive markets.Disciplined macrorisk framework.
• Can control process• Can’t control outcome
Good Process
Bad Process
Good Outcom
e
Deserved
Success
Dumb Luck
Bad Outcom
e
Bad Break
Poetic Justice
August 11, 2015
Selection: Process versus Outcome
Selection: Process versus Outcome
• Principle-based framework (not rules-based)
• Focus on process keeps us from buying high and selling low
• No substitute for good judgment
August 11, 2015
“Ninety percent of what passes for brilliance, or incompetence, in investing is the ebb and flow of investment styles. Since opportunities by style regress [to the mean], past performance tends to be negatively correlated with future performance.”
- Jeremy Grantham
Selection: Philosophy
• Focus within fertile opportunity sets with wide outcomes
August 11, 2015
“Active management strategies demand un-institutional behavior from institutions, creating a paradox that few can unravel.
Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom.”
– David F. Swensen, Pioneering Portfolio Management
Selection: Philosophy
• Avoid adverse selection issues• Superior opportunities will rarely find
us, we must seek them out
• Active sourcing process for small, unique, and unscalable opportunities
• Leverage staff pre-existing relationships to create opportunity in areas with limited capacity
August 11, 2015
Selection: Philosophy
• Balance small opportunistic managers withmid-to-large opportunities
• Calibrate assets under management with opportunity
• Calibrate manager lifecycle with investment structure, fees, and alignment of interests
August 11, 2015
Selection: Concentration
• Our focus is the concentrated investors, who have typically outperformed other types of active managers over the long run
• Concentration allows managers to focus on their best ideas rather than diluting returns withlow-conviction ideas just because they belong to benchmarks
August 11, 2015
Selection: Concentration
August 11, 2015
Selection: Other Characteristics
• Discernible investment edge and investment opportunity
• Ability to preserve capital• Robust risk management
process/policies• Preference for superior security
selection or market timing, not both
August 11, 2015
Selection: Other Characteristics
• Preference for low-to-moderate leverage• Appropriate assets under management
for strategy• Avoid black-box or difficult-to-
understand strategies• Attractive long-term, net of fees
performance• Lesser-known, “emerging” managers
August 11, 2015
ONGOINGDUE DILIGENCE
August 11, 2015
Ongoing Due Diligence: Monitoring
August 11, 2015
• On-site visits• Meetings in Vanderbilt offices• Ad-hoc and scheduled phone calls• Weekly, monthly, quarterly reports• Annual meetings• Log meeting and call notes in Backstop• Internal debates on positions• Portfolio monitoring
• Performance, attribution (alpha/beta/market timing), exposure (strategy, geography, gross/net), liquidity, holdings-based (when available)
TERMINATIONDECISION
August 11, 2015
Termination: Rationale
• Consistent underperformance • Managers are not terminated just for
underperformance• Based on strategy and markets at a point
in time• Key and/or high personnel turnover• Better investment opportunities• Material strategy drift• Substantial and fast asset growth beyond
what might be expected• Unexpected events
August 11, 2015
August 11, 2015
Termination: Rationale
RECENTACTIVITY
August 11, 2015
Recent Activity: Since September 2013
• Added 24 new Global Equity managers totaling $998 million of market value
• Launched Hedged Strategies separately-managed account platform (11 managers, $513 million of net asset value)
• Introduced Commodities as a new asset class
• Reduced Fixed Income allocation• Deep dives on private investments
portfolio• Private Capital• Real Estate• Natural Resources
August 11, 2015
• Completed office remodeling
• Hired 15 new employees
• Made 61 new investments in total• Public investments: 37 investments
totaling$1.6 billion
• Private investments: 24 commitments totaling $218 million
August 11, 2015
Recent Activity: Since September 2013
Anders Hall, CFA
Vice Chancellor for Investments
& Chief Investment Officer
Questions?
August 11, 2015