Wayne State University Foundation...Wayne State University Foundation 2012 Annual Foundation...

Wayne State University Foundation

2012 Annual FoundationInvestment Performance Report

Fiscal Year Ending September 30, 2012

Paul R. Kenney, Jr., CFA, Partner

• Markets have been driven by “macro” events – The European debt crisis

– Concerns about a hard landing in China

– Continued high unemployment and sluggish growth in the US

• Not all news is bad news– European leaders are making progress on the debt issue

– Federal Reserve continues to be very accommodative on monetary policy

– US corporations have healthy balance sheets and earnings are strong

• Key issues looking ahead– US fiscal cliff at year end (e.g., potential expiration of tax cuts)

– Ability of European leaders to continue to navigate the debt crisis

– Muted return outlook (e.g., interest rates are very low)

• Short-term results have been positive despite global uncertainty– The Foundation has returned 15.4% net of fees over the past year ending September

30, 2012

Economic Overview

2 September 30, 2012~ NEPC,LLC

• The past five years have seen significant swings in the equity markets

– 2008: Worst equity market since the Great Depression

– 2009: Markets rally behind unprecedented fiscal/monetary stimulus

– 2010 thru 2012: Rollercoaster years with periods of high volatility

Equity Market Overview

3 September 30, 2012

Fixed Income and Hedge Fund Market Overview

Source: Barclays Capital, Hedge Fund Research, Inc.

• Investment grade bonds have produced steady returns— Yields are presently low, under 2%

• High yield bonds and hedge funds have been volatile, though less so more recently

4September 30, 2012

September 30, 2012

Performance Highlights

2012 Performance Summary

The Wayne State University Foundation ended the fiscal year with $259.1 million in assets, up from $228.7 million at the end of last year

The Wayne State University Foundation had strong performance for 2012 fiscal year, returning 15.7% gross of fees / 15.4% net of fees:

• The one year results ranked in the 2nd quartile with a 48th percentile ranking (a rank of 1 is highest, 100 is lowest)

− Active management added approximately 2% (as shown by the difference between the Composite and Allocation Index in the table below)

− Fixed income, emerging market equities and real assets outperformed relative to their respective benchmarks.

• Performance ranked in the 3rd quartile for the past three years

• Performance ranked in the 1st quartile vs. peers for five and seven periods

• Active management has contributed to performance over all periods

• Returns are shown gross of fees for all managers except hedge funds which are reported net, consistent with how returns are calculated in the peer universe.


Total Fund Asset Allocation


*The policy target reflects the strategic target in the WSU Investment Policy. The Endowment currently also utilizes a tactical target.

*The Investment Committee decided to temporarily invest the Blackstone redemption proceeds in the Real Assets allocation until Opportunistic capital call investments are made.

Asset Allocation – Investment Managers

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Asset Allocation Over Time

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• More recent changes include the increase in real assets, funding of opportunistic investments and decrease in hedge funds


Five Year Risk vs. Return – Endowments and Foundations

Note: Performance is gross of manager fees. Peer universe is Total Endowments & Foundations.

•

• The chart on the left shows that the Foundation had higher returns and lower risk than most of its peers for the past five years (the intersection of the lines represents the median peer return and risk)

• The return of 3.14% per year over the past five years was in the 22nd percentile (1st quartile)


• Emerging market equity, fixed income and real asset managers posted strong relative performances in 2012; domestic equity and GAA managers underperformed

– Emerging Markets: Aberdeen exceeded benchmark by 7.8% for the all cap strategy and 15.5% for the small cap strategy

– Fixed Income: Loomis Sayles outperformed the BC aggregate by 11%; both PIMCO funds beat their benchmarks by over 5%; Post Limited Term High Yield outperformed the high yield benchmark by 1.0%

– Real Assets: PIMCO All Asset and Gresham outpaced their benchmarks by 6.9% and 1.0%, respectively

– Domestic small cap: IronBridge trailed the Russell 2000 by 5.6%

– Global asset allocation (GAA): GMO (-2.7%) and Wellington Opportunistic (-1.6%) both lagged their benchmarks

– Hedge Fund of Funds: JPMorgan outperformed the HRFI benchmark by 1.2%; FrontPoint and Blackstone are in liquidation

Individual Manager Performance Summary


* Returns are gross of fees. Managers with no returns shown above were funded for less than 1 year.

Past Year Actions

• Tactical target for total equities was increased from 35% to 38%− This change was beneficial as US equities outperformed all other major market indices over the past year

• Opportunistic illiquid investments were added in June to position the portfolio to take advantage of distressed opportunities over the next few years:

− $7.5 million commitment was made to the Marathon European Distressed Opportunities, the fund emphasizes credit-related investments in Europe

− $7.5 million commitment was made to the Perella Weinberg Asset Backed Opportunities fund; the fund focuses on distressed investments primarily in the US with an emphasis on income generating assets

− $1.0 million commitment to the Renaissance Venture Capital Fund II; a private equity fund of funds focused on investments that have the potential to benefit the Michigan economy

• Tactical targets for fixed income and hedge funds were reduced from 30% to 25% and from 10% to 5%, respectively

− The targets reflect the fact that equities and the opportunistic investments noted above were viewed as having greater return potential compared to fixed income and hedge funds

− Additionally, by reducing the hedge fund exposure, the overall investment management fees paid by the Foundation were reduced as well

• The Committee approved targeting a higher risk profile− To provide greater flexibility to improve the portfolio’s return potential the Committee agreed at the

August meeting to a 12.5% volatility limit, up from 11%

• The asset allocation will be reviewed again at the beginning of 2013.


Looking Forward

• The return outlook going forward remains muted as interest rates have fallen to historically low levels and credit spreads have narrowed− Equities appear to be fairly valued in the US and potentially undervalued in foreign developed and emerging

markets

• Without change to underlying fundamentals, higher near-term returns “rob from the future”− Potential to place downward pressure on 2013 5-7 year assumptions

• Assessing the global investing landscape, key concerns face investors:− European debt crisis – Progress has been made, but more work to be done− US fiscal cliff – US politicians need to reach a compromise to avoid a hit to GDP− China’s slowing growth – Slowing, but still much higher than in developed countries

• Due to global uncertainties, we expect continued volatility − Portfolio positioning reflects this with a 20% plus allocation to tactical strategies such as GAA managers

GMO and Wellington and real assets manager PIMCO All Asset− Newly added opportunistic managers Marathon and Perella Weinberg should benefit in this environment

• It is worth noting that there are some positive economic signs as well − US corporations are flush with cash, have strong balance sheets and continue to report solid earnings − Home prices have risen in nearly all US cities in Q3− Consumer spending has picked up and the University of Michigan reported that consumer confidence in

October was at a five year high

• Looking ahead, we will continue to investigate ways to improve the Foundation’s risk/return profile− The increased volatility target approved by the Committee in August will provide greater flexibility to

pursue new investments; our primary objective will be to do so using an approach that is prudent based on the economic landscape


Appendix: Manager Historical Performance and Disclosure

~ NEPC,LLC

Manager Return History and Ranks (1 is highest, 100 is lowest)


* Returns are gross of fees

• NEPC uses, as its data source, the plan’s custodian bank or fund service company, and NEPC relies on those sources for security pricing, calculation of accruals, and all transactions, including income payments, splits, and distributions. While NEPC has exercised reasonable professional care in preparing this report, we cannot guarantee the accuracy of all source information contained within.

• The Investment Performance Analysis (IPA) is provided as a management aid for the client’s internal use only. The IPA does not constitute a recommendation by NEPC.

• Information in this report on market indices and security characteristics is received from sources external to NEPC. While efforts are made to ensure that this external data is accurate, NEPC cannot accept responsibility for errors that may occur.

Information Disclosure


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