UConn Foundation Investment Management December 2015 Introduction Asset
UConn Foundation Investment Management December 2015 Introduction Asset management is the service of professionally investing money The largest segment of the asset management in the United States is made up of registered investment companies. These companies managed $18.2 trillion in assets at year-end 2014, largely on behalf of more than 90 million U.S. retail investors. The industry has experienced strong growth over the past quarter century from asset appreciation and strong demand from households due to rising household wealth, evolution of employer-based retirement systems, and endowed assets, etc. Top Five Investment Management Firms
Source: CNBC, September 2015 Rank Primary Business Name 1 2 Vanguard Group Inc. Pacific Investment Management Co, LLC. Capital Research and Management Co. JP. Morgan Asset Management FMR Co, Inc.
3 4 5 Total AUM ($ bill) $3,006.42 $1,680.39 $1,366.31 $1,149.34 $918.63 World Largest Mutual Fund and ETF market in the USA Investment World of Investment Companies Source: ICI
Who are the Investors? Institutional Investors Pension Funds Defined-Benefit Plans Defined-Contribution Plans Hybrid and other Plans Foundations and Endowments Foundations Endowments The Insurance Industry Life Insurance Companies Non-Life Insurance Companies Banks and other Institutional Investors Portfolio Management as a Process Portfolio Management as a Process
Portfolio management is an integrated set of steps undertaken in a consistent manner to create and maintain appropriate combination of investment assets. Planning Step Investors Objectives and Constraints Investment Policy Statement (IPS) Forming Capital Market Expectations Creating Strategic Asset Allocation Execution Step Portfolio Construction and Revision Portfolio Optimization Tactical Asset Allocation The Feedback Step Monitoring and Rebalancing Performance Evaluation Investment Objectives Risk Objective largely determines return objective How to measure risk?
Absolute vs Relative Downside Risk: Value at Risk (VaR) What is the investors willingness to take risk? Institutional vs. Individual Investors ability to take risk? Return Objectives How is Return Measured? Total/Nominal/Real Stated Return Desire Required Return Investment Constraints Liquidity Time Horizon Tax Concerns Legal and Regulatory Factors Unique Circumstances Defined-Benefit (DB Plan)
Plan sponsor is obligated in terms of the benefits to plan participants. Promise made by a plan sponsor generates a future financial liability or pension liability. Return Objective To achieve returns that adequately fund pension liabilities Overhang of trillion dollars liabilities Risk: DB plans payout of the pension assets, which are invested in the market. Market Risk Longevity Risk Liquidity Risk Funding status under-funded/over-funded Overall low risk tolerance Defined-Contribution (DC Plan) Plan sponsor is obligated in terms of contribution to pension fund rather than benefits to plan participants. Promise for DC Plan is for the current stage there is no future financial
liability. DC Plan sponsor bears the legal risk of investing DC plans are portable Foundations Usually grant making institutions funded by gifts and investment assets usually created by single donor to fund philanthropic goals. Investment portfolio provides the dominant source of revenue Purchasing power of its corpus is either maintained or not. US tax laws essentially mandate minimum level of annual spending. Foundations can vary widely in their investment goals and time horizon. Foundations, generally, dont fundraise or reach out to donors. Risk & Return Objectives: Foundations can have higher risk tolerance Most Foundations want to preserve corpus and target returns accordingly Endowments
Long-term funds (inter-generational) generally owned by non-profit institutions like universities, hospitals, museums etc. Preserve purchasing power of the principal gift and to use fraction of returns as spending for designated cause. Risk & Return Objectives: Return objective is to provide significant, stable, and sustainable flow of funds to support designated programs. Risk is related to spending policy; Averaging rules dampen short term volatility while striving for long term target returns. Risk tolerance depends on the endowments role in operating budget. Private Universities Ranked by June 30, 2012 Endowment Market Value $Billions 1 Harvard
30.4 2 Yale 19.3 3 Stanford 17.0 4 Princeton
17.0 5 MIT 10.1 6 Columbia 7.7 7 Northwestern
7.1 8 Pennsylvania 6.8 9 Chicago 6.6 10 Notre Dame
6.3 16 Fy12 Endowment Spending as a % of the Market Value Harvard Dartmouth Chicago Yale Johns Hopkins Rice Duke Penn MIT Northwestern USC Princeton Stanford
Vanderbilt Emory Wash U Brown 5.5% 5.4% 5.2% 5.2% 5.1% 4.9% 4.9% 4.9% 4.9% 4.8% 4.6% 4.4% 4.4%
4.4% 4.4% 4.3% 4.3% Risk Management as Process Risk management is a process involving: Identifying Risk factors Quantification of exposure to risk Map various risks in to risk estimation calculation
Identify overall risk exposure Continuous measurement of exposure Adjustment to exposure according to agreed risk exposure limits Alteration based on new information Portfolio Risk Universe Systematic Risk: Influences large number of assets, difficult to diversify Unsystematic risk: Influences small number of assets, manageable Credit and Default Risk: Associated with Bonds and Stocks Geo-political Risk: Related to policies and internal situation of a region or country Foreign Exchange Risk: due to financial policies of various countries Interest Rate Risk: Related to Fed policy Market Risk: Related to market volatility Headline Risk: Avoid Bad Publicity Asset Class Traditional
Alternative Stocks Hedge Funds Bonds Private Equity REITS Private Real Estate Commodities Natural Resources
Asset Class Characteristics Asset Class/Strategy Risk Characteristics Public Equity Market beta/high Volatility High return/Growth Private Equity Illiquid/high Volatility
Higher return/Growth Real Estate (REITS) Market beta/high Volatility High return/Growth/Inflation Protection Real Estate (Private) Illiquid/regional/Volatile High return/Inflation protection Bonds
Portfolio Construction: Risk Reward Trade-off Rational portfolio choices based on the efficient risk (Modern Portfolio Theory). Capital Markets Expectations Asset class and strategy diversification Use of quantitative methods in portfolio management Risk budgeting 20-years Asset-Class Returns 7-Year Asset Class Real Return Forecasts 24 Endowment Management Investment Strategy Implementation Manager searches
Manager evaluation Investment Portfolio Monitoring Portfolio risk management Performance measurement Performance reporting Performance and attribution analyses Capital markets monitoring Other Investment Risk Management 360 degree risk management Risk minimization is one of the three objectives Investment decisions are based on better risk adjusted returns and downside risk protection. Investment portfolio is diversified across asset classes, markets, and strategies to mitigate risk. Manager selection is based on stringent quantitative and qualitative duediligence.
Risk reporting is part of the culture Types of Risks Market Risk Manager Performance Risk Counter-party Risk Manager Business Risk Concentration Risk Style drift Risk Fraud Risk
Endowment Investment Return Goal Return Inflation Spending Admin fee > 0 ? - 2.5% - 4.25% - 2% > 0 UCONN Foundation Managed Assets Fiscal Year Net Return 2007
2.95% UCONN Foundation Policy Benchmark Composition Asset Benchmark Global Equities Private Capital Long Short Equities Global Macro Event Driven Real Estate TIPS Natural Resources Investment Grade
Relative Value MSCI ACWI PE Median TW HFRI Equity Hedge Index HFRI Macro Index HFRI Event Driven Index Weighted Public/Private Index TIPS Weighted Public/Private Index Barclay Aggregate HFRI Relative Value Index Weight 31.5% 14% 11.5% 4%
2% 6% 5% 16% 1% 9% PBM Composition The Policy Benchmark mirrors the target portfolio allocation. Indexes were chosen by consultants at Wilshire Associates and approved by IC. ML HY Master II PE Median TW HFRI Macro Index Weighted Public/Private Index Weighted Public/Private Index
Barclay Aggregate MSCI ACWI HFRI Equity Hedge Index HFRI Event Driven Index HFRI Relative Value Index Liquidity Liquidity Profile 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%
i bl Pu ity qu E c le ab t ke ar M Al t
ti na er s ve iva Pr te ty ui Eq Super Liquid (<2 Months)
Re al s As s et Liquid (2 to 6 Months) Fi d xe m
co In e Illiquid The portfolio has a meaningful allocation to locked-up investments, to capture an illiquidity premium. A large portion of the portfolio is super liquid and the majority of these assets can be liquidated in under three days. s Ca h Q&A
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