Annual Asset Management Report

Office of Investments &

Banking

Annual Asset Management Report

June 30, 2012

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Table of Contents

• Overview – All Funds • Highlights and Commentary

– Consolidated Endowment Fund (CEF) – Temporary Investment Pool (TIP) – Group Income Pool (GIP) – RUMINCO

• New/Terminated Managers • Targeted Investment Managers

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Overview – All Funds OIB Managed Funds ($ millions) June-12 June-11 Jun-10

Consolidated Endowment Fund (CEF) * $ 977.6 $ 956.8 $ 861.5

Long-Term Reserves (GIP)** 44.7 44.3 41.9

Short-Term Reserves (TIP) 972.2 824.9 697.6

RUMINCO Ltd. 32.6 32.3 31.2

Invested Assets Related to Indebtedness 189.7 181.9 45.5

Total 2,216.8 1,963.5 1,677.7

Other Funds Not Managed by OIB U of M Foundation Fund $ 1,337.7 $ 1,328.0 $ 1,133.4 MN Medical Foundation Fund 222.4 236.4 189.4

Basic Faculty Retirement Plan $ 3,107.8 $ 3,012.2 $ 2,629.9

* Includes TIP, GIP and PUF investments, which as of 06/30/12 were $112.6, $10.7, and $404.3, respectively ** GIP market value excludes the $10.7 invested in CEF. Elsewhere in the presentation this value is included for purposes of calculating total fund performance

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CEF Review Investment Policy Objectives: 1) Maintain Inflation Adj. Endowment Value 2) Acceptable Risk Parameters 3) Stable Distributions

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Maintain Inflation-Adj. Endowment Value

$5.04

$6.75

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Jun-90 Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12

CEF Endowment Performance Growth of $1 since June 30, 1990

Investment Objective* CEF Actual

*CPI plus payout plus actual expenses (calculated quarterly)

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- One year outperformance driven primarily by the following: - Tactical underweight to international public equity was a positive performance driver by protecting the portfolio from declines in international

equity markets - Private capital outperformed the CEF benchmark by 509 bps, primarily driven by strong venture capital returns - Real assets outperformed the CEF benchmark by 680 bps, primarily driven by energy partnerships and private real estate - Fixed income outperformed the CEF benchmark by 68 bps, due to an overweight in mortgages - Fund Value $978MM****

* Net of Manager Fees ** Benchmark: CEF Custom Index – 20% Russell 3000, 20% MSCI AC World ex US (Net), 20% State Street PE One Qtr Lag, 20% NCREIF Property One Qtr Lag and 20% Barclays Capital Aggregate *** Benchmark: 70% Russell 3000, 30% Barclays Capital Aggregate **** Total CEF Market Value includes $112.6 in TIP and $10.7 in GIP investments

0.2%

4.9%

8.4%

-1.8%

5.8%

0.1%

3.8%

11.1%

2.5%

6.9%

-1.5%

5.3%

14.1%

2.7%

6.1%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

QTR 1 YR 3 YR 5 YR

CEF Performance vs. Benchmarks

CEF*

Benchmark**

70/30 Benchmark***

L-T Target Return

10 YR

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* Net of Manager Fees ** Benchmark: CEF Custom Index – 20% Russell 3000, 20% MSCI AC World ex US (Net), 20% State Street PE One Qtr Lag, 20% NCREIF Property One Qtr Lag and 20% Barclays Capital Aggregate - State Street Private Equity benchmark not available for 1Q2012, used actual CEF Private Capital performance as a proxy *** Benchmark: 70% Russell 3000, 30% Barclays Capital Aggregate

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Fiscal Year Performance* Comparison

CEF CEF Benchmark** 70/30 Benchmark***

Current OIB Management hired. Begin actively diversifying portfolio into alternative asset classes designed to enable the fund to exceed the benchmark

Market dislocation reduces value of public equity relative to private investments, resulting in a loss of liquidity. OIB implements additional strategies to preserve capital

Equity markets rebound, however CEF’s liquidity position

limits its ability to rebalance to take advantage of changing market conditions

Migration to new asset allocation with enhanced risk constraints is intended to increase returns and add downside protection

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1 Year Contribution to Return by Asset Class

0.7% 0.9% 1.5%

2.4% 2.1% 2.7%

3.2% 1.8%

1.5%

-0.8% -2.3% -2.9%

0.2%

0.8%

1.0%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

CEF Actual Returns* CEF Actual Returns withPolicy Weights

CEF Benchmark withPolicy Weights

Fiscal Year 2012

Fixed Income Real Assets Private Capital Int'l Equity Domestic Equity

Change due to asset allocation decisions

Change due to investment manager performance relative to benchmark

Asset Allocation Decisions Effect (%)

Underweight to public equity 0.9

Overweight to private capital 1.4

Other 0.1

Total Asset Allocation Effect 2.4

Individual Manager

Performance

Effect (%)

Outperformance by public equity managers

0.4

Underperformance by fixed income managers

(0.6)

Underperformance by real asset managers

(0.6)

Outperformance by private capital managers

0.3

Other 0.0

Total Manager Performance Effect (0.5)

Total* 1.9 * Excludes the affect of cash and assets in the process of liquidation, which for FY2012 was (0.8%)

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* Net of Manager Fees ** Benchmark: Domestic Equity = Russell 3000; Int’l Equity = MSCI AC World ex US (Net); Private Capital = State Street PE One Qtr Lag; Real Assets = NCREIF Property One Qtr Lag; Fixed Income = Barclays Capital Aggregate

Sector vs. Benchmark Returns

1.3%

-11.7%

8.9% 10.6%

4.5% 3.8%

-14.6%

7.3%

13.4%

7.5%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

DomesticEquities

InternationalEquities

PrivateCapital

Real Assets Fixed Income

1 Year

CEF Benchmark**

-3.1%

-7.9%

3.3%

1.3%

3.1%

-3.2%

-7.6%

6.6%

2.6% 2.1%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

DomesticEquities

InternationalEquities

PrivateCapital

Real Assets FixedIncome

1 Quarter

CEF Benchmark**

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Acceptable Risk Parameters

0

2

4

6

8

10

12

14

16

1 Year 3 Year 5 Year 10 Year

Lo

we

r

H

igh

er

Standard Deviation vs. Benchmark

Target Range CEF CEF Custom 70/30 Index

Definition: Standard deviation is a measure of the volatility of returns Target: 10-12% when measured over an entire market cycle Strategy: Reduce risk, as measured by standard deviation, through diversification and hedging strategies

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Definition: Policy targets are developed to optimize investment performance and risk mitigation. Target: “Three year plan”

developed in 2011 returns portfolio to policy targets Strategy: Use increasing liquidity to rebalance to new asset allocation guidelines

12/31/10Actual

12/31/11Actual

12/31/12Forecast

12/31/13Forecast

12/31/14Forecast

PolicyTargets

Risk Mitigating FI 1% 2% 5% 8% 12% 12%

Public Equity 20% 21% 24% 29% 32% 30%

Private Capital 39% 44% 39% 31% 23% 20%

Inflation Hedges 22% 23% 21% 18% 16% 15%

Return Generating FI 16% 8% 7% 7% 8% 12%

Absolute Return 3% 2% 3% 7% 10% 11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Asset Allocation Progress Towards Policy Targets

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* Forecast

Definition: Liquidity is a measure of assets that can be sold at reasonable prices within one year. Higher levels of liquidity enable timely rebalancing and responses to new opportunities Target: No more than 35% invested in illiquid assets. Illiquid assets market value plus unfunded commitments should not exceed 55%

Strategy: Reduce illiquid investments to 35-40% of the overall portfolio over the next 2 years

30.5% 29.5% 32.9% 42.4%

50.0% 49.0%

3.6% 3.7% 3.0%

13.0%

15.0% 16.0%

65.9% 66.8% 64.1%

44.6% 35.0% 35.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 Actual 2011 Actual 2012 Actual 2013* 2014* Long-termTarget

3 year Plan - Liquidity

Liquid Semi-Liquid Illiquid

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0.6 10.9

17.4 17.7 28.3

34.0 45.0

51.9

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Net Cash Flows from Illiquid Portfolio Actual vs. Forecast

OIB Forecast (Cumulative) Forecast Actual Cashflow (Cumulative)

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Acceptable Risk Parameters Top 10 Managers

Manager Total Market Value

($M)

% of Total Fund

Blackrock* 128.9 13.1

State Street 61.3 6.3

Goldman Sachs 56.7 5.7

PIMCO 49.0 5.0

PineBridge 39.8 4.1

TCW 39.0 4.0

Oaktree 34.7 3.6

LaSalle 32.0 3.3

Kayne Anderson 31.1 3.2

Varde 28.5 2.9

Definition: Maintain concentration in managers and funds at appropriate levels Target: No individual fund > 10%, no manager > 20% Strategy: Closely monitor large core positions and adjust holding size to maintain compliance with targets

* Blackrock investment consists of three funds, the largest of which is a Russell 3000 index fund at 7.3% of the endowment

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Acceptable Risk Parameters Geographic Diversification

60% 24%

16%

Public Equity

Domestic

DevelopedInternational

EmergingMarkets

71%

19%

10%

Private Equity

71%

10%

19%

Real Assets

86%

10% 4%

Fixed Income

Definition: Geographic concentration limits opportunity and exposes the portfolio to unnecessary risk of regional cycles Target: Diversified geographic exposure for each asset class

Strategy: Diversify geographic and non-US Dollar exposure

Region Percent Market Value

Domestic 69% $675

Developed Int'l 16% $159

Emerging Markets 15% $143

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Stable Distributions

M

2M

4M

6M

8M

10M

12M

14M

Sep-

00D

ec-0

0M

ar-0

1Ju

n-01

Sep-

01D

ec-0

1M

ar-0

2Ju

n-02

Sep-

02D

ec-0

2M

ar-0

3Ju

n-03

Sep-

03D

ec-0

3M

ar-0

4Ju

n-04

Sep-

04D

ec-0

4M

ar-0

5Ju

n-05

Sep-

05D

ec-0

5M

ar-0

6Ju

n-06

Sep-

06D

ec-0

6M

ar-0

7Ju

n-07

Sep-

07D

ec-0

7M

ar-0

8Ju

n-08

Sep-

08D

ec-0

8M

ar-0

9Ju

n-09

Sep-

09D

ec-0

9M

ar-1

0Ju

n-10

Sep-

10D

ec-1

0M

ar-1

1Ju

n-11

Sep-

11D

ec-1

1M

ar-1

2Ju

n-12

Actual CEF Distribution (gross of reinvestment) Actual Payout Trendline

Change in Calculation Methodology

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Investment Strategy Update Liquidity - Allocate private partnership distributions to public equity and risk-mitigating fixed income portfolios Asset Allocation – Execute rebalancing migration plan towards new asset allocation target ranges (new ranges effective July 1, 2012) Risk Mitigating FI– Identify new managers and fund dedicated allocations to short-duration treasuries and US TIPS as part of new asset allocation guidelines Public Equities- Identify new managers and fund dedicated allocations to US small cap and emerging markets equity portfolios

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TIP Review

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TIP – Total Fund Performance* Market Value: $972.2M

- One year outperformance driven primarily by: - Higher current yield of the fund (92 bps) vs. the benchmark (26 bps) - Overweight to US government agency bonds and mortgages

* Performance is net of manager fees and excludes balances at Wells Fargo and US Bank used to offset banking fees ** Benchmark: 70% BofAML U.S. Treasuries 1-3 Yr / 30% 91 Day T-Bill *** Total TIP Market value excludes the $112.6 investment in CEF

0.5%

1.6%

2.3% 2.4%

0.1%

0.6%

1.2%

2.6%

0%

1%

2%

3%

QTR 1 YR 3 YR 5 YR

TIPBenchmark**

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TIP – Asset Allocation Market Value: $972.2M

Statistic Portfolio Benchmark

Average Duration

1.50 1.40

Average Credit Rating

Govt/Agency Govt/Agency

Current Yield 0.92% 0.26%

Govt/Agency 81%

AAA 3%

Cash 16%

Credit Quality

Mortgages 4.2%

Treasury Notes 5.0%

Money Market &

Cash 19.0%

Agency Bonds 72.2%

Sector Exposure

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*Performance is net of manager fees ** Performance excludes balances at Wells Fargo and US Bank used to offset banking fees

TIP – Performance* by Sector Market Value: $972.2M

0.0%

0.3%

1.0%

1.9%

0.5%

1.9%

2.3%

3.3%

1.3%

2.6%

3.7%

5.7%

0.6%

0%

1%

2%

3%

4%

5%

6%

QTR 1 YR 3 YR 5 YR

Cash Equivalents**

Agency Bonds

Mortgages (MBS)

US Treasuries

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GIP Review

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- One year underperformance driven primarily by: - Investment in CEF (19% allocation) trailed the GIP benchmark by 184 bps - Underweight to US Treasuries relative to the benchmark

* Net of Manager Fees ** Benchmark: 100% Barclays Capital Aggregate *** Total GIP market value and investment performance includes the $10.7 investment in CEF

GIP – Total Fund Performance* Market Value***: $55M

1.9%

4.8%

7.0%

4.2%

5.9%

2.1%

7.5% 6.9% 6.8%

5.6%

0%1%2%3%4%5%6%7%8%

QTR 1 YR 3 YR 5 YR 10 YR

GIP

Benchmark**

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GIP – Asset Allocation Market Value: $55M

Core Fixed Income 73%

EM Debt 8%

GIP CEF 19%

Portfolio Composition

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* Net of Manager Fees ** Benchmark: 100% Barclays Capital Aggregate

GIP – Performance* by Sector Market Value: $55M

6.8%

4.0%

2.9%

7.5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Core FixedIncome

EM Debt GIP CEF Benchmark**

1 Year

2.4%

0.4%

1.3%

2.1%

0%

1%

1%

2%

2%

3%

3%

Core FixedIncome

EM Debt GIP CEF Benchmark**

1 Quarter

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RUMINCO Review

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- One year underperformance primarily driven by: - Underweight to US Treasuries relative to the benchmark

* Net of Manager Fees ** Benchmark: 40% MSCI AC World Net, 30% Barclays Capital Aggregate, 30% BofAML U.S. Corp & Govt 1-3 Yr

RUMINCO – Total Fund Performance* Market Value: $33M

-1.2% -0.6%

7.2%

-1.7% -1.5%

0.4%

7.5%

-1.0%

-4%

-2%

0%

2%

4%

6%

8%

QTR 1 YR 3 YR 5 YR

RUMINCO

Benchmark**

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RUMINCO – Asset Allocation Market Value: $33M

Global Equity 42%

Long-Term Fixed Income 36%

Intermediate Fixed Income 22%

Portfolio Composition

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Investment Manager Changes New:

• SIT Investment Associates - Taxable Short Duration (TIP) • Wellington Hawkes Bay HF (CEF) • Blackrock Floating Rate Securities Fund (CEF) • Charles River XV (CEF) Terminated:

• Wellington Spindrift HF (CEF) • Coast Value Fund (GIP) • CommonFund Hedge Fund (CEF)

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Targeted Investment Managers

The University and the Office of Investments & Banking (OIB) recognizes the opportunity of working with targeted investment managers which are defined as emerging investment managers (less than $250 million under management) and minority / women owned investment firms. The OIB has an open door policy when interviewing investment managers and makes every effort to consider targeted managers consistent with the financial and fiduciary responsibilities of the University. In the last year, OIB hired one targeted investment manager: Sit Investment Associates.

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Documents

Annual Asset Management Report