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Independent Education gratefully a cknowledges our sponsor . Is the ‘Yale Endowment Model’ Obsolete? A Discussion on Lessons Learned from the Financial Meltdown of 2008 . Agenda. The Endowment Model worked…. - PowerPoint PPT Presentation
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Independent Education gratefully acknowledges our sponsor
Is the ‘Yale Endowment Model’ Obsolete?A Discussion on Lessons Learned from the Financial Meltdown of 2008
USMF OUNDATION
2
Agenda
1. What is the Endowment Model? How does it add value?
2. How has it changed over time?
3. How does U. Maryland Endowment invest?
4. What’s new since the crisis of 2008?
5. Thematic investing?
3
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The Endowment Model worked…
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100%
100%
200%
300%
400%
500%
600%
700%
619%
493%456%
344%
20 year Cumulative Nominal Return:1991- 2010
Over $1bn (10.9% annualized)
Under $500m (9.8% annualized)
80% stocks / 20% bonds (9.4% annual-ized)
CPI+5% (8.2% annualized)
Source: Cambridge Associates LLC. Note: Yale data is for years ending June 30 th and from NACUBO.
4
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…and worked very well for Yale!
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100%
100%
200%
300%
400%
500%
600%
700%
800%
900%
1000%
1100%
1200%
1300%
1400%
1084%
619%
493%456%344%
20 year Cumulative Nominal Return:1991- 2010
Yale (13.1% annualized)
Over $1bn (10.9% annualized)
Under $500m (9.8% annualized)
80% stocks / 20% bonds (9.4% annual-ized)
CPI+5% (8.2% annualized)
Source: Cambridge Associates LLC. Note: Yale data is for years ending June 30 th and from NACUBO.
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How does the “Endowment Model” add value?
1. Asset Allocation
2. Risk management
3. Manager Selection
4. Thematic investing
6
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Traditional vs. Endowment Models
Stocks45%
Bonds40%
Alternatives15%
Traditional “Pension” Model
Stocks35%
Bonds15%
Real Assets15%
Private Equity15%
Hedge Funds20%
“Endowment” Model
Alternatives50%
Growth
Inflation Hedging
Deflation Hedging
Source: Cambridge Associates LLC.
As of 2010
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What are “Alternative” Investments?
Absolute Return• Long/short equity • Arbitrage • Macro-trading • Distressed Credit
Private Equity
• Leveraged buyouts• Venture capital • Growth capital • Mezzanine financing • Turnarounds
Real Assets
• Real estate • Oil & gas properties • Energy infrastructure - pipelines & storage• Timber & Farmland• Mining• Commodities
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The Yale Endowment
28% Real Assets
33% Private Equity
19% Absolute Return9% Int’l. Equity4% Bonds7% US Equity
Source: The Yale Endowment Report 2010.
As ofJune 30,
2010
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Endowment Asset Allocation History
9
1990 1995 2000 2005 20100%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
48%40% 34%
26%15%
5%11%
13%21%
18%
4%4%
13%9%
15%4%
5%
6%8% 13%33%
27%19%
13% 11%6% 6% 4% 2% 2%
8% 13%22%
26%
US Equities Int'l. Equities Absolute Return Private Equity Real Assets Bonds Cash
The Current “Over $1 billion” Endowment Universe – Historical Mean Asset Allocation
Source: Cambridge Associates LLC.
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USMF Policy Allocation History
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
69% 63% 63% 66% 68% 62%53% 50%
43% 37% 36%
4%6% 10% 10%
18%22%
27%26%
28%27% 22%
25% 27% 14% 12%
6% 6% 4% 2% 2% 4% 10%2% 4%
13% 11%2% 4% 7% 5%
1%
7% 9% 15% 20%23%
26%27%
Global Equities Absolute Return Real Assets Bonds Cash
USMF Investment Committee embarked on a new strategy in 2004. Implementation took several years.
11
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Current Endowment Asset Allocation
Global Equi-ties 49%
Absolute Re-turn 19%
Real Assets 28%
Bonds & Cash 4%
YaleAs of June 30, 2010
U. MarylandAs of Dec. 31, 2010
Source: Cambridge Associates LLC. Note: Real Assets includes real estate, commodities, oil & gas, timber, and other private partnerships.
Global Equi-ties48%
Absolute Re-turn26%
Real Assets13%
Bonds & Cash13%
Over $1 billion UniverseAs of Dec. 31, 2010
Global Equi-ties45%
Absolute Re-turn23%
Real Assets20%
Bonds & Cash12%
Liquid & Quasi-liquid 75%Private 25%
Liquid & Quasi-liquid 66%Private 34%
Liquid & Quasi-liquid 42%Private 58%
Liquidity:
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USMF Allocation by Security Type
12
Bonds & Cash24%
Equity & Equity-Like Alternatives
76%
Total Endowment as of 3/31/2011
Note: Represents a look-through to all securities held by endowment managers.
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USMF Allocation by Security Type
13
Bonds & Cash24%
Equity-Like76%
Total Endowment
Gov't Bonds15%
Cash25%
Corporate Bonds15%
High Yield & Dis-tressed
15%
Mortgages30%
Bonds & CashSector Breakdown
Note: Represents a look-through to all securities held by endowment managers.
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USMF Allocation by Security Type
14
Bonds & Cash24%
Equity-Like76%
Total Endowment
North America50%
Europe15%
Japan5%
Asia ex Japan17%
Latin America5%
Africa & Middle East8%
Equity-LikeRegional Breakdown
30% Emerging Markets
70% Developed
Markets
Note: Represents a look-through to all securities held by endowment managers.
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How does the “Endowment Model” add value?
1. Asset Allocation
2. Risk management
3. Manager Selection
4. Thematic investing
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Risk Management
Enhancements post-2008:
Risk Management Software
Streamline risk exposure data aggregation System provides enhanced stress testing, VaR analysis, risk factor attribution
Formal Liquidity Policy
Tightened limit on outstanding capital commitments (liabilities must be < 20% of endow.)
Placed ceiling on illiquid investments at 50% of endowment
Valuations-based Rebalancing
17
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“Non-Normal” Markets
1987 Market Crash (Oct 1987)
Bond Market Crash (Feb-May 1994)
Russian Default / LTCM (Jul-Aug 1998)
2002 Credit Crunch (May-Sept 2002)
Lehman Fail (Sept-Nov 2008)
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
-9.7%
-3.1%
-8.6% -8.9%
-21.4%
-28.5%
-7.8%
-15.4%
-23.5%
-36.9%
Sample Stress Test Analysis: Current USMF Endowment vs. S&P 500 Index
USMF En-dowmentS&P 500 Index
USMF Max “1 in 8” Loss: -12.5%
USMF Max Loss: -25.0%
Note: Above stress test estimates the current portfolio’s response to the changes in capital markets during the specified events.
18
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“Normal markets” – VaR analysis
Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11-20%
-15%
-10%
-5%
0%
5%
10%
Value-at-Risk vs. Risk Guard-rails
USMF VaRS&P 500 VaR
Need to reduce risk
Note:
VaR represents the likely one-month loss that might occur every 1 in 20 months, i.e. 95% of all months the portfolio’s returns are likely to be better than the stated VaR amount. This does not capture the “tail events”, and it assumes a normal distribution of returns.
VaRCurre
nt Avg.
USMF -2.6% -5.5%
S&P -5.1% -10.2%
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How does the “Endowment Model” add value?
1. Asset Allocation
2. Risk management
3. Manager Selection
4. Thematic investing
20
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Value Add via Manager Selection
Source: The Yale Endowment Report 2010.
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How did Yale do it? Right place, right managers
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
26%
41%
9%
28%
-25%
19%
-4%
-20%
Annual Nominal Returns:Periods ending June 30
Yale
Endowments Over $1bn mean
All C&Us mean
Yale’s Real Assets & Private Equity results in high returns, outperformance
Yale’s illiquidity causes high unreal-ized losses…but what happens next?
Source: Cambridge Associates LLC. Note: Yale data is for years ending June 30 th and from NACUBO.
Yale’s Venture Capital results in high returns, outperformance
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How does the “Endowment Model” add value?
1. Asset Allocation
2. Risk management
3. Manager Selection
4. Thematic investing
23
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What is asset allocation?
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
176%
15-Year Cumulative Performance through March 31, 2011
60/40
80/20
Debates about 80/20 vs. 60/40 are probably less important…diversification across different asset classes matters far more.
24
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Not just US stocks/US bonds…
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
346%
46%22%
Cumulative Return: Jan. 2001 – Mar. 2011
Emerging Markets
Int'l. Developed Markets
S&P 500
Source: Bloomberg
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Thematic Investing
Possible themes for the next several years:
End of the bull market in US govt. bonds
New bilateral relationships in the developing world
Super-cycle wave for commodities
Urbanization and a rising consumer class
High quality multi-national companies ; US technology ; EU luxury brands
Asian Union?
26
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Emerging Economies Drive Global Growth
2000-2010 2010-2015 2015-20200.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0.9% 0.8% 0.9%
2.8% 3.3% 3.6%
Contribution to World GDP Growth
Developing Economies
Advanced Economies
Source: The Conference Board, Inc.
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Growing Bilateral Relationships in Developing World
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000Brazil-China Trade
Brazil Exports to China
Brazil Imports from China
Brazil Exports to US
Source: IMF DOT Database, UN COMTRADE
US$millions
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Urbanization
Nearly 1 billion people might urbanize in the next ten years
Source: World Urbanization Prospects
29
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E.g., in China, the number of cities with large middle-affluent populations will expand dramatically in the next decade.
Source: The Boston Consulting Group, Inc. 2010. “The Keys to the Kingdom – Unlocking China’s Consumer Power”
Rising Consumer Class
30
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Urbanization
Shanghai 1990 Shanghai 2010
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Asian Demand for Resources
32
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Urbanization in Africa
33
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Improved Macro Fundamentals in Africa
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0%
2%
4%
6%
8%
10%
12%
14%
0%
10%
20%
30%
40%
50%
60%
70%
80%Sub-Saharan Africa External Debt 1980-2015
Total Debt Service % GDP (lhs) Total Debt Service, Interest % Exports (lhs) Ext. Debt % GDP (rhs)
Source: IMF
34
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Real vs. Financial Assets
1975 1980 1985 1990 1995 2000 2005 20100%
500%
1000%
1500%
2000%
2500%
3000%
3500%
4000%
4500%
5000%Cumulative Return: 1975 – 2011
S&P 500BondsGold
Source: Bloomberg
35
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Contact Information
University System of Maryland Foundation, Inc.
Michael Barry – Chief Investment Officer301-445-2796