Investment Performance Commentary for the Year Ending June 30, 2010
The market value of the University of Rochester's Long-Term Investment Pool (“LTIP”) as of June 30, 2010 was $1.47 billion, an increase of nearly $100 million for the fiscal year.
Fiscal year 2010 net return was 12.1% versus 13.9% for the benchmark. Performance exceeded the benchmark for 3, 5, and 10 year periods.
As more fully described below, the LTIP's domestic and international public equity managers as a group, as well as the fixed income managers as a group, exceeded their benchmarks for the fiscal year, as well as for longer periods. The alternative investment program continues to augment performance of these “traditional” investment categories.
Asset Allocation and Performance
The attached schedule shows the allocation to major asset classes and asset class performance for the periods ending June 30, 2010. Several changes to asset allocation were made during the quarter as domestic equity and fixed income exposures were reduced to provide funding for three new hedge fund managers.
The chart below shows asset allocation targets for the LTIP. With the exception of a 1% underweight in real assets, all asset classes are within their policy portfolio ranges.
|University of Rochester
Long Term Investment Pool Asset Allocation (in %)*
|As of 6/30/2010|
|Portfolio||Actual||+ / -||Range|
|U.S. publicly-traded long equities||15||15||0||14 - 16|
|Non-U.S. publicly-traded long equities||15||16||1||14 - 16|
|Total, publicly-traded long equities||30||31||1||28 - 32|
|Fixed Income||10||8||-2||8 - 12|
|Total, Traditional Investments||40||39||-1||38 - 40|
|Hedge Funds||25||24||-1||20 - 25|
|Private Equity / Distressed||20||22||2||20 - 25|
|Real Assets||15||14||-1||15 - 20|
|Total, Alternative Investments||60||60||0||60 - 65|
|Cash (not held by managers)||0||0||0||0 - 2|
|Note: Numbers may not foot due to rounding. Excludes impact of letter of credit.|
|* Committee approval on 8/4/2009|
The LTIP has an allocation of 60% to alternative investments, consisting of hedge funds as well partnerships that invest in real assets and equities of private companies. This allocation is near the mean allocation to alternatives by the largest endowments. The net average annualized ten year return of 7% per annum from the LTIP's alternative investments is significantly above the performance of public equities, as shown on the performance chart. As noted in earlier reports, the LTIP's diversification into alternatives provides excellent long term performance and reduces risk, but tends to dampen performance in periods of rapid price appreciation of public equities.
The domestic equity allocation was reduced from 17.5% at the end of March to 15.1% at the end of June, slightly above the 15% target. The group significantly outperformed its benchmark for all times periods.
International equity represented 15.9% of the LTIP at the end of June, little changed from the prior quarter. Performance is ahead of the benchmark for all periods, outperforming for the fiscal year by 6.8% and over ten years by 4.7% per annum. Emerging markets represent approximately 37% of the international allocation.
Hedge funds allocations were 24% at the end of the quarter, slightly below the target allocation of 25%. Three new managers, King Street Capital, Hoplite Capital, and Steadfast International, were funded during the quarter, raising the allocation by 4% over the March quarter end.
The hedge fund portfolio in the LTIP returned -1.9% for the quarter and 9.7% for the twelve months through June 30. The hedge fund program, which reduces volatility and helps to preserve capital in equity market downturns, has exceeded public equity market performance for three, five, and ten year time periods.
Partnerships investing in real assets (real estate, energy and natural resources) returned -0.1% for the quarter and -6.7% for the fiscal year period. While returns through three years are negative, five and ten year annualized performance is 4.2% and 11.7%, respectively. Real assets represent 14.1% of the LTIP, and will likely increase above the 15% lower limit in the policy portfolio in the fall of 2010 as commitments are drawn. The natural resources component of the real assets portfolio returned 8.8% for the fiscal year; the ten-year annualized return is 18.9%. The real estate portfolio experienced a significant negative return for the fiscal year, down 16%, as holdings were marked to market. The ten-year return for real estate is 5.9%. Investing in real assets requires a “long cycle” view and the general partners of the LTIP's real estate funds have indicated their funds will likely generate attractive relative returns even in relatively weak economic conditions. Deployment of existing capital commitments in an environment of lower prices also bodes well for real estate performance in the coming years.
The LTIP's private equity positions, consisting of partnerships investing in buy-out, venture and distressed companies returned 2.3% for the quarter and 20.9% for the fiscal year. The ten-year annualized return of 4.1% on private equity, while lower than anticipated, reflects J curve effects as well as recessionary write-downs in fiscal 2009, most of which are mark-to-market valuations rather than realized losses. The buyout and distressed components of the private equity portfolio have had strong returns in fiscal 2010 and reflect a reversal of the mark-to-market losses that were recorded in 2009. There is very little “permanent impairment” of value in Rochester's private equity portfolio. The private equity portfolio represented 22.2% of the LTIP at the end of the quarter and will likely increase toward the 25% target as commitments are drawn in the next few years.
Fixed income and cash equivalents allocations were reduced during the quarter from 12.4% to 8.7% of the LTIP, as investment opportunities were funded. For the quarter, the LTIP's fixed income and cash investments returned 2.1% compared to 3.5% for the Barclays Aggregate. For the fiscal year, the fixed income and cash portfolio returned 10.2% vs. 9.5% for the benchmark. For three and five years, the portfolio has outperformed the benchmark; it is slightly behind for ten years at 5.9% vs. 6.5%.
The portfolio has adequate liquidity, with 60% of assets available within one year. 2010 has seen a significant increase in return of capital and realizations from private equity and real estate investments. The line of credit was not accessed during the year.
As noted in earlier reports, the University's long term investment program has stayed on course and adjusted allocations in response to conditions and opportunities. Over the past eighteen months, the Investment Committee conducted in-depth reviews of the private equity, hedge fund, real estate programs and public markets.