Report on Calendar Year 2016 Performance
The market value of the LTIP as of December 31, 2016 was $2.2 billion. Performance for the year was 4.5%, net of all fees and expenses, compared with the benchmark return of 7.3%. Performance of the LTIP has exceeded the benchmark, net annualized, for three, five and ten year periods. Ten year LTIP performance of 5.2% (net annualized) is 1.2% above the 4.0% annual return on the benchmark. Fiscal 2009 performance of -19.8%, arising from the global financial crisis, was the primary cause of the decline in the ten year return. While this result is below the expected 8% long-term return from the LTIP, outperformance versus the benchmark is significant.
Asset Allocation and Performance
The chart below shows asset allocation targets and ranges compared to actual allocations on December 31, 2016.
|Policy Portfolio||Actual||+ / –||Range|
|Traditional Investments Consisting of:|
|Total, Publicly-traded long equities||35||35||0||34 – 36|
|Fixed Income||3||3||0||3 – 3|
|Cash (not held by managers)||4||5||1||(2) – 6|
|Total, Traditional Investments||42||43||1||35 – 45|
|Alternative Investments Consisting of:|
|Hedge Funds||25||25||0||25 – 28|
|Private Equity||22||20||(2)||19 – 23|
|Real Assets||11||12||1||11 – 14|
|Total, Alternative Investments||58||57||(1)||55 – 65|
*Committee approval in September 2016
The LTIP’s 56% alternative investment allocation consists of hedge funds and partnerships investing in real assets and equities of private companies. This allocation is near the mean allocation to alternatives of the largest educational endowments. The net average annualized ten year return of 6.2% per annum from the LTIP’s alternative program exceeded the return on the LTIP, with significantly lower volatility (4.4% for the ten years ending December 31, 2016, compared to 7.2% for the LTIP). Importantly, the LTIP’s alternative investments generate attractive returns in periods of weak or negative performance by public equities and bonds.
Public EquitiesThe publicly-traded equity portfolio represented 35% of the total portfolio, equaling the target allocation. The publicly-traded equity portfolio returned 6.7% net for the calendar year which was below the 7.9% return for the MSCI All Country World Index (“ACWI”). The publicly-traded equity portfolio outperformed the benchmark for the ten year period by 1% net annualized, and approximately equaled the benchmark return over three and five years.
Opportunistic funds represented 15% of the LTIP at the end of December. The group returned 4.5% net for the calendar year, below the 7.9% return for the ACWI. The group outperformed the ACWI for three, five and ten year periods.
International equity represented 20% of the LTIP at the end of December. Performance for the calendar year was 9.0% net which was well above the 4.5% return of the benchmark (ACWI ex-U.S.). The group also outperformed the benchmark for three and ten year time periods and was equal to the benchmark for the five year period. Emerging markets, which represented slightly more than half of the international public equity allocation, returned 11.6% net for the calendar year, outperforming the 11.2% return of the benchmark, the MSCI Emerging Markets Index. For all longer periods, the emerging group outperformed the Index.
Hedge FundsThe hedge fund allocation was 25% at the end of December, equal to the target allocation of 25%. The hedge fund portfolio’s net return was 0.6% for the calendar year. Equity-oriented managers returned -6.4% net, multi-strategy managers (diversifier) returned 7.2% net, and the liquid diversifier manager returned 6.6% net. The hedge fund ten year net annualized return was 5.2% which was above the 4.0% return of the LTIP benchmark. The ability of hedge funds to deliver returns comparable to those of the overall LTIP with lower volatility has been a key component of the LTIP’s attractive long-term risk-adjusted return profile.
Real AssetsPartnerships investing in real assets represented 12% of the LTIP at the end of December, at the target and lower limit in the allocation range. The real assets portfolio returned 3.8% net for the calendar year. The net annual return of 2.2% for the most recent five year period and ten-year net annual return of 0.8% are disappointing and reflect declines in energy and commodity prices. Real assets serve an important role in the LTIP by stabilizing performance during periods of volatility in public markets.
The LTIP’s real asset partnerships invest in energy/mining and real estate/agriculture. Energy and mining, a 5% allocation within the LTIP, returned -2.0% net for the calendar year largely due to mark to market losses on private positions that are linked to prices of public securities in the energy sector (as opposed to actual realized losses). The ten year net annualized return for energy and mining was -2.0%. Real estate and agriculture, a 6% allocation within the LTIP, returned 7.4% net for the calendar year. The ten year net annualized returns for real estate and agriculture were below expectations at 2.8% and 3.8%, respectively, largely resulting from investment partnerships deploying capital prior to the financial crisis.
The real assets portfolio has undrawn commitments of 11% of the LTIP which are expected to be deployed in today’s lower-priced environment, which should bode well for future returns. Patience is required in today’s environment for real asset investing.
Private EquityThe LTIP’s private equity portfolio consists of partnerships investing in buyouts/growth, distressed/credit, and venture capital. The portfolio represented 20% of the LTIP at the end of December, below the target allocation of 22%. Private equity returned 7.1% net for the calendar year; the ten year net annualized return was 11.9%. The LTIP’s private equity managers continued to distribute cash and marketable securities at a high rate through sales of portfolio companies to strategic buyers and by initial public offerings.
Buyouts, the largest strategy allocation within private equity at 10%, returned 12.4% net for the calendar year. Venture capital, representing 8% of the LTIP, returned 3.0% net for the calendar year. Distressed, a 2% allocation within the LTIP, returned -0.8% net for the calendar year. Ten year annualized net returns for these subcategories were 10.4%, 15.9% and 10.0%, respectively.
Fixed IncomeThe allocation to fixed income and cash equivalents remains low and represented 8% of the LTIP. The LTIP fixed income benchmark was changed to the Bloomberg Barclays U.S. Aggregate Government Credit 1-3 Year Bond Index in October 2016. For the calendar year, the LTIP’s fixed income and cash investments returned 3.3% net, compared to 4.6% for the blended index. The ten-year annualized return for fixed income was 4.2%, below the return of 4.5% for the blended index.
The LTIP has ample liquidity, with 63% of assets convertible into cash within one year.