Report on Calendar Year 2017 Performance
The market value of the University of Rochester Long-Term Investment Pool (“LTIP”) as of December 31, 2017 was $2.5 billion. Performance for the year was 15.9%, net of all fees and expenses, compared with the benchmark return of 19.0%. Performance of the LTIP slightly lagged the benchmark, net annualized, for the five year period and lagged by 1.2% annualized for three years, primarily due to lower returns of hedge funds. Ten year LTIP performance of 5.6% (net annualized) is 0.5% above the 5.1% annual return on the benchmark. Fiscal 2009 performance of -19.8%, arising from the global financial crisis significantly impacted the ten year return.nt.
Asset Allocation and Performance
The chart below shows asset allocation targets and ranges (“policy portfolio”) compared to actual allocations on December 31, 2017.
| Target | Actual | + / – | Range | ||
| Traditional Investments Consisting of: | |||||
| Total, Publicly-traded long equities | 35 | 37 | 2 | 34 – 36 | |
| Fixed Income | 4 | 4 | 0 | 4 – 6 | |
| Cash (not held by managers) | 3 | 2 | (1) | (3) – 3 | |
| Total, Traditional Investments | 42 | 43 | 1 | 35 – 45 | |
| Alternative Investments Consisting of: | |||||
| Hedge Funds | 25 | 26 | 1 | 25 – 28 | |
| Private Equity | 21 | 19 | (2) | 19 – 23 | |
| Real Assets | 12 | 12 | 0 | 11 – 14 | |
| Total, Alternative Investments | 58 | 57 | (1) | 55 – 65 | |
| TOTAL *Committee approval in September 2016 |
100 | 100 | (0) | 100 | |
The LTIP’s 57% 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 6.0% per annum from the LTIP’s alternative program exceeded the return on the LTIP, with significantly lower volatility (4.3% for the ten years ending December 31, 2017, compared to 7.1% for the LTIP). Importantly, the LTIP’s alternative investments generate attractive returns in periods of weak or negative performance by public equities and bonds.
Comment on Asset Category Performance
The weights and contributions to return by asset classes for the calendar year ended December 31, 2017 are shown in chart below.
| Category Return | Average Weight | Contribution | ||
| Total | 15.9% | 100.00% | 15.9% | |
| Opportunistic | 23.6% | 14.9% | 3.5% | |
| ACWI ex US Mandate | 27.5% | 9.6% | 2.5% | |
| Emerging | 28.4% | 11.5% | 3.1% | |
| Hedge Funds | 11.5% | 26.1% | 3.1% | |
| Energy and Minin | 15.6% | 5.7% | 0.9% | |
| Agriculture | 13.1% | 0.6% | 0.1% | |
| Real Estate | 3.5% | 4.9% | 0.2% | |
| Private Equity | 12.8% | 11.7% | 1.5% | |
| Venture Capital | 13.6% | 8.0% | 1.1% | |
| Bonds | 8.7% | 3.2% | 0.3% | |
| Short-Term Investments | 0.7% | 3.7% | 0.0% | |
| Cust/Consulting/Inv.Office Exp | -100.0% | 0.0% | -0.2% | |
Public Equities
The publicly-traded equity portfolio represented 37% of the total portfolio, above the target allocation of 35%. The publicly-traded equity portfolio returned 26.1% net for the calendar year which was above the 24.0% 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 23.6% net for the calendar year, slightly below the 24.0% return for the ACWI. The group underperformed the ACWI by less than 1% for the three year period and outperformed for five and ten year periods.
International equity represented 22% of the LTIP at the end of December. Performance for the calendar year was 27.9% net which was slightly above the 27.2% return of the benchmark (ACWI ex-U.S.). The group also outperformed the benchmark for three, five and ten year time periods. Emerging markets, which represented slightly more than half of the international public equity allocation, returned 28.4% net for the calendar year, underperforming the 37.3% return of the benchmark, the MSCI Emerging Markets Index. The group underperformed the benchmark by 1% for the three year period and outperformed for five and ten year periods
Hedge Funds
The hedge fund allocation was 26% at the end of December, above to the target allocation of 25%. The hedge fund portfolio’s net return was 11.5% for the calendar year. Equity-oriented managers returned 15.1% net, multi-strategy managers (diversifier) returned 7.0% net, and the liquid diversifier manager returned 13.1% net. The hedge fund ten year net annualized return was 4.9% which was slightly below the 5.1% 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 Assets
Partnerships investing in real assets represented 12% of the LTIP at the end of December, at the target allocation. 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. The real assets portfolio returned 9.6% net for the calendar year. The net annual return of 3.4% for the most recent five year period and ten year net annual return of 0.5% are disappointing and reflect declines in energy and commodity prices.
Energy and mining, a 7% allocation within the LTIP, returned 15.6% net for the calendar year. The ten year net annualized return for energy and mining was -1.9%. Real estate and agriculture, a 5% allocation within the LTIP, returned 4.4% net for the calendar year. The ten year net annualized returns for real estate and agriculture were below expectations at 1.9% and 4.3%, respectively, largely resulting from investment partnerships deploying capital prior to the financial crisis.
Private Equity
The LTIP’s private equity portfolio consists of partnerships investing in buyouts/growth, distressed/credit, and venture capital. The portfolio represented 19% of the LTIP at the end of December, below the target allocation of 21%. Private equity returned 12.8% net for the calendar year; the ten year net annualized return was 10.4%. The LTIP’s private equity managers continue to distribute cash and marketable securities through sales of portfolio companies to strategic buyers and by initial public offerings.
Buyouts, the largest strategy allocation within private equity at 9%, returned 14.3% net for the calendar year. Venture capital, representing 8% of the LTIP, returned 13.6% net for the calendar year. Distressed, a 2% allocation within the LTIP, returned 6.6% net for the calendar year. Ten year annualized net returns for these subcategories were 10.3%, 15.1% and 10.4%, respectively.
Fixed Income
The allocation to fixed income and cash equivalents represented 6% of the LTIP. For the calendar year, the LTIP’s fixed income and cash investments returned 4.3% net, compared to 0.8% for the blended index. The ten year annualized return for fixed income was 3.6%, below the return of 3.9% for the blended index.
Liquidity
The LTIP has ample liquidity, with 64% of assets convertible into cash within one year.