Report on Investment Performance for the fiscal year ending June 30, 2016
The market value of the LTIP as of June 30, 2016 was $2.1 billion. Performance for the year was -3.1%, net of all fees and expenses, compared with the benchmark return of -1.7%. Performance of the LTIP has exceeded the benchmark, net annualized, for one, three, five and ten year periods. Ten year LTIP performance of 5.8% net annualized is 1.2% annualized above the 4.6% return on the benchmark and representative of the expected results from the LTIP over longer time periods. 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 (“policy portfolio”) compared to actual allocations on June 30, 2016.
Note: May not foot due to rounding; figures are in percent.
*Committee approval in September 2015
|Target*||Actual||+ / –||Range|
|Traditional Investments Consisting of:|
|Total, Publicly-traded long equities||35||37||2||35 – 38|
|Fixed Income||3||4||1||3 – 5|
|Cash (not held by managers)||3||2||(1)||(1) – 4|
|Total, Traditional Investments||41||43||2||37 – 47|
|Alternative Investments Consisting of:|
|Private Equity / Distressed||22||21||(1)||16 – 22|
|Real Assets||12||11||(1)||12 – 14|
|Total, Traditional Investments||59||57||(2)||53 – 63|
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 average annualized ten year net return of 6.8% from the LTIP’s alternative program exceeded the return on the LTIP, with significantly lower volatility (4.5% for the ten years ending June 30, 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.
The publicly-traded equity portfolio represented 37% of the total portfolio, above the target allocation of 35%. The publicly-traded equity portfolio returned -6.3% net for the fiscal year, below the -3.7% return for the MSCI All Country World Index (“ACWI”) primarily due to an overweight to international stocks. The publicly-traded equity portfolio outperformed the benchmark for five and ten year periods.
Opportunistic funds represented 17% of the LTIP at the end of June. The group returned -5.8% net for the fiscal year, below the -3.7% return for the ACWI. The group outperformed the ACWI for three, five and ten year periods. Stock selection by certain managers in 2016 was the primary detractor for the year, but the primary driver of longer-term outperformance.
International equity represented 20% of the LTIP at the end of June. Performance was -7.1% net, above the -10.2% return of the benchmark, the ACWI ex-U.S. The group outperformed the benchmark for one, three, five and ten year time periods. Emerging markets, which represented slightly less than half of the international public equity allocation, returned -5.4% net for the fiscal year, outperforming the -12.1% return of the benchmark, the MSCI Emerging Markets Index. For all longer periods, the emerging group outperformed the Index.
The hedge fund allocation was 25% at the end of June, equal to the target allocation of 25%. The hedge fund portfolio’s fiscal year net return was -4.7%. Equity-oriented managers returned -8.3% net, multi-strategy managers returned -1.9% net, and the liquid diversifier manager returned -0.8% net. The hedge fund ten year net annualized return was 5.6%, above the 4.6% return of the LTIP benchmark. The ability of hedge funds to deliver returns comparable to those of the overall LTIP with much lower volatility has been a key component of the LTIP’s attractive long-term risk-adjusted return profile.
Partnerships investing in real assets represented 11% of the LTIP at the end of June, just below the target and lower limit in the allocation range of 12%. The real assets portfolio returned -3.1% net for the fiscal year. The net annual return of 2.2% for the most recent five year period and ten year net annual return of 1.3% are disappointing and further explained below. 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 4.6% allocation within the LTIP, returned -15.9% net for the fiscal 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 realized losses). The ten year annualized net return for energy and mining was -1.6%. Real estate and agriculture, a 6.7% allocation within the LTIP, returned 5.6% net for the fiscal year. The ten year net annualized returns for real estate and agriculture were below expectations at 3.3% and 3.7%, respectively.
The real assets portfolio has undrawn commitments of 10% 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.
The LTIP’s private equity portfolio consists of partnerships investing in buyouts/growth, distressed/credit, and venture capital, and represented 21% of the LTIP at the end of June. The target allocation is 22%. Private equity returned 4.8% net for the fiscal year. The ten year net annualized return was 12.6%. The LTIP’s private equity managers continued to distribute cash and marketable securities through sales of portfolio companies, though at a slower pace than in 2015.
Buyouts, representing 11% of the LTIP, returned 9.8% net for the fiscal year. Venture Capital, representing 8% of the LTIP, returned -0.4% net for the fiscal year. This was a significant decrease from the prior fiscal year, when Venture Capital returned 26.2%, accounting for nearly half of the LTIP’s gains for that period. Distressed, a 2% allocation within the LTIP, returned 2.8% net for the fiscal year. Ten year annualized net returns for these categories were 10.9%, 15.6% and 10.5%, respectively.
The allocation to fixed income and cash equivalents represented 6% of the LTIP. For the fiscal year, the LTIP’s fixed income and cash investments returned -0.1% net, compared to 6.0% for the Barclays Aggregate. The portfolio underperformed due to its overweight in corporate credit positions and underweight of U.S. government bonds. The allocation is expected to protect the fixed income portfolio in a rising rate environment. The ten year annualized return for fixed income was 4.3%, below the return of 5.1% for the Index.
The LTIP has ample liquidity, with 63% of assets convertible into cash within one year.