Investment Management Company ANNUAL REP ORT 2010–11
From the CEO................................1 UVIMCO Overview.....................2 Portfolio at a Glance.......................4 Investment Strategy........................6 Asset Allocation..............................8 Risk Management.........................12 Private Investment Funds............14 Investment Performance..............17 Looking Ahead..............................20
Copyright Š 2011 by the University of Virginia Investment Management Company Photography by Tom Cogill
From the CEO To the Rector and Visitors of the University of Virginia, Foundation Trustees, and other members of the University community:
A
s the new Chief Executive Officer and Chief Investment Officer of the University of Virginia Investment Management Company, I am pleased to report strong gains for fiscal year 2011 in the value of the Long Term Pool that UVIMCO manages for the University and its related Foundations. Buoyed by an upswing in global investment markets, the Long Term Pool regained all of the wealth lost during the recession of 2008–09, and more. Given UVIMCO’s long-term investment focus, our performance is best evaluated over a long time frame. For the twenty-year period ended June 30, 2011, the Long Term Pool recorded an annualized return of 12.5 percent, exceeding the 7.9 percent return earned by our performance benchmark and the endowment spending rate. Through effective asset allocation and exemplary manager selection, the Long Term Pool continues to provide the primary source of sustainable private support for the University of Virginia and its related Foundations. Over the past year, the investment markets have provided us with great challenges. Unprecedented levels of sovereign debt, elevated unemployment, and persistent inflationary threats were offset by strong corporate balance sheets and healthy earnings. Low interest rates continued to drive investors toward equity investments, propping up public markets even as the negative ramifications of sovereign debt levels grew more evident. Against this backdrop, the UVIMCO Board and staff continued to employ the same long-term focus and consistent investment strategy that have served us well for decades. This annual report provides you with information on our corporate governance, investment strategy, asset allocation, risk management process, and performance. As a newcomer to the organization, I have been particularly impressed by the quality of our people and the outstanding portfolio of external investment managers with whom we invest. On behalf of the Board and staff of UVIMCO, I would like to thank all of you for your continuing support of our efforts to provide exemplary investment services to the University and its related Foundations. Sincerely,
Lawrence E. Kochard Chief Executive Officer Chief Investment Officer UVIMCO Charlottesville, Virginia June 30, 2011 2011 ANNUAL REPORT
1
UVIMCO Overview T
he University of Virginia Investment Management Company (UVIMCO) provides investment management services to the Rector and Visitors of the University of Virginia and to the University’s related Foundations. UVIMCO invests the endowment and other long-term funds held by the University and its related Foundations in a Long Term Pool. Throughout its history, the University of Virginia has relied on appropriations from the Commonwealth of Virginia for its core funding. At the same time, support from generous donors has provided the University with a margin of excellence. Nationally recognized for its conscientious management, the University stewards funds from taxpayers and donors with equal care. The University’s endowment consistently ranks among the five largest for public institutions of higher education and among the twenty largest of all colleges and universities in the nation. Equally important, the endowment per student also consistently ranks among the largest in the
nation for a public university. Today more than ever, gifts from alumni, parents, friends, faculty, and staff are helping the University maintain a secure place among the nation’s most eminent centers of higher learning. A number of the University’s schools and programs have related Foundations that manage their philanthropic support. This foundation model allows the University and its related Foundations to work together with the schools and programs to ensure that funds are managed prudently and that gifts are used as donors intend. Together they determine how best to use unrestricted contributions to provide student aid, build and maintain library collections, support student organizations and publications, and enhance teaching and research. The University’s Board of Visitors has a representative on the Board of each of the affiliated Foundations, as does the President of the University. As of June 30, 2011, the shareholder composition of the Long Term Pool was as follows:
16% LONG-TERM UNIVERSITY OPERATING RESERVES
62% UNIVERSITY OF VIRGINIA ENDOWMENT
22% UNIVERSITY-RELATED FOUNDATIONS
A Board of eleven directors, including three appointed by the Board of Visitors and one appointed by the University President, governs UVIMCO. Our Board meets four times a year to discuss investment strategy, set investment policy, and monitor performance. Biographical sketches of our Board members are available on the UVIMCO website: www.virginia.edu/uvimco. The Board delegates daily investment management to 2
UVIMCO’s full-time, experienced, professional staff, which is supervised by Lawrence E. Kochard, Chief Executive Officer and Chief Investment Officer. In addition to Mr. Kochard, UVIMCO presently employs three managing directors, two associates, seven investment analysts, a general counsel, a chief operating officer, and fifteen operations and administration staff members. Our website also features biographical sketches of UVIMCO’s staff.
UNIVERSITY OF VIRGINIA INVESTMENT MANAGEMENT COMPANY
•
2011 ANNUAL REPORT
3
Portfolio at a Glance
Fiscal Year Ending June 30 Market Value (in millions) Net Asset Value per Share Return Investment Strategy Allocations: Public Equity Long/Short Equity Private Equity Real Estate Resources Absolute Return Credit Bonds & Cash
4
2007 2008 2009 2010 2011 4,342.4 5,100.5 3,959.7 4,454.7 5,346.5 4,786 5,070 4,006 4,612 5,732 25.2% 5.9% -21.0% 15.1% 24.3% 27.1% 20.6% 20.7% 20.0% 20.3% 31.8% 32.3% 24.5% 23.6% 22.2% 16.6% 19.6% 16.5% 18.7% 19.6% 2.7% 5.2% 4.0% 4.0% 5.9% 3.0% 5.0% 5.9% 7.1% 7.3% 13.5% 8.1% 8.7% 9.9% 8.2% 1.3% 4.8% 7.6% 6.0% 4.8% 4.0% 4.4% 12.1% 10.7% 11.7%
UNIVERSITY OF VIRGINIA INVESTMENT MANAGEMENT COMPANY
E
ndowment gifts benefit the University and its related Foundations in perpetuity. Invested properly, endowments generate a steady stream of income for professorships, scholarships, fellowships, lectureships, book funds, and many other purposes. UVIMCO’s investment objectives for the Long Term Pool are to support the current and future operations of the University and its Foundations, and to preserve and enhance the
purchasing power of their long-term funds. To accomplish these goals, the Long Term Pool must generate a longterm average annual return (after inflation and net of fees) in excess of the spending rate. The Long Term Pool derives most of its current value from positive investment returns above and beyond inflation and new endowment gifts. The following chart shows the growth in the Long Term Pool since 1974.
Long Term Pool Performance, 1974–2011 6,000
5,000
(in millions)
4,000
3,000
2,000
1,000
0 1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Actual Long Term Pool Value Long Term Pool Performance Post-1974 Net Gifts and Transfers* 1974 Endowment* *Adjusted for inflation using the Higher Education Price Index
Assuming an inflation rate equal to the Higher Education Price Index (HEPI), an inflation index that tracks the main cost drivers in higher education, the University’s 1974 endowment of nearly $60 million grows to $340 million today. Adding gifts and transfers (including $300 million of University operating funds formerly
held by the Commonwealth of Virginia), the value of the University’s Long Term Pool grows to $1.6 billion. The additional $3.7 billion of the Long Term Pool’s current value of $5.3 billion is due primarily to successful investment management by UVIMCO over the past several decades.
•
2011 ANNUAL REPORT
5
Investment Strategy
A
ttractive long-term investment returns are best produced by maintaining a consistent investment philosophy, team, and process over time. Several core principles guide us at UVIMCO as we invest the Long Term Pool. First, we are long-term investors. Our relatively long time horizon allows us to capitalize on market inefficiencies and risk premiums that arise from other investors’ focus on short-term news and market events. While our portfolio may outperform expectations in the short term, this is not our goal. Rather, we seek to outperform our benchmarks over the long term, which means we are willing to underperform passive benchmarks and peer institutions over shorter periods of time. Second, we seek attractive long-term returns through our external investment manager selections, asset allocation decisions, and portfolio tilts that take advantage
6
of economic themes. Securities are selected for UVIMCO by a team of extraordinary external managers that we have built over time. Whereas the vast majority of money managers fail to beat passive benchmarks, UVIMCO’s disciplined research process and pattern recognition enable us to develop relationships with outstanding investment managers who demonstrate an edge in both security selection and asset allocation. Third, we believe that price matters. Behavioral biases by other investors can cause prices of investments to differ from their fundamental values for long periods of time. Markets tend to overreact to recent events and assume that recent good or bad news will continue into the future. At UVIMCO, we believe in long-term reversion to fundamental values. Superior long-term returns depend on investing in securities, themes, and asset classes with
UNIVERSITY OF VIRGINIA INVESTMENT MANAGEMENT COMPANY
current prices below their fundamental values. Mispricings at the security level create opportunities for our external investment managers, while thematic and assetclass inefficiencies may be exploited by both external investment managers and our internal investment team. We seek investments that have fallen out of favor, resulting in a supply/demand mismatch of capital. We recognize that prices can differ from their fundamental values for extended periods, so we must remain patient for this approach to pay off. Fourth, we believe our success is largely dictated by the quality of the people on the UVIMCO team and the longterm partnerships we maintain with external investment managers. We ask all staff members to demonstrate a strong work ethic, passion for investing, effective teamwork skills, and the desire to put the University’s interests above
personal interests. We expect our external investment managers to demonstrate similar values, and believe that hiring talented, high-integrity managers is one of the most important ways in which we control portfolio risk. Finally, we believe in the benefits of diversification. We expect that the quality of our research and manager selection will lead to good results over time, but we understand that certain decisions will be unsuccessful. Therefore, we diversify our investments across asset classes, themes, and managers. We pursue strategies and investments where we have expertise, and decline opportunities where we do not. This approach requires humility in our investment team. We also seek humility in our investment managers, appreciating those who are confident but not overconfident, who employ investment processes we can understand, and who consider the downside risk of any investment.
•
2011 ANNUAL REPORT
7
Asset Allocation T
he Long Term Pool is allocated to three broad asset classes: equities, real assets, and fixed income/ absolute return investments. We seek a strategic asset allocation that generates attractive long-term returns while reducing the two biggest market risks facing our portfolio: inflation and deflation. Our policy allocation to the three broad asset classes is 60 percent equity, 10 percent real assets, and 30 percent fixed income and absolute return. Equity investments provide ownership claims on the growth opportunities provided by public and private companies. In a growing global economy with low inflation, equity investments typically provide the highest long-term return opportunities. Real assets provide protection to the portfolio in an inflationary environment, tending to benefit during a period of rising prices, rising interest rates, and/or a depreciating dollar. Fixed income and absolute return investments provide protection in deflationary or weak economic environments. Returns
from each asset class depend on the economic environment as well as the assets’ initial purchase price. Each broad asset class covers a number of investment strategies with varying levels of liquidity and risk. But we do not consider investment strategies as discrete, standalone opportunities. Rather, our decisions in one area may influence our actions elsewhere in the portfolio. For example, when our staff members travel outside of the United States, they do not look at stocks and bonds alone, but consider public equity, real estate, infrastructure, and other investments across the landscape of each country. Thirty years ago, the endowment portfolio that UVIMCO managed was simple—75 percent domestic equity and 25 percent fixed income. Over time, UVIMCO developed a more sophisticated portfolio heavily weighted toward nontraditional investment strategies. The following graph displays the trends in the asset allocation of the Long Term Pool over the past decade:
Portfolio Asset Allocation over Time 100 90 80
% of Long Term Pool
70 60 50 40 30 20 10 0 2001
2002
2003
Public Equity Long/Short Equity
8
2004
2005
2006
Private Equity Real Estate
UNIVERSITY OF VIRGINIA INVESTMENT MANAGEMENT COMPANY
2007
2008
Resources Absolute Return
2009
2010
2011
Credit Bonds & Cash
In 2001, UVIMCO held meaningful positions in public and private equities, including buyout funds and venture capital. Over the next few years, returns from public and private equities, particularly venture capital, were redeployed into long/short equity and absolute return funds based on an assessment of available opportunities. Long/short equity reached nearly 50 percent of the Long Term Pool in 2003. From 2004 to 2008, we used new
capital flowing into the Long Term Pool to rebalance the portfolio, directing it toward investments in public equity, private equity, and resources, with long/short equity falling as a percentage of the overall portfolio. After the financial crisis in 2008–09, we further reduced investments in long/ short equity and used the resulting funds to increase our cash and bond portfolio. As of June 30, 2011, the asset allocation of the Long Term Pool was as follows:
BONDS & CASH 12% CREDIT 5%
PUBLIC EQUITY 20%
ABSOLUTE RETURN 8% RESOURCES 7%
LONG/SHORT EQUITY 22%
REAL ESTATE 6% PRIVATE EQUITY 20%
2011 ANNUAL REPORT
9
10
UNIVERSITY OF VIRGINIA INVESTMENT MANAGEMENT COMPANY
Asset Allocation continued from page 9
EQ UITY Public Equity | The objective of our public equity strategy is to achieve capital appreciation through ownership of publicly listed businesses worldwide. We seek capital appreciation by acquiring ownership stakes at attractive prices and sharing in the long-term economic value these businesses create. Because we try to achieve returns in excess of market indices, we pursue opportunities where market inefficiencies are prevalent. UVIMCO typically allocates 15 percent to 25 percent of the Long Term Pool to public equity.
Resources | Similar to real estate, we expect that our resources strategy will provide an attractive long-term return and provide diversification from equity markets. Our resource managers develop oil and gas properties, mine metals and minerals, and build infrastructure for power production. Resource strategies provide investors with the option of accelerating production when market prices spike and slowing production when prices decline. UVIMCO typically allocates 5 percent to 10 percent of the Pool to resources.
Long/Short Equity | Our objective when investing in long/short equity is high returns achieved through unconstrained security selection. Long/short equity encompasses a wide variety of strategies. Certain managers may invest across a large spectrum of industries, sectors, or regions, whereas others are more specialized. UVIMCO expects long/short equity to generate long-term returns comparable to liquid public equity, but with less shortterm return volatility. We typically allocate 15 percent to 25 percent of our Pool to long/short equity.
FIXED I NCO ME AN D ABSOLU TE RETURN
Private Equity | Private equity is a category that encompasses a broad range of investment activities. Private equity is a higher-risk, illiquid alternative to public equity, and UVIMCO invests in private equity only when the expected payoff from private investments warrants the assumption of these risks. Our objective is to pursue high, long-term returns through value created by private businesses or other assets. Private equity includes buyout, growth, and venture capital investments. UVIMCO typically allocates 15 percent to 20 percent of the Pool to private equity.
Absolute Return | Our absolute return strategy includes investments with low correlations to the public equity markets. These managers invest across multiple asset classes and generate returns primarily from manager skill rather than exposure to any single asset class. Absolute return managers help us preserve capital during severe equity market contractions. This allocation depends on available opportunities, but over time UVIMCO expects to allocate approximately 10 percent of the Pool to absolute return investments.
Credit | The objective of our credit strategy is to generate long-term appreciation from investments that provide greater capital preservation than equity investments because they are secured by high-quality assets or backed by a senior claim on cash flows. Because credit investments have limited opportunity for capital appreciation in normal markets, we invest during, or in anticipation of, periods of distress. UVIMCO’s current allocation to credit is approximately 5 percent.
REAL ASSETS
Bonds and Cash | Our bond portfolio is primarily a Real Estate | The objective of our real estate strategy source of liquidity and, secondarily, a stable, diversifying is to generate long-term capital appreciation and provide diversification from equity markets. To maximize returns, we invest with managers who buy and improve properties through refurbishing, repositioning, or redeveloping. Because real estate markets possess supply-and-demand characteristics requiring specialized knowledge, skills, and contacts, we invest with small, specialized, private managers. UVIMCO typically allocates 5 percent to 10 percent of the Pool to real estate.
complement to our large equity allocation. Our bond allocation is invested entirely in liquid sovereign debt instruments and related derivatives in developed countries. UVIMCO typically allocates 10 percent of the Pool to bonds and cash.
•
2011 ANNUAL REPORT
11
Risk Management U
VIMCO strives to assist the University and its related Foundations in their efforts to protect and create value for stakeholders including students, alumni, employees, and society overall. By identifying and proactively addressing investment risks and opportunities, we provide an important component of the integrated risk management activities of our individual shareholder institutions. We determine our investment risk tolerance by balancing competing objectives of stable current spending with long-term growth. Investments with low risks and low returns decrease the possibility of significant short-term depreciation, and a corresponding reduction in spending, but also decrease expected long-term growth. Investments with high risks and high returns raise the possibility of a near-term decline in spending, but also raise expected long-term growth. Investors are usually willing to bear short-term risks if they are adequately compensated with long-term returns. Most endowments are long-term investors and hence able to assume certain risks. At UVIMCO, we strive to understand and measure the risks in the Long Term Pool so we can manage them over time. We eliminate investments if the risk of losses appears too high, or if we do not earn a sufficient premium for assuming such a risk. UVIMCO measures and controls for three primary risks: market risk, manager risk, and liquidity risk.
Market Risk | Market risk is measured by the volatility of returns or maximum potential drawdown in a portfolio. The Long Term Pool’s largest risk factor is equity market risk. Over the past decade, the United States’ average annual equity market volatility of 16 percent is slightly higher than it has been since the end of World War II. UVIMCO manages market risk by diversifying across three broad asset classes: equity, fixed income, and real assets. By investing the Long Term Pool in asset classes that perform differently from each other, we can mitigate the Pool’s exposure to any particular
market condition. However, we recognize that certain investments behave quite differently in an inflationary environment than in a deflationary environment. During inflationary periods, fixed-income securities may act more like equities, and foreign currency and commodities may act less like equities. On the other hand, during periods of deflation, fixed-income securities may act less like equities, and foreign currency and commodities may act more like equities. Today, inflation is low and the global financial community has no desire to see deflation. Given these market conditions, we expect the return of the Long Term Pool to have an average future volatility of about 10 percent per year versus the policy portfolio benchmark’s expected annual volatility of 12 percent.
Manager Risk | UVIMCO invests the Long Term Pool with more than one hundred external managers. Manager risk includes tracking error or active positions away from the benchmark, operational or business risks, a lack of transparency, and leverage. UVIMCO mitigates manager risk by using a thorough due diligence process. In addition, we reduce manager risk through diversification, by declining certain partnership structures, and by avoiding certain investment strategies (e.g., highly leveraged hedge funds). Most importantly, we control manager risk by building close relationships with managers who have unquestioned ethics and integrity, and who align their interests with those of our University and Foundation shareholders.
Liquidity Risk | At
Manager Risk
Market Risk
12
UNIVERSITY OF VIRGINIA INVESTMENT MANAGEMENT COMPANY
Liquidity Risk
UVIMCO, we define liquidity risk as an inability to meet any of the following four primary liquidity requirements: (i) withdrawals by the University and its related Foundations; (ii) an excess of capital calls by private funds over expected capital distributions; (iii) the need to rebalance exposures following a market decline; and (iv) the ability to deploy cash as new investment opportunities arise. We manage this risk
by maintaining a portfolio of treasury bills and bonds, maintaining sufficient liquidity with public equity and hedge fund managers, and managing the pace of commitments to private investments. Given our four primary liquidity requirements, we believe that an appropriate target for liquidity is to have 10 percent of the Long Term Pool invested in assets that are safe and highly liquid. In addition, we believe the Pool should have at least 30 percent of its assets available for conversion to cash in any twelve-month period. At any moment, the amount of actual liquidity we have available is a function of the size and nature of our private portfolio, the amount of Pool funds invested in bonds or cash, and the liquidity terms of our public investments. We currently hold 12 percent of the Long Term Pool’s assets in highly liquid, government-issued debt securities and cash. In addition, we can access more than 30 percent of the Pool’s investments within three months, and about 50 percent within a year. This current level of liquidity exceeds the Long Term Pool’s minimum requirements. We also measure and monitor liquidity risk through the “private aggregate,” which is the sum of the market value of invested private assets and uncalled commitments. Due to the illiquid nature of private investments and the variable timing of future capital calls and distributions, the private aggregate normally ranges from 50 percent to 70 percent of the Long Term Pool. The Pool’s current private aggregate is 61 percent, composed of $2.21 billion invested in private assets (42 percent) and $0.97 billion (19 percent) in uncalled commitments.
•
2011 ANNUAL REPORT
13
PRIVATE I NVEST ME NT FUN DS
A
t UVIMCO, we make the majority of our investments in private equity (buyout and venture capital), real estate, resources, and credit through private investment funds, which typically invest in illiquid opportunities. The managers of these private funds hold such investments for
a number of years then, once the investments are sold, distribute capital back to us. These investments bear a liquidity risk that derives from the uncertainty of the timing between cash outflows (“capital calls”) and cash inflows (“capital distributions”).
Composition of Private Investment Funds BONDS & CASH 12%
ABSOLUTE RETURN 7%
REAL ESTATE 6% RESOURCES 7%
MARKET VALUE • $2.21 Billion
PRIVATE ASSETS 42%
LONG/SHORT EQUITY 22%
CREDIT 5%
PRIVATE EQUITY 20% OTHER 4% PRIVATE EQUITY 8%
PUBLIC EQUITY 17%
REAL ESTATE 6%
Unfunded Commitments • $0.97 Billion
Long Term Pool
$5.35 Billion
OTHER 1%
As of June 30, 2011 Investors in private funds cede control of the timing of cash flows into and out of a particular investment to external fund managers. Investors must be compensated for assuming this liquidity risk. Following the market decline in 2008–09, allocations to private fund investments made by large endowments and foundations received considerable attention. Investors’ unease regarding the illiquid nature of private investments, questions about valuations, and the uncertainty of timing of calls for committed capital are all exacerbated during declining markets. Furthermore, private investments are often misinterpreted as mega-buyout funds that execute overleveraged buyout deals. As a result, many people think the value from private investing is created entirely 14
CREDIT 2%
RESOURCES 2%
through leverage—like flipping houses in a hot real estate market—which can be highly profitable during a bull market but disastrous in a bear market. At UVIMCO, we typically do not invest with private managers who add value primarily through leverage. Instead, we view private fund investments as a way for talented fund managers to identify attractive investment opportunities, add value through improvements, and sell them at a profit. UVIMCO’s returns from private investments reflect compensation for liquidity risk in addition to managers’ ability to identify worthwhile opportunities in less-efficient private markets, and managers’ ability to add value to the underlying companies or assets. UVIMCO does not adhere to strict targets
UNIVERSITY OF VIRGINIA INVESTMENT MANAGEMENT COMPANY
for investments in private funds, and allocates capital to private investments only when the expected returns warrant the assumption of these risks. Historically, large endowments and foundations have been the most successful private fund investors. These institutions have a long-term investment horizon that enables them to assume more liquidity risk than other investors. In addition, endowments and foundations have demonstrated an ability to select excellent fund managers. This skill is important, as research has shown that the average private manager underperforms a comparable
public investment on a risk-adjusted basis. At UVIMCO, we believe that investing with top managers is the only way to properly offset the high fees and liquidity risk associated with private fund investments. We also believe that liquidity risk premiums vary across strategies and time. UVIMCO seeks to invest in private funds when capital is scarce and liquidity is low, moving capital into pockets of distress or inefficiency when the market pays us for doing so on a risk-adjusted basis. We believe that investing in private investment funds has added significant value to the Long Term Pool over time.
•
2011 ANNUAL REPORT
15
16
UNIVERSITY OF VIRGINIA INVESTMENT MANAGEMENT COMPANY
Investment Performance T
he primary benchmark for the Long Term Pool is a traditional policy portfolio benchmark established by the UVIMCO Board of Directors. This policy benchmark consists of passive public indices with an allocation of 60 percent equity, 10 percent real estate, and 30 percent fixed income. The policy portfolio benchmark is designed to represent the global securities market, and its historical returns closely track the average returns of the broad universe of institutional investors. The UVIMCO Board directs staff to manage the Long Term Pool actively to pursue long-term returns in excess of this passive policy benchmark. We do this primarily by employing external investment managers. Using this strategy, our 24.3 percent return in fiscal year 2011 exceeded the 22.4 percent return of the policy benchmark by nearly 2 percent. We are pleased by this level of strong absolute and relative performance. However, it is not our goal to outperform the passive benchmark over relatively short time periods such as one year.
Rather, as long-term investors, we believe the Long Term Pool’s performance is most appropriately evaluated over multi-year periods. Over the five- and ten-year periods ending June 30, 2011, UVIMCO’s portfolio compounded at an annualized rate of 8.4 percent and 9.2 percent, respectively. This performance comfortably exceeds the 4.7 percent and 6.1 percent annualized returns available through ownership of the passive policy portfolio over the same five- and ten-year time horizons. The trailing ten-year period includes the tail end of the demise of the dot-com mania, the rupture of unprecedented credit and housing bubbles, and the beginning of significant sovereign debt crises around the globe. It was not an easy decade in which to invest. The following figure illustrates the difference in return on $1 invested in the Long Term Pool, the policy portfolio benchmark, and Standard & Poor’s 500 stock index over the ten years that ended June 30, 2011.
Growth of $1.00: UVIMCO vs. Benchmarks $3.00 2.50 2.00 1.50 1.00 0.50 0 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Long Term Pool UVIMCO Policy Portfolio Benchmark S&P 500 Index
2011 ANNUAL REPORT
17
Investment Performance continued from page 17 The following table summarizes the performance of the Long Term Pool and its component strategies over time:
UVIMCO Strategy Allocation and Investment Returns June 2011 Annual Return Annualized Return Allocation(1) FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 5 YR 10 YR 20 YR Equity Public 20.3 37.7 (8.3) (31.1) 27.8 41.1 9.4 11.9 12.5 Long/Short 22.2 23.8 17.8 (17.1) 1.8 16.3 7.4 8.7 — Private 19.5 29.4 13.8 (35.5) 19.7 35.5 9.0 8.0 21.3 Total Equity 62.0 30.0 8.2 (25.9) 15.3 30.1 9.4 9.8 14.6 MSCI All Country World Equity 25.8 (8.8) (28.9) 12.3 30.8 3.7 5.3 7.7 Real Assets Real Estate 5.9 12.5 (11.9) (45.4) (28.1) 3.8 (16.6) (5.3) — Resources 7.3 28.9 28.6 (23.5) 40.9 62.2 23.7 26.3 — Total Real Assets 13.2 22.2 3.7 (34.9) 9.0 35.6 4.0 10.5 — MSCI Real Estate(2) 21.2 (18.8) (39.2) 31.7 34.8 1.2 8.5 9.3 Fixed Income, Cash & AR Absolute Return 8.2 10.2 4.2 2.1 17.9 7.4 8.2 6.5 — Credit 4.8 15.6 (6.9) (10.8) 29.0 13.3 7.0 10.0 — Bonds 8.1 6.3 6.8 17.8 6.4 0.7 7.5 7.4 7.9 Cash & Currency 3.6 6.3 (1.5) 27.0 0.5 0.3 6.1 — — Total Fixed Income, Cash & AR 24.8 9.9 (0.1) 5.8 16.5 5.9 7.5 7.4 8.2 Barclays Aggregate Bond(3) 5.5 6.0 6.6 8.6 3.0 5.9 5.4 6.7 Long Term Pool 100.0 25.2 5.9 (21.0) 15.1 24.3 8.4 9.2 12.5 Policy Benchmark(4) 19.1 (5.3) (19.6) 13.3 22.4 4.7 6.1 7.9 % of Net Asset Value 50% MSCI U.S. Real Estate and 50% MSCI All Country World Real Estate (prior to January 1995, 100% FTSE NAREIT) (3) 50% Barclays U.S. Aggregate Bond and 50% Barclays Global Aggregate Bond Hedged in USD (prior to 1990, 100% Barclays U.S. Aggregate Bond) (4) Geometrically linked monthly average of 60% MSCI All Country World Equity, 10% MSCI Real Estate, and 30% Barclays Aggregate Bond (1) (2)
As the table indicates, different investment strategies make positive contributions to the portfolio’s overall performance over different periods of time. In some years, such as fiscal year 2007, we were fortunate to receive strong contributions across our full set of strategies. In other periods, such as fiscal year 2011, select strategies drove overall performance. Our public equity, private equity, and resources contributed to this year’s strong returns. Over the past five years, our mix of active equity strategies delivered an annualized return of 9.4 percent, producing more than 5 percent of excess return per year relative to the 3.7 percent return of the benchmark MSCI All Country 18
World Index. In 2007, 2010, and 2011, returns from our public and private equity strategies far surpassed those of long/short equity. In 2008, long/short provided the highest return and then declined by far less in fiscal year 2009. The combined performance of our three equity strategies exceeded our global equity benchmark in four of the past five years, in both rising and falling equity market environments. Our real asset strategies have produced a five-year annualized return of 4 percent, almost 3 percent above the 1.2 percent return of the benchmark. While the performance of our real estate funds has been negative over the past five years, our resource funds produced the
UNIVERSITY OF VIRGINIA INVESTMENT MANAGEMENT COMPANY
best returns of all the strategies in which we invested. Real estate represents a relatively small allocation within the Long Term Pool, limiting the negative impact of this strategy’s decline on the Pool’s overall performance. Our allocation to the diversifying collection of cash, bond, credit, and absolute return strategies produced a five-year annualized return of 7.5 percent, outperforming the 5.9 percent annualized return of the benchmark Barclays Aggregate Bond index by 1.6 percent. Similar to our experience in equities, different components within these diversifying strategies contributed to our
performance at different times, enabling the group as a whole to outperform over the five-year time frame. To evaluate our performance, we also compare our returns to those of peer institutions. Universities with large endowments typically report their returns after completing their fiscal year-end audits, in late September or October, so official comparisons for the 2011 fiscal year were not available at the time of this report’s distribution. However, we can compare the Long Term Pool’s performance to that of the TUCS All Master Trust Universe, a widely accepted benchmark for the performance of institutional assets.
•
UVIMCO Long Term Pool Relative Performance (Annualized through June 30, 2011) UVIMCO Long Term Pool UVIMCO Policy Portfolio Benchmark TUCS All Master Trust Universe Median
1 year 24.3% 22.4% 20.1%
3 years 4.2% 3.7% 4.2%
5 years 8.4% 4.7% 4.7%
10 years 9.2% 6.1% 5.5%
As this table shows, the investment performance of the Long Term Pool compares favorably with the performance of other institutional investors. 2011 ANNUAL REPORT
19
Looking Ahead W
e are pleased with the value that UVIMCO has generated for the University and its related Foundations over the past several decades. Supporting our efforts have been passive capital market returns, which have been high enough to support the spending needs of endowments and foundations, as a balanced, passive portfolio delivered a real return in excess of 5 percent per year over this period. The past five years tell a different story. Over the past five years, our policy portfolio benchmark delivered a real annual return of less than 5 percent. Through active management, we still were able to build the portfolio’s assets and support the spending rate designated by the University’s Board of Visitors.
Looking ahead, we expect the global markets to deliver a nominal return of less than 5 percent over the next ten years, which is not enough to maintain the purchasing power of the endowment after spending and inflation. However, we are confident that UVIMCO can achieve higher returns for the Long Term Pool by tilting the portfolio away from the passive policy benchmark, selecting astute investment managers, and by bearing liquidity risk in our private investments. We sincerely thank the University of Virginia and its related Foundations for the privilege of managing their long-term investment assets.
“ Above all things I hope the education of the common people will be attended to; convinced that on their good sense we may rely with the most security for the preservation of a due degree of liberty.” —Thomas Jefferson Letter to James Madison, December 20, 1787
20
UNIVERSITY OF VIRGINIA INVESTMENT MANAGEMENT COMPANY
•
www.uvimco.com