December 2015 Endowment Quarterly Investment Report

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Performance Review

University of Guelph Endowment Funds

4th Quarter 2015

Prepared by:

Pavilion Advisory Group Ltd.
1250 René-Lévesque Blvd. West. Suite 4030
Montreal, Quebec
H3B 4W8 Canada

Endowment Funds Results Overview

(Gross Returns for the 12 months ended December 31st, 2015)

The Total Endowment Funds returned 2.9% for the last 12 months versus 8.6% for the benchmark.

 

Canadian Equity U.S. Equity
  • The Canadian equity portfolio lost 11.7% over the past year, 3.4% below the return of the S&P/TSX index.
  • Both the Endowment’s Canadian equity managers (Burgundy, Sionna) underperformed the index for the year. However, Burgundy is responsible for the bulk of the underperformance, with lower returns and a higher dollar allocation.
  • The lack of dedicated small cap exposure helped returns as small caps underperformed large caps by more than 5.5% over the past year.
  • U.S. equity markets performed extremely well in Canadian dollar terms with a 1-year return of 21.7% for the S&P500.
  • However, the Endowment’s U.S. equity investments did not perform as well, with a return of 16.2%.
  • The U.S. large cap manager (Fiduciary) lagged the S&P 500 index by 3.6%, and the mid cap mandate managed by Wedge lagged its benchmark by 1.3%. The sole outperformer was Wedge’s small cap strategy, which beat the Russel 2000 Value Index by 5.0% over the past year.
Non-North American Equity Fixed Income
  • In Canadian dollars, non-North American equities outperformed Canada but lagged the U.S. with a return of 19.0% for developed markets. Emerging markets gained 2.5% over the past year.
  • The developed markets managers (with 21.7% of the total Endowment funds) performed inconsistently over the past year. LSV beat the MSCI EAFE by 2.2%, while Tweedy Browne lagged by a wider 4.1%.
  • The emerging markets manager (LSV) lagged the MSCI Emerging Markets index by 6.1% over the past year, although it outperformed from 2012 to 2014.
  • The Canadian fixed income portfolio is indexed to the FTSE TMX Universe and, as expected, closely matched its return of 3.5%.
  • The cash return was negative due to losses on internal foreign exchange transactions.
  • The infrastructure portfolio managed by Brookfield outperformed its index by 26.8% in 2015, largely thanks to a falling Canadian dollar over the period.
  • Currency hedging, which is implemented for risk control rather than to generate returns, was a drag on performance over the past year as it cost the portfolio 4.8%.

 

Total Endowment Portfolio Vs Endowment Policy Benchmark

As of December 31, 2015 (Gross of Fees, Annualized for Periods over 1 Year)

Vertical bar graph illustrating total endowment portfolio Vs endowment policy benchmark: current quarter 2.4% vs 4.5%; 1 year 2.9% vs 8.6%; 3 years 10.9% vs 12.7%; 5 years 9.1% vs 9.3%; 10 years 6.0% vs 6.0%

 

 

Returns are presented gross of fees in CAD.
Endowment Policy Benchmark: 27.5% FTSE TMX Bond Universe + 5% Infrastructure (CPI+5%) + 20% S&P/TSX Composite + 25% S&P 500 ($CAD) + 17.5% MSCI EAFE Net ($CAD) + 5% MSCI Emerging Markets Index.

 

 

Annualized Asset Class Performance

As of December 31, 2015 (Gross of Fees)

Annualized Asset Class Performance
  Allocation Performance(%)
  Market Value ($) % of portfolio Year to Date 1 Year 2 Years 3 Years 4 Years 5 Years 6 Years 7 Years 8 Years 9 Years 10 Years
Canadian Equity 55,115,389 16.4 -11.7 -11.7 -2.6 4.9 6.6 4.0 5.5 8.7 3.7 4.0 4.9
S&P/TSX Composite Index     -8.3 -8.3 0.7 4.6 5.3 2.3 4.7 8.6 2.2 3.0 4.4
Relative Performance     -3.4 -3.4 -3.3 0.3 1.3 1.7 0.8 0.1 1.5 1.0 0.5
US Equity 88,511,405 26.3 16.2 16.2 20.3 27.4 24.4 19.7 19.4 18.2 13.2 9.3 10.1
S&P 500     21.7 21.7 22.8 28.6 24.7 20.4 18.4 16.8 11.2 8.5 9.2
Relative Performance     -5.5 -5.5 -2.5 -1.2 -0.3 -0.7 1.0 1.4 2.0 0.8 0.9
Non-North American Equity 73,264,592 21.7 18.2 18.2 11.5 18.1 17.7 13.5 12.1 13.3 7.8 4.6 6.7
MSCI EAFE (net)     19.0 19.0 11.1 17.3 16.7 10.8 9.3 9.7 3.8 2.7 4.8
Relative Performance     -0.8 -0.8 0.4 0.8 1.0 2.7 2.8 3.6 4.0 1.9 1.9
Emerging Markets Equity 16,208,012 4.8 -2.6 -2.6 3.4 4.4 8.1 2.8 N/A N/A N/A N/A N/A
MSCI Emerging Markets Index     2.5 2.5 4.7 4.6 7.3 2.2 3.9 9.7 1.4 3.2 5.8
Relative Performance     -5.1 -5.1 -1.3 -0.2 0.8 0.6 N/A N/A N/A N/A N/A
Canadian Fixed Income 83,934,180 24.9 3.6 3.6 6.2 3.7 4.1 5.0 5.4 5.9 5.7 5.3 5.2
FTSE TMX Canada Universe Bond Index     3.5 3.5 6.1 3.6 3.6 4.8 5.1 5.2 5.3 5.1 5.0
Relative Performance     0.1 0.1 0.1 0.1 0.5 0.2 0.3 0.7 0.4 0.2 0.2
Infrastructure 19,237,529 5.7 33.5 33.5 22.2 N/A N/A N/A N/A N/A N/A N/A N/A
CPI + 5%     6.7 6.7 6.6 6.5 6.4 6.6 6.7 6.7 6.6 6.7 6.7
Relative Performance     26.8 26.8 15.6 N/A N/A N/A N/A N/A N/A N/A N/A
Internal Cash 4,933,237 1.5 -1.8 -1.8 -1.8 -1.8 -1.3 0.2 1.6 1.4 1.6 N/A N/A
FTSE TMX Canada 91 Day T-Bill     0.6 0.6 0.8 0.8 0.9 0.9 0.8 0.8 1.1 1.5 1.7
Relative Performance     -2.4 -2.4 -2.6 -2.6 -2.2 -0.7 0.8 0.6 0.5 N/A N/A
Total Endowment (Net of Fees) 337,087,797 100.0 2.3 2.3 6.2 10.3 10.7 8.6 8.8 9.6 6.0 4.5 5.4
Endowment Policy Benchmark     8.6 8.6 10.1 12.7 11.9 9.3 9.2 9.8 5.8 5.0 6.0
Relative Performance     -6.3 -6.3 -3.9 -2.4 -1.2 -0.7 -0.4 -0.2 0.2 -0.5 -0.6
Total Endowment (Gross of Fees) 337,087,797 100.0 2.9 2.9 6.8 10.9 11.3 9.1 9.4 10.1 6.6 5.0 6.0
Endowment Policy Benchmark     8.6 8.6 10.1 12.7 11.9 9.3 9.2 9.8 5.8 5.0 6.0
Relative Performance     -5.7 -5.7 -3.3 -1.8 -0.6 -0.2 0.2 0.3 0.8 0.0 0.0
Total Endowment ex. Currency Hedge 341,204,345 101.2 7.7 7.7 9.9 13.6 13.2 10.7 N/A N/A N/A N/A N/A
Endowment Policy Benchmark     8.6 8.6 10.1 12.7 11.9 9.3 9.2 9.8 5.8 5.0 6.0
Relative Performance     -0.9 -0.9 -0.2 0.9 1.3 1.4 N/A N/A N/A N/A N/A
Effect of Passive Currency Hedge     -4.8 -4.8 -3.1 -2.7 -1.9 -1.6 N/A N/A N/A N/A N/A

 

Endowment Policy Benchmark: 27.5% FTSE TMX Bond Universe + 5% Infrastructure (CPI+5%) + 20% S&P/TSX Composite + 25% S&P 500 ($CAD) + 17.5% MSCI EAFE Net ($CAD) + 5% MSCI Emerging Markets Index.

All returns are reported gross of fees in CAD except for the Total Endowment where returns are displayed both net and gross of fees. EAFE stands for Europe, Australasia and Far East. Cash amounts and percentages presented exclude residual manager cash balances and currency overlay (currency hedging).

 

Annual Asset Class Performance

(Gross of Fees)

 

Annual Asset Class Performance
  Performance(%)
  Jan-2015 To Dec-2015 Jan-2014 To Dec-2014 Jan-2013 To Dec-2013 Jan-2012 To Dec-2012 Jan-2011 To Dec-2011 Jan-2010 To Dec-2010 Jan-2009 To Dec-2009 Jan-2008 To Dec-2008 Jan-2007 To Dec-2007 Jan-2006 To Dec-2006
Canadian Equity -11.7 7.5 21.6 11.7 -5.5 13.0 30.5 -25.7 6.3 14.2
S&P/TSX Composite Index -8.3 10.6 13.0 7.2 -8.7 17.6 35.1 -33.0 9.8 17.3
Relative Performance -3.4 -3.1 8.6 4.5 3.2 -4.6 -4.6 7.3 -3.5 -3.1
US Equity 16.2 24.4 43.0 15.9 2.6 18.0 10.9 -16.5 -17.4 17.9
S&P 500 21.7 23.9 41.2 13.5 4.6 9.1 7.7 -21.4 -10.6 15.4
Relative Performance -5.5 0.5 1.8 2.4 -2.0 8.9 3.2 4.9 6.8 2.5
Non-North American Equity 18.2 5.2 32.6 16.6 -2.1 5.4 20.9 -24.0 -17.9 27.4
MSCI EAFE (net) 19.0 3.6 31.0 14.8 -10.0 2.1 12.2 -29.3 -5.8 25.9
Relative Performance -0.8 1.6 1.6 1.8 7.9 3.3 8.7 5.3 -12.1 1.5
Emerging Markets Equity -2.6 9.7 6.4 20.0 -15.9 N/A N/A N/A N/A N/A
MSCI Emerging Markets Index 2.5 7.0 4.3 16.1 -16.2 13.0 52.4 -41.6 18.5 32.1
Relative Performance -5.1 2.7 2.1 3.9 0.3 N/A N/A N/A N/A N/A
Canadian Fixed Income 3.6 8.9 -1.0 5.3 8.7 7.0 8.9 4.4 2.7 4.0
FTSE TMX Canada Universe Bond Index 3.5 8.8 -1.2 3.6 9.7 6.7 5.4 6.4 3.7 4.1
Relative Performance 0.1 0.1 0.2 1.7 -1.0 0.3 3.5 -2.0 -1.0 -0.1
Infrastructure 33.5 11.8 N/A N/A N/A N/A N/A N/A N/A N/A
CPI + 5% 6.7 6.6 6.4 6.0 7.3 7.5 6.4 6.2 7.6 6.8
Relative Performance 26.8 5.2 N/A N/A N/A N/A N/A N/A N/A N/A
Internal Cash -1.8 -1.8 -1.9 0.0 6.7 9.1 0.3 2.6 N/A N/A
FTSE TMX Canada 91 Day T-Bill 0.6 0.9 1.0 1.0 1.0 0.5 0.6 3.3 4.4 4.0
Relative Performance -2.4 -2.7 -2.9 -1.0 5.7 8.6 -0.3 -0.7 N/A N/A
Total Endowment (Net of Fees) 2.3 10.2 19.1 12.0 0.3 9.8 14.4 -15.6 -7.1 14.4
Endowment Policy Benchmark 8.6 11.7 17.9 9.7 -0.6 8.5 13.6 -18.2 -1.1 14.9
Relative Performance -6.3 -1.5 1.2 2.3 0.9 1.3 0.8 2.6 -6.0 -0.5
Total Endowment (Gross of Fees) 2.9 10.8 19.6 12.5 0.8 10.5 14.9 -15.2 -6.7 14.7
Endowment Policy Benchmark 8.6 11.7 17.9 9.7 -0.6 8.5 13.6 -18.2 -1.1 14.9
Relative Performance -5.7 -0.9 1.7 2.8 1.4 2.0 1.3 3.0 -5.6 -0.2
Total Endowment ex. Currency Hedge 7.7 12.3 21.4 11.9 1.2 N/A N/A N/A N/A N/A
Endowment Policy Benchmark 8.6 11.7 17.9 9.7 -0.6 8.5 13.6 -18.2 -1.1 14.9
Relative Performance -0.9 0.6 3.5 2.2 1.8 N/A N/A N/A N/A N/A

 

 

Endowment Policy Benchmark: 27.5% FTSE TMX Bond Universe + 5% Infrastructure (CPI+5%) + 20% S&P/TSX Composite + 25% S&P 500 ($CAD) + 17.5% MSCI EAFE Net ($CAD) + 5% MSCI Emerging Markets Index.

All returns are reported gross of fees in CAD except for the Total Endowment where returns are displayed both net and gross of fees. EAFE stands for Europe, Australasia and Far East. Cash amounts and percentages presented exclude residual manager cash balances and currency overlay (currency hedging).

 

 

Performance Attribution

Total Endowment Funds Vs Endowment Policy Benchmark
1 Year Ending December 31, 2015

A grouping of bar graphs illustrating Performance Attribution numbers in percentages. Part 1 performance: total fund 2.93 vs endowment policy benchmark 8.56, total value added negative 5.63 Part 2 attribution of total value added: asset allocation 0.87; manager value added negative 1.73; FX hedge and other negatvie 4.78 Part 3 average active weight , contribution to total asset allocation value added (0.87) and contribution to total manager value added (negative 1.73) by Canadian Equity are negative 1.76, 0.29 and negative 0.69; US equity 2.38, 0.19 and negative 1.26; non-North American equity 2.73, 0.08 and negative 0.16; Emerging Markets 0.20, negative 0.03 and negative 0.25; Canadian fixed income negative 3.69, 0.20 and 0.01; Infrastructure 0.59, 0.16 and 0.62; Internal cash 0.16, negative 0.02 and 0.00

Returns are presented gross of fees in CAD.

Endowment Policy Benchmark: 27.5% FTSE TMX Bond Universe + 5% Infrastructure (CPI+5%) + 20% S&P/TSX Composite + 25% S&P 500 ($CAD) + 17.5% MSCI EAFE Net ($CAD) + 5% MSCI Emerging Markets Index.

The Benchmarks do not assume currency hedging.

“Other” includes the effects of all other factors on the Total Endowment's relative returns, including rebalancing and residual trading activity.

 

Endowment Asset Mix

Actual Allocation vs. Investment Policy Allocation
As of December 31, 2015

Bar graph illustrating Endowment asset mix. Total value $337,087,797. Market value, target allocation, actual allocation and allocation difference for Canadian equities are $55,498,666, 20.0%, 16.5% and negative 3.5%; US equities $78,101.397, 25.0%, 23.2% and negative 1.8%; non-North American equities $72,108,980, 17.5%, 21.4% and 3.9%; Emerging markets $16,208.012, 5.0%, 4.8% and negative 0.2%; Canadian fixed income $83,934.180, 27.5%, 24.9% and negative 2.6%; Infrastructure $18,866.549, 5.0%, 5.6% and 0.6%; Cash $12,370.015, 0.0%, 3.7% and 3.7%

 

Note: This actual allocation displays the aggregate managers' holdings regardless of their mandate. Cash includes internal cash directly owned by the Endowments and manager residual cash balances (data from CIBC Mellon).

 

 

Endowment Currency Exposure

As of December 31st, 2015

Stacked bar graph illustrating Endowment currency exposure at quarter-end unhedged as detailed in the following table. Stacked bar graph illustrating Endowment currency exposure at quarter-end hedged as detailed in the following table.

 

Currency December 31st,2015 Unhedged Gross Exposure(CAD) Hedge(CAD) December 31st, 2015 Hedged Net Hedged Exposure(CAD)
Canadian Dollar 39.4% 134,415,509 106,410,738 71.4% 240,826,247
U.S. Dollar 41.7% 142,438,474 -78,383,255 19.0% 64,055,219
Euro 7.1% 24,353,668 -12,957,079 3.4% 11,396,589
British Pound 3.8% 12,834,492 -6,496,878 1.9% 6,337,614
Swiss Franc 2.7% 9,251,457 -4,662,628 1.4% 4,588,829
Japanese Yen 2.7% 9,283,950 -4,755,766 1.3% 4,528,184
Other 2.5% 8,626,795 -3,271,680 1.6% 5,355,115

Note: The Net Hedged Exposure equals the fund’s original currency exposure to its total investments (Gross Exposure) plus the currency hedge implemented by Mesirow, which is designed to protect the Endowment funds from excessive foreign currency fluctuations.

Growth of Endowment Assets

December Market Values and Net 1-Year Returns to December 31st of Each Year

Combined bar and line graph illustrating year over year comparison of the quarter-end market values and net one-year returns to quarter-end of each year. $M Endowment fund market value for 2006 182.8 2007 170.9 2008 145.9 2009 172.1 2010 206.6 2011 214.0 2012 246.1 2013 295.1 2014 325.2 2015 337.1 Percentage Cad$ return net for 2006 14.4% 2007 negative 7.1% 2008 negative 15.6% 2009 14.4% 2010 9.8% 2011 0.3% 2012 12.0% 2013 19.1% 2014 10.2% 2015 2.3%

 

Over the last 12 months the total Endowment portfolio increased $11.9 M to $337.1 M consisting of:

  • Total contributions of $6.0 M and distributions of $1.4 M.
  • 1-year return (net of investment management fees) of 2.3% compared to 10.2% for the year ended December 2014.