June 30, 2015 Endowment Quarterly Investment Report

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Performance Review

University of Guelph Endowment Funds

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 June 30th, 2015)

The Total Endowment Funds returned 8.2% for the last 12 months versus 11.1% for the benchmark.

Canadian Equity U.S. Equity
  • The Canadian equity portfolio lost 3.5% over the past year, 2.3% below the return of the S&P/TSX index.
  • Both the plan's Canadian equity managers (Burgundy, Sionna) underperformed the index for the year.
  • The lack of dedicated small cap exposure helped returns as small caps underperformed large caps by more than 13% over the past year.
  • U.S. equity markets performed extremely well in Canadian dollar terms with a one-year return of 25.9% for the S&P500.
  • The Endowment's U.S. equity investments performed well with a return of 26.6%, outperforming the benchmark by 70 basis points.
  • While the U.S. large cap manager (Fiduciary) lagged the S&P500 index by 70 basis points, significant value was added versus their respective indexes by the small-(6.5%) and mid-cap (9.5%) portfolios managed by Wedge.
Non-North American Equity Fixed Income
  • In Canadian dollars, non-North American equity underperformed the U.S. but outperformed Canada with a return of 12.7% for developed markets and 11.6% for emerging markets.
  • The developed markets managers (with 17.3% of the total endowment funds) performed poorly in the past year. LSV and Tweedy Browne underperformed the MSCI EAFE benchmark by 0.5% and 3.1% respectively.
  • The emerging markets manager (LSV) slightly lagged MSCI Emerging Markets index by 1.9% over the past year, although it outperformed over two and three years.
  • The Canadian fixed income portfolio is indexed to the FTSE TMX Universe and, as expected, closely matched its return of 6.3%
  • The cash return was negative due to losses on internal foreign exchange transactions.
  • The Infrastructure portfolio managed by Brookfield outperformed its index by 25.5% in one year. There is a large difference between the gross and net of fees returns due to accounting adjustments that occurred in August 2014.
  • 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 3.2%.

Total Endowment Portfolio Vs Endowment Policy Benchmark

As of June 30, 2015 (Gross of Fees, Annualized for Periods over 1 year)

Vertical bar graph illustrating total endowment portfolio vs endowment policy benchmark as of June 30, 2015 gross of fees annualized for periods over one year. Last Quarter total endowment return negative 1.1% benchmark return negative 1.1%. One year total endowment return 8.2% benchmark return 11.1%. Three years total endowment return 14.3% benchmark return 14.1%. Five years total endowment return 12.0% benchmark return 11.5%. Ten years total endowment return 6.5% benchmark return 6.4%.

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 June 30, 2015 (Gross of Fees)

   
  Allocation Performance(%)
Market Value ($) % of Portfolio Year to Date 1 Year 2 Years 3 Years 4 Years 5 Years 6 Years 7 Years 8 Years 9 Years 10 Years
Canadian Equity 62,608,131 18.5 0.0 -3.5 10.6 13.3 7.8 9.3 9.9 5.3 5.1 6.9 7.5
S&P/TSX Composite Index     0.9 -1.2 12.8 11.1 5.3 8.3 8.9 3.1 3.5 5.5 6.9
Relative Performance     -0.9 -2.3 -2.2 2.0 2.5 1.0 1.0 2.2 1.6 1.4 0.6
US Equity 90,748,842 26.8 10.2 26.6 27.0 27.4 22.1 21.8 20.9 15.6 10.3 10.8 9.2
S&P 500     9.1 25.9 25.9 25.5 21.8 21.2 18.3 12.7 8.5 9.2 8.1
Relative Performance     1.1 0.7 1.1 1.9 0.3 0.6 2.6 2.9 1.8 1.6 1.1
Non-North American Equity 70,561,909 20.8 12.4 10.8 18.6 20.2 14.2 14.5 13.2 9.2 5.5 6.1 6.5
MSCI EAFE (net)     13.8 12.3 18.3 19.8 11.8 13.2 10.2 5.0 2.3 4.3 5.3
Relative Performance     -1.4 -1.5 0.3 0.4 2.4 1.3 3.0 4.2 3.2 1.8 1.2
Emerging Markets Equity 18,284,598 5.4 9.3 9.7 15.0 12.8 6.4 N/A N/A N/A N/A N/A N/A
MSCI Emerging Markets Index     11.2 11.6 13.7 11.3 5.3 7.5 8.3 4.2 3.7 7.1 8.7
Relative Performance     -1.9 -1.9 1.3 1.5 1.1 N/A N/A N/A N/A N/A N/A
Canadian Fixed Income 81,690,154 24.1 2.4 6.3 5.9 4.1 5.4 5.3 5.7 6.0 6.0 5.8 5.1
FTSE TMX Universe Index     2.4 6.3 5.8 3.8 5.2 5.1 5.4 5.6 5.8 5.6 5.0
Relative Performance     0.0 0.0 0.1 0.3 0.2 0.2 0.3 0.4 0.2 0.2 0.1
Infrastructure 15,002,290 4.4 13.7 31.5 N/A N/A N/A N/A N/A N/A N/A N/A N/A
CPI + 5%     3.6 6.0 6.6 6.5 6.5 6.9 6.8 6.5 6.7 6.8 6.8
Relative Performance     10.1 25.5 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Internal Cash 335,459 0.1 -1.8 -2.6 -1.8 -1.8 0.5 2.0 1.6 1.6 1.8 N/A N/A
FTSE TMX Canada 91 Day T-Bill - C$     0.4 0.9 0.9 0.9 1.0 0.9 0.8 1.0 1.4 1.7 1.8
Relative Performance     -2.2 -3.5 -2.7 -2.7 -0.5 1.1 0.8 0.6 0.4 N/A N/A
Total Endowment (Net of Fees) 339,231,383 100.0 4.7 7.4 13.2 13.7 10.5 11.5 10.9 7.9 5.4 6.3 6.0
Endowment Policy Benchmark     6.7 11.1 15.1 14.1 10.8 11.5 10.4 6.8 5.3 6.3 6.4
Relative Performance     -2.0 -3.7 -1.9 -0.4 0.3 0.0 0.5 1.1 0.1 0.0 -0.4
Total Endowment (Gross of Fees) 339,231,383 100.0 5.0 8.2 13.9 14.3 11.1 12.0 11.5 8.4 6.0 6.8 6.5
Endowment Policy Benchmark     6.7 11.1 15.1 14.1 10.8 11.5 10.4 6.8 5.3 6.3 6.4
Relative Performance     -1.7 -2.9 -1.2 0.2 0.3 0.5 1.1 1.6 0.7 0.5 0.1
Total Endowment ex. Currency Overlay 339,231,383 100.0 6.8 11.4 15.9 15.8 12.3 N/A N/A N/A N/A N/A N/A
Relative Performance     0.1 0.3 0.8 1.7 1.5 N/A N/A N/A N/A N/A N/A
Effect of Passive Currency Hedge     -1.8 -3.2 -2.0 -1.5 -1.2 N/A/ 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)

  Performance%
Jul 2014 to Jun 2015 Jul 2013 to Jun 2014 Jul 2012 to Jun 2013 Jul 2011 to Jun 2012 Jul 2010 to Jun 2011 Jul 2009 to Jun 2010 Jul 2008 to Jun 2009 Jul 2007 to Jun 2008 Jul 2006 to Jun 2007 Jul 2005 to Jun 2006
Canadian Equity -3.5 26.8 18.4 -6.7 15.5 13.2 -18.5 3.7 22.3 13.1
S&P/TSX Composite Index -1.2 28.7 7.9 -10.3 20.9 12.0 -25.7 6.7 22.7 19.6
Relative Performance -2.3 -1.9 10.5 3.6 -5.4 1.2 7.2 -3.0 -0.4 -6.5
US Equity 26.6 27.4 28.1 7.7 20.5 16.4 -11.4 -20.7 14.7 -3.8
S&P 500 25.9 25.8 24.8 11.4 18.8 4.5 -15.6 -17.1 15.3 -1.4
Relative Performance 0.7 1.6 3.3 -3.7 1.7 11.9 4.2 -3.6 -0.6 -2.4
Non-North American Equity 10.8 26.9 23.4 -1.9 15.8 6.9 -12.1 -17.1 11.0 10.6
MSCI EAFE (net) 12.3 24.8 22.7 -9.0 18.5 -3.2 -21.4 -14.7 21.5 14.9
Relative Performance -1.5 2.1 0.7 7.1 -2.7 10.1 9.3 -2.4 -10.5 -4.3
Emerging Markets Equity 9.7 20.6 8.6 -10.9 N/A N/A N/A N/A N/A N/A
MSCI Emerging Markets Index 11.6 15.8 6.8 -10.9 16.5 12.8 -17.4 0.1 39.1 23.3
Relative Performance -1.9 4.8 1.8 0.0 N/A N/A N/A N/A N/A N/A
Canadian Fixed Income 6.3 5.5 0.5 9.4 5.2 7.5 8.0 6.0 4.3 -1.2
FTSE TMX Universe Index 6.3 5.3 -0.2 9.5 4.7 6.9 7.0 6.8 4.8 -0.7
Relative Performance 0.0 0.2 0.7 -0.1 0.5 0.6 1.0 -0.8 -0.5 -0.5
Infrastructure 31.5 N/A N/A N/A N/A N/A N/A N/A N/A N/A
CPI + 5% 6.0 7.3 6.3 6.6 8.2 6.2 4.8 8.4 7.1 7.5
Relative Performance 25.5 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Internal Cash -2.6 -1.0 -1.9 7.8 8.0 0.0 1.4 3.5 N/A N/A
FTSE TMX Canada 91 Day T-Bill-C$ 0.9 1.0 1.0 1.0 0.9 0.3 2.0 4.1 4.3 3.2
Relataive Performance -3.5 -2.0 -2.9 6.8 7.1 -0.3 -0.6 -0.6 N/A N/A
Total Endowment (Net of Fees) 7.4 19.4 14.5 1.4 15.6 8.1 -8.8 -10.1 13.6 3.2
Endowment Policy Benchmark 11.1 19.2 12.3 1.2 14.6 4.9 -12.4 -4.9 15.1 7.0
Relative Performance -3.7 0.2 2.2 0.2 1.0 3.2 3.6 -5.2 -1.5 -3.8
Total Endowment (Gross of Fees) 8.2 19.9 15.0 1.9 16.1 8.6 -8.3 -9.6 13.9 3.6
Endowment Policy Benchmark 11.1 19.2 12.3 1.2 14.6 4.9 -12.4 -4.9 15.1 7.0
Relative Performance -2.9 0.7 2.7 0.7 1.5 3.7 4.1 -4.7 -1.2, -3.4
Total Endowment ex. Currency Overlay 11.4 20.5 15.7 2.6 N/A N/A N/A N/A N/A N/A
Relative Performance 0.3 1.3 3.4 1.4 N/A 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 June 30, 2015

Total endowment performance. Bar graph illustrating total endowment performance. Total endowment 8.16% total endowment policy benchmark 11.11 total value added negative 2.95%. Total value added: negative 2.95%. Bar graph illustrating total value added: negative 2.95%. Fx hedge, other negative 3.19% manager value added negative 0.71% asset allocation 0.95%.Active Weights (Asset Classes) Bar graph illustrating average active weight. Internal cash 0.20% infrastructure 1.89% canadian fixed income negative 4.99%  emerging markets 0.38% non-north american equity 0.59%  US equity 2.51%  canadian equity negataive 0.59%. Total Asset Allocation: 0.95% Bar graph illustrating asset allocation value added internal cash negative 0.03% infrastructure 0.43% canadian fixed income 0.24% emerging markets negative 0.02% non-north american equity 0.00% US equity 0.31% canadian equity 0.01%. Total Manager Value Added: 0.71% Bar graph illustrating manager value added internal cash 0.00% infrastructure negative 0.09% canadian fixed income 0.02% emerging markets negative 0.08% non north american equity negative 0.30% US equity 0.25% canadian equity negative 0.52%

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 June 30, 2015

 June 30, 2015 $338,873,102. Bar graph illustrating Endowment Asset Mix Canadian Equities $61,479,020 target allocation 20.0% actual allocation 18.1% allocation differences negative 1.9% US equities 81,284,931 target allocation 25.0% actual allocation 24.0% allocation differences negative 1.0% non north american equities $68,282,665 target allocation 17.5% actual allocation 20.1% allocation differences negative 2.6% emerging markets $18,284,598 target allocation 5.0% actual allocation 5.4% allocation differences 0.4% canadian fixed income 81,690,154 target allocation 27.5% actual allocation 24.1% allocation differences negative 3.4% infrastructure $14,905,713 target allocation 5.0% actual allocation 4.4% allocation differences negative 0.6% cash $12,946,022 target allocation 0.0% actual allocation 3.8% allocation differences 3.8%

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 June 30th, 2015

Stacked bar graph illustrating endowment currency exposure June 30, 2015 unhedged as detailed in the following table. Stacked bar graph illustrating endowment currency exposure June 30, 2015 hedged as detailed in the following table.

Currency June 30, 2015 Unhedged Gross Exposure (CAD) Hedge (CAD) June 30, 2015 Hedged Net Hedged Exposure (CAD)
Canadian Dollar 42.2% 143,226,594 100,132,186 71.8% 243,358,780
US Dollar 39.5% 134,133,233 -69,296,525 19.1% 64,836,708
Euro 6.6% 22,531,805 -11,846,861 3.2% 10,684,943
British Pound 3.8% 12,855,330 -6,622,416 1.8% 6,232,914
Swiss Franc 2.8% 9,339,707 -4,906,034 1.3% 4,433,673
Japanese Yen 2.7% 9,036,669 -4,660,184 1,3% 4,376,515
Other 2.4% 8,164,651 -3,158,447 1.5% 5,006,204

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

Combined bar and line graph illlustrating year over year comparison of the June market values and net one-year returns to June 30 of each year. $M endowment market value Heritage and General  for 2006 $161.0 2007 $182.3 2008 $166.7 2009 $153.4 2010 $181.8 2011 $215.8 2012 $226.4 2013 $262.9 2014 $317.0 2015 $339.0. Percentage Cad$ return net for 2006 3.2% 2007 13.6% 2008 negative10.1% 2009 negative 8.8% 2010 8.1% 2011 15.6% 2012 1.4% 2013 14.5% 2014 19.4% 2015 7.4%.

Over the last 12 months the total Endowment portfolio increased $22 M to $339 M consisting of:

  • -Total contributions of $7.0 M and distributions of $8.4 M.
  • -1 year return (net of investment management fees) of 7.4% compared to 19.4% for 2014.