September 30, 2015 Endowment Quarterly Investment Report

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Performance Review

University of Guelph Endowment Funds

3rd Quarter 2015

Prepared by:

Pavillion 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 September 30th, 2015)

The Total Endowment Funds returned 2.8% for the last 12 months versus 6.6% for the benchmark.

 

Canadian Equity U.S. Equity
  • The Canadian equity portfolio lost 11.9% over the past year, 3.5% below the return of the S&P/TSX index.
  • Both the Endowment’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 11.9% over the past year.
  • U.S. equity markets performed extremely well in Canadian dollar terms with a 1-year return of 19.2% for the S&P500.
  • The Endowment’s U.S. equity investments performed well with a return of 21.3%, outperforming the benchmark by 2.1%.
  • The U.S. large cap manager (Fiduciary) beat the S&P 500 index by 140 basis points, and significant value was added versus their respective indexes by the small- (5.6%) and mid-cap (6.1%) 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 9.5% for developed markets. However, emerging markets lost 2.8% over the past year.
  • The developed markets managers (with 21.2% of the total Endowment funds)  performed poorly  in the past  year. LSV and Tweedy Browne underperformed the MSCI EAFE benchmark by 0.3% and 0.9% respectively.
  • The emerging markets manager (LSV) lagged the MSCI Emerging Markets index by 2.7% over the past year, although it has outperformed over longer time periods.
  • The Canadian fixed income portfolio is indexed to the FTSE TMX Universe and, as expected, closely matched its return of 5.3%.
  • The cash return was negative due to losses on internal foreign exchange transactions.
  • The infrastructure portfolio managed by Brookfield outperformed its index by 24.7% in one year, 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 4.5%.

 

Total Endowment Portfolio Vs Endowment Policy Benchmark

As of September 30, 2015 (Gross of Fees, Annualized for Periods over 1 Year)

vertical bar graph illustrating total endowment portfolio Vs endowment policy benchmark: current quarter -4.5 vs -2.6; 1 year 2.8 vs 6.6: 3 years 11.2 vs 12.0; 5 years 9.6 vs 9.2 and 10 years 5.8 vs 5.8


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 September 30, 2015 (Gross of Fees)

Annualized Asset Class Performance
  Allocation Performance(%)
Market Value ($) % of Portfolio Year to Date 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year
Canadian Equity 56,377,496 17.5 -9.8  -11.9 2.0  6.9 8.6 6.0 6.6 6.1 3.7 5.5 5.2
S&P/TSX Composite Index     -7.0 -8.4 5.0  5.7 6.6 4.5 5.6 4.9 2.2 4.3 4.8
Relative Performance     -2.8 -3.5 -3.0 1.2 2.0 1.5 1.0 1.2 1.5 1.2 0.4
US Equity 84,132,313 26.1 9.0 21.3 24.2 26.4 25.6 20.2 18.9 15.1 11.4 9.7 9.6
S&P 500     9.7 19.2 24.6 24.6 24.2 19.6 17.1 13.5 9.2 8.5 8.3
Relative Performance     -0.7 2.1 -0.4 1.8 1.4 0.6 1.8 1.6 2.2 1.2 1.3
Non-North American Equity 68,436,243 21.2 10.1 9.3 12.8 18.0  16.3 11.9  11.0 11.5 6.0 5.2 6.3
MSCI EAFE (net)      9.7 9.5 11.4 17.1 14.6 9.7 7.8 7.3 2.5 3.4 4.4
Relative Performance     0.4 -0.2 1.4 0.9 1.7 2.2 3.2 4.2 3.5 1.8 1.9
Emerging Markets Equity  15,921,334 4.9 -4.5 -5.5 5.3 6.6 7.8 2.4 N/A N/A N/A N/A N/A
MSCI Emerging Markets Index     -1.8  -2.8 5.1 5.4 6.7 2.1 4.2  6.4 1.2 5.0 6.1
Relative Performance     -2.7 -2.7 0.2 1.2 1.1 0.3 N/A N/A N/A N/A N/A
Canadian Fixed Income 81,859,147 25.4 2.6 5.4 5.9  3.5 4.3 4.7 5.2 6.1 5.9 5.3 5.1
FTSE TMX Canada Universe Bond Index     2.5 5.3 5.8 3.4 3.9 4.5 4.9 5.7 5.5 5.1 5.0
Relative Performance     0.1 0.1 0.1 0.1 0.4 0.2 0.3 0.4 0.4 0.2 0.1
Infrastructure 17,294,653 5.4 26.7 30.7 N/A N/A N/A N/A N/A N/A N/A N/A N/A
CPI + 5%     5.0 6.0 6.6 6.4 6.4 6.8 6.8 6.4 6.7 6.8 6.7
Relative Performance     21.7 24.7 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Internal Cash 400,636 0.1 -1.8 -2.6 -1.8 -1.8 -1.5 0.2 1.6  1.5 1.7 N/A N/A
FTSE TMX Canada 91 Day T-Bill     0.5 0.8 0.8 0.9 0.9 0.9 0.8 0.9 1.3 1.6 1.8
Relative Performance     -2.3 -3.4 -2.6 -2.7 -2.4 -0.7 0.8 0.6 0.4 N/A N/A
Total Endowment (Net of Fees) 322,876,636 100.0 -0.2 2.2 8.2 10.6 11.5 9.1 8.6 8.0 5.3 5.2 5.3
Endowment Policy Benchmark     3.9 6.6 11.5 12.0 11.8 9.2 8.6 7.9 5.1 5.5 5.8
Relative Performance     -4.1 -4.4 -3.3 -1.4 -0.3 -0.1 0.0 0.1 0.2 -0.3 -0.5
Total Endowment (Gross of Fees)  322,876,636 100.0 0.2 2.8 8.9 11.2 12.1 9.6 9.2 8.6 5.9 5.7 5.8
Endowment Policy Benchmark     3.9 6.6 11.5 12.0 11.8 9.2 8.6 7.9 5.1 5.5 5.8
Relative Performance     -3.7 -3.8 -2.6 -0.8 0.3 0.4 0.6 0.7 0.8 0.2 0.0
Total Endowment ex. Currency Hedge 324,421,822 100.5 4.0 7.3 12.1 13.7 13.6 N/A N/A N/A N/A N/A N/A
Endowment Policy Benchmark     3.9 6.6 11.5 12.0 11.8 9.2 8.6 7.9 5.1 5.5 5.8
Relative Performance     0.1 0.7 0.6 1.7 1.8 N/A N/A N/A N/A N/A N/A
Effect of Passive Currency Hedge     -3.8 -4.5 -3.2 -2.5 -1.5 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(%)
Oct-2014 to Sep-2015 Oct-2013 to Sep-2014 Oct-2012 to Sep-2013 Oct-2011 to Sep-2012 Oct-2010 to Sep-2011 Oct-2009 to Sep-2010 Oct-2008 to Sep-2009 Oct-2007 to Sep-2008 Oct-2006 to Sep-2007 Oct-2005 to Sep-2006
Canadian Equity -11.9 18.0 17.5 13.8 -3.8 9.3 3.3 -11.5 20.8 2.4
S&P/TSX Composite Index -8.4 20.4 7.1 9.2 -3.6 11.6 0.5 -14.4 22.8 9.2
Relative Performance -3.5 -2.4 10.4 4.6 -0.2 -2.3 2.8 2.9 -2.0 -6.8
US Equity 21.3 27.2 30.8 23.5 0.8 12.5 -5.4 -11.3 -2.9 8.4
S&P 500 19.2 30.1 24.7 22.9 2.8 5.3 -5.9 -16.6 3.6 6.2
Relative Performance 2.1 -2.9 6.1 0.6 -2.0 7.2 0.5 5.3 -6.5 2.2
Non-North American Equity 9.3 16.4 29.1 11.5 -4.1 6.3 15.0 -25.9 -1.1 17.5
MSCI EAFE(net) 9.5 13.3 29.4 7.4 -7.9 -1.3 4.3 -25.7 11.1 14.2
Relative Performance -0.2 3.1 -0.3 4.1 3.8 7.6 10.7 -0.2 -12.2 3.3
Emerging Markets Equity -5.5 17.4 9.2 11.5 -16.6 N/A N/A N/A N/A N/A
MSCI Emerging Markets index -2.8 13.8 5.9 10.8 -14.6 15.2 20.7 -28.4 41.2 15.8
Relative Performance -2.7 3.6 3.3 0.7 -2.0 N/A N/A N/A N/A N/A
Canadian Fixed Income 5.4 6.5 -1.1 6.7 6.0 7.9 11.7 4.2 1.1 3.5
FTSE TMX Canada Universe Bond Index 5.3 6.3 -1.3 5.5 6.7 7.3 10.3 4.6 1.6 4.0
Relative Performance 0.1 0.2 0.2 1.2 -0.7 0.6 1.4 -0.4 -0.5 -0.5
Infrastructure 30.7 N/A N/A N/A N/A N/A N/A N/A N/A N/A
CPI + 5% 6.0 7.1 6.1 6.2 8.4 6.9 4.2 8.6 7.6 5.7
Relative Performance 24.7 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 -0.6 7.5 8.9 0.8 3.2 N/A N/A
FTSE TMX Canada 91 Day T-Bill 0.8 0.9 1.1 0.9 1.0 0.4 1.3 3.7 4.4 3.7
Relative Performance -3.4 -1.9 -3.0 -1.5 6.5 8.5 -0.5 -0.5 N/A N/A
Total Endowment (Net of Fees) 2.2 14.6 15.5 14.3 -0.2 6.6 4.1 -11.5 4.3 6.0
Endowment Policy Benchmark 6.6 16.6 12.9 11.3 -0.4 5.7 3.3 -12.4 8.6 8.3
Relative Performance -4.4 -2.0 2.6 3.0 0.2 0.9 0.8 0.9 -4.3 -2.3
Total Endowment (Gross of Fees)  2.8 15.3 16.0 14.9 0.3 7.1 4.7 -11.1 4.7 6.3
Endowment Policy Benchmark 6.6 16.6 12.9 11.3 -0.4 5.7 3.3 -12.4 8.6 8.3
Relative Performance -3.8 -1.3 3.1 3.6 0.7 1.4 1.4 1.3 -3.9 -2.0
Total Endowment ex. Currency Hedge 7.3 17.1 17.0 13.2 N/A N/A N/A N/A N/A N/A
Endowment Policy Benchmark 6.6 16.6 12.9 11.3 -0.4 5.7 3.3 -12.4 8.6 8.3
Relative Performance 0.7 0.5 4.1 1.9 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 September 30, 2015
 

A grouping of bar graphs illustrating numbers in percentages. Part 1 performance: total fund 2.82 vs endowment policy benchmark 6.60, total value added -3.79. Part 2 attribution of total value added: asset allocation 0.60; manager value added 0.11; FX hedge and other -4.49. Part 3 average active weight, contribution to total asset allocation value added (0.60) and contribution to total manager value added (0.11) by Canadian equity are -1.17, 0.13 and -0.74; US equity 2.82, 0.29 and 0.57; Non-North American equity 1.71, -0.06 and -0.03; Emerging Markets 0.32, -0.04 and -0.13; Canadian fixed income -4.44, 0.12 and 0.03; infrastructure 1.32, 0.19 and 0.41; Internal cash 0.17, -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 September 30, 2015

Bar graph illustrating Endowment Asset Mix. Total value $322,876,636. Market value, target allocation, actual allocation and allocation difference for Canadian equities are $57,055,544, 20.0%, 17.7% and -2.3%; US equities $75,009,241, 25.0%, 23.2% and -1.8%; Non-North American equities $68,136,485, 17.5%, 21.1% and 3.6%; Emerging markets $15,921,334, 5.0%, 4.9% and -0.1%; Canadian fixed income $81,859,147, 27.5%, 25.4% and -2.1%; Infrastructure $16,967,864, 5.0%, 5.3% and 0.3%; Cash $7,927,020, 0.0%, 2.5% and 2.5%

 

 

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 September 30th, 2015

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

Currency September 30th,
2015 Unhedged		 Gross Exposure
(CAD)		 Hedge (CAD) September 30th,
2015 Hedged		 Net Hedged
Exposure (CAD)
Canadian Dollar 44.6% 151,021,276 97,462,546 73.8% 248,483,822
U.S. Dollar 37.4% 126,607,830 -68,037,876 17.4% 58,569,954
Euro 6.8% 22,906,706 -11,999,918 3.2% 10,906,788
British Pound 3.8% 12,695,126 -6,559,222 1.8% 6,135,903
Swiss Franc 2.7% 9,254,286 -4,826,870 1.3% 4,427,416
Japanese Yen 2.5% 8,313,614 -4,537,325 1.1% 3,776,290
Other 2.2% 7,591,309 -3,046,521 1.3% 4,544,788

 

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


September Market Values and Net 1-Year Returns to September 30th 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 $168.3 2007 $175.1 2008 $157.5 2009 $165.4 2010 $193.2 2011 $198.1 2012 $234.4 2013 $274.3 2014 $317.5 2015 $322.9. Percentage Cad$ return net for 2006 5.9% 2007 4.3% 2008 -11.5% 2009 4.1% 2010 6.6% 2011 -0.2% 2012 14.3% 2013 15.5% 2014 14.6%2 2015 2.2%
 

Over the last 12 months the total Endowment portfolio increased $5.4 M to $322.9 M consisting of:
–    Total contributions of $7.0 M and distributions of $8.4 M.
–    1-year return (net of investment management fees) of 2.2% compared to 14.6% for the year ended September 2014.