September 30, 2017 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

(Net of fees returns for the 12 months ended September 30th, 2017)

The Total Endowment Funds gained 9.2% over the last 12 months, outperforming the unhedged benchmark by 2.0% and the hedged benchmark by 1.0%.

Canadian Equity U.S. Equity
  • The Canadian equity portfolio gained 11.2% over the past year, 2.0% above the return of the S&P/TSX index.
  • Both Burgundy and Sionna contributed to the outperformance with 10.3% and 12.8% returns respectively
  • The S&P/TSX index posted a 9.2% return over the past year while Burgundy and Sionna outperformed this benchmark by 1.1% and 3.6% respectively.
  • U.S. equity markets performed well in Canadian dollar terms with a 1-year return of 12.9% for the S&P500.
  • The Endowment’s U.S. equity investments gained 11.8% over the last year, underperforming the S&P500 index by 1.1%.
  • The U.S. large cap manager (Fiduciary) lagged the S&P 500 index by 0.7%. The mid cap mandate managed by Wedge beat its benchmark by 4.4%, while Wedge’s small cap strategy underperformed its benchmark, the Russell 2000 Value Index, by 4.8% over the past year.
Non-North American Equity Fixed Income
  • In Canadian dollars, non-North American equities in developed markets outperformed both Canada (9.2%) and the U.S. (12.9%) with a return of 13.8%, while emerging markets equities gained 17.0% over the past year.
  • Tweedy Browne underperformed the MSCI EAFE index by 2.7% while LSV outperformed the benchmark by 3.1%.
  • The emerging markets manager (LSV) outperformed the MSCI Emerging Markets index by 0.3% over the past year.
  • The Canadian fixed income portfolio slightly outperformed the FTSE TMX Universe index by 0.3%.
  • The infrastructure portfolio managed by Brookfield outperformed its index by 6.4% over the past year. Short- term returns should be interpreted with caution due to the long-term nature and illiquidity of the investment.

Total Endowment Portfolio Vs Endowment Policy Benchmark

As of September 30, 2017 (Gross of Fees, Annualized for Periods over 1 Year)

vertical bar graph illustrating total endowment portfolio vs endowment policy benchmark: current quarter 1.3 vs 0.8 benchmark return vs 1.3 benchmark return (hedged); 1 year 9.8 vs 7.2 benchmark return vs 8.2 benchmark return (hedged); 3 years 7.4 vs 7.8 benchmark return vs 7.1 benchmark return (hedged); 5 years 10.6 vs 10.6 benchmark return vs 9.7 benchmark return (hedged); 10 years 6.7 vs 5.8 benchmark return vs 5.4 benchmark return (hedged)

Returns are presented gross of fees in CAD.
Endowment Policy Benchmark: 30% FTSE TMX Bond Universe + 7.5% Infrastructure (CPI+5%) + 17.5% S&P/TSX Composite + 20% S&P 500 ($CAD) + 20% MSCI EAFE Net ($CAD) + 5% MSCI Emerging Markets Index. The Hedged Endowment Policy Benchmark has the same composition as the Endowment Policy Benchmark, but all foreign indices are 50% hedged back to Canadian dollars from November 2010 to June 2017, 37.5% hedged from June to September 2017, 25% hedged since September 2017.

Asset Class Performance

As of September 30, 2017 (Gross of Fees)

   
  Allocation Annualized Performance(%) Annual Performance(%)
Market Value ($) % of Portfolio Quarter to Date 1 Year 3 Years 5 Years 10 Years 1 Year Ending Sep-2016 1 Year Ending Sep-2015 1 Year Ending Sep-2014 1 Year Ending Sep-2013 1 Year Ending Sep-2012
Canadian Equity 78,307,642 18.5 5.7 11.7 4.5 9.6 5.6 15.8 -11.9 18.0 17.5 13.8
S&P/TSX Composite Index     3.7 9.2 4.5 8.1 4.1 14.2 -8.4 20.4 7.1 9.2
Relative Performance     2.0 2.5 0.0 1.5 1.5 1.6 -3.5 -2.4 10.4 4.6
US Equity 89,277,848 21.1 -0.5 12.5 15.1 20.5 11.6 11.8 21.3 27.2 30.8 23.5
S&P 500 Index (CAD)     0.6 12.9 15.0 19.8 9.9 13.2 19.2 30.2 24.7 22.9
Relative Performance     -1.1 -0.4 0.1 0.7 1.7 -1.4 2.1 -3.0 6.1 0.6
Non-North American Equity 90,812,233 21.4 1.3 14.8 10.1 14.9 6.9 6.2 9.3 16.4 29.1 11.5
MSCI EAFE Composite     1.6 13.8 9.5 14.2 4.2 4.9 10.0 13.8 29.8 7.9
Relative Performance     -0.3 1.0 0.6 0.7 2.7 1.3 -0.7 2.6 -0.7 3.6
Emerging Markets 21,942,306 5.2 2.3 18.4 8.8 10.5 N/A 15.0 -5.5 17.4 9.2 11.5
MSCI Emerging Markets Index     4.0 17.0 9.3 9.5 4.0 14.9 -2.8 13.8 5.9 10.8
Relative Performance     -1.7 1.4 -0.5 1.0 N/A 0.1 -2.7 3.6 3.3 0.7
Canadian Fixed Income 119,552,252 28.2 -1.8 -2.7 3.0 2.8 5.0 6.5 5.4 6.5 -1.1 6.7
FTSE TMX Canada Universe Bond Index     -1.8 -3.0 2.8 2.7 4.7 6.3 5.3 6.3 -1.3 5.5
Relative Performance     0.0 0.3 0.2 0.1 0.3 0.2 0.1 0.2 0.2 1.2
Infrastructure 23,785,082 5.6 -2.8 14.2 14.3 N/A N/A 0.1 30.7 N/A N/A N/A
CPI + 5%     1.5 6.6 6.3 6.4 6.6 6.3 6.0 7.1 6.1 6.2
Relative Performance     -4.3 7.6 8.0 N/A N/A -6.2 24.7 N/A N/A N/A
Internal Cash 871,411 0.2 0.0 -0.7 -1.2 -1.3 1.3 -0.3 -2.6 -1.0 -1.9 -0.6
FTSE TMX Canada 91 Day T-Bill     0.1 0.5 0.6 0.7 1.1 0.5 0.8 0.9 1.1 0.9
Relative Performance     -0.1 -1.2 -1.8 -2.0 0.2 -0.8 -3.4 -1.9 -3.0 -1.5
Total Endowment (Gross of Fees) 424,100,427 100.0 1.3 9.8 7.4 10.6 6.7 9.9 2.8 15.3 16.0 14.9
Net of Fees     1.2 9.2 6.8 10.0 6.1 9.2 2.2 14.6 15.5 14.3
Relative Performance     0.1 0.6 0.6 0.6 0.6 0.7 0.6 0.7 0.5 0.6
Endowment Policy Benchmark (Hedged)     1.3 8.2 7.1 9.7 5.4 9.9 3.3 15.1 12.2 12.8
Relative Performance     0.0 1.6 0.3 0.9 1.3 0.0 -0.5 0.2 3.8 2.1
Total Endowment (Gross of Fees) 424,100,427 100.0 1.3 9.8 7.4 10.6 6.7 9.9 2.8 15.3 16.0 14.9
Total Endowment ex. FX overlay     0.6 8.8 8.5 11.8 7.1 9.4 7.3 17.1 17.0 13.2
Relative Performance     0.7 1.0 -1.1 -1.2 -0.4 0.5 -4.5 -1.8 -1.0 1.7

Endowment Policy Benchmark (Hedged): 30% FTSE TMX Bond Universe + 7.5% Infrastructure (CPI+5%) + 17.5% S&P/TSX Composite + 20% S&P 500 ($CAD) + 20% MSCI EAFE Net ($CAD) + 5% MSCI Emerging Markets Index.. All foreign indices are 50% hedged back to Canadian dollars from November 2010 to June 2017, 37.5% hedged from June to September 2017, 25% hedged since September 2017.

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, 2017

a grouping of bar graphs illustrating performance attribution numbers in percentages part 1 performance: total fund 9.76 vs endowment policy benchmark 7.20, total value added 2.56 part 2 attribution of total value added: asset allocation 0.47; manager value added 1.25; FX hedge and other 0.85 part 3 average active weight, contribution to total asset allocation value added (0.47) and contribution to total manager value added (1.25) by canadian equity are 0.68, 0.00 and 0.48; us equity 2.85, 0.15 and -0.07; non-north american equity 0.71, 0.02 and 0.27; emerging markets -0.09, -0.01 and 0.04; canadian fixed income -3.25, 0.33 and 0.08; infrastructure -1.63, 0.01 and 0.44; internal cash 0.63, -0.03 and 0.00

Returns are presented gross of fees in CAD.
Endowment Policy Benchmark: 30% FTSE TMX Bond Universe + 7.5% Infrastructure (CPI+5%) + 17.5% S&P/TSX Composite + 20% S&P 500 ($CAD) + 20% MSCI EAFE Net ($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, 2017

bar graph illustrating endowment asset mix. total value $424,100,427 market value, target allocation, actual allocation and allocation difference for canadian equities are $77,850,546, 17.5%, 18.4% and 0.9%; us equities $79,278,698, 20.0%, 18.7% and -1.3%; non-north american equities $86,584,491, 20.0%, 20.4% and 0.4%; emerging markets $21,942,306, 5.0%, 5.2% and 0.2%; Canadian fixed income $119,552,252, 30.0%, 28.2% and -1.8%; infrastructure $23,314,485, 7.5%, 5.5% and -2.0%; cash $15,577,649, 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).

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 1-year returns to quarter-end of each year. $M endowment fund market value for 2008 157.5 2009 165.4 2010 193.2 2011 198.1 2012 234.4 2013 274.3 2014 317.5 2015 322.8 2016 378.7 2017 424.1 percentage Cad$ return net for 2008 -11.5% 2009 4.1% 2010 6.6% 2011 -0.2% 2012 14.3% 2013 15.5% 2014 14.6% 2015 2.2% 2016 9.2% 2017 9.2%

Over the last 12 months the total Endowment portfolio increased from $378.7 M to $424.1 M consisting of:

  • –Total contributions of $19.2 M and distributions of $9.4 M
  • –1-year return (net of investment management fees) of 9.2%, same as the year ended September 2016. Per Expendable Fund Investment Policy approved by the Board on Jun. 3, 2016, all sinking funds and a portion of expendable funds are now invested in this portfolio