Presentations text content in The Vanderbilt Endowment
Slide1
The Vanderbilt Endowment
August 11, 2015
Slide2Agenda
Endowment BackgroundOffice of InvestmentsAsset AllocationBeta FactorsCapital Market ResearchManager SelectionOngoing Due DiligenceTermination DecisionRecent Activity
August 11,
2015
Slide3EndowmentBackground
August 11,
2015
Slide4Background: Endowment Overview
August 11, 2015
Vanderbilt’s endowment is not one singular, homogeneous fundIt is comprised of approximately 2,500 different funds supporting a variety of institutional needs and purposes
Athletics Chairs Fellowships/stipendsGraduate support (aid, stipends) LectureshipsPlant, equipment, and facility operations
Prizes
and
awards
Professional
financial aid
Programs
Research
Student
loans
Undergraduate
financial aid
Unrestricted
Slide5Background: Endowment Categories
August 11, 2015
Gift CategorySizePercentageAthletics financial aid$58 million1.3%Chairs$968 million22.0%Fellowships/stipends$27 million0.6%Graduate support (aid, stipends)$48 million1.1%Lectureships$19 million0.4%Loans$3 million0.1%Other$17 million0.4%Other financial aid$42 million0.9%Pending designation$33 million0.8%Plant, equipment, and facility operations$44 million1.0%Prizes and awards$13 million0.3%Professional financial aid$278 million6.3%Programs$236 million5.4%Research$71 million1.6%Undergraduate financial aid$999 million22.7%Unrestricted$1.5 billion35.0%Total$4.3 billion100.0%
Slide6Background: Endowment Structure
August 11, 2015
The endowment is run similar to a mutual fund or common trust, with each internal beneficiary “owning” units (similar to shares of a mutual fund) of the endowment
At December 2014, the endowment had 43.9 million units valued at $98.32/unit
Spending from the endowment is based on 4.5% of a trailing three-year unit value
The payout for FY 2015 (based on 12/31/12, 12/31/13, and
12/31/14 unit valuations) was $4.09/unit
Slide7Background:
Largest 25 Endowments
EndowmentSize (as of 6/30/14)Harvard $35.9 billionTexas 25.4Yale 23.9Stanford 21.4Princeton 21.0MIT 12.4Texas A&M 11.1Northwestern 9.8Michigan 9.7Penn 9.6Columbia 9.2Notre Dame 8.0Chicago 7.5California 7.4Duke 7.0Emory 6.7Washington U. 6.6Virginia 5.9Cornell 5.9USC 5.6Rice 5.5Dartmouth 4.5Vanderbilt 4.1Ohio State 3.5Pitt 3.5
August 11,
2015
Slide8Background: Endowment Growth
August 11, 2015
Slide9Background: Endowment Additions
August 11, 2015
True Corpus (Book Value) Additions (in millions)
9
$11M
5-yr avg.
$4M
5-yr avg.
$4M
5-yr avg.
$11M
5-yr avg.
$18M
5-yr avg.
$22M
5-yr avg.
$29M
5-yr avg.
$36M
5-yr avg.
$47M
5-yr avg.
$75M 10-yr total
$78M 10-yr total
$202M 10-yr total
$414M 10-yr total
$232M 5-yr total
$330M 10-yr total
Slide10Background: Endowment Additions
August 11, 2015
Sources of Endowment Growth (in millions)
Endowment that existed at the end of FY00
True endowment additions (and growth) since FY00
Quasi-endowment additions (and growth) since FY00
$4,046
$2,990
$886
$170
10%
5
1
%
39%
$1,731 of growth
% of
growth
$2,315
Slide11August 11, 2015
Background: Endowment Dependency
FY 2013 Endowment distribution ÷ Operating revenues
* Includes health system
Slide12August 11, 2015
Not including the hospitals and clinics, Vanderbilt’s endowment dependency is approximately 8%
Endowment dependency is defined as endowment distributions as a percentage of operating revenues, net of financial aidIncludes Vanderbilt Medical Group
Percentage of revenues derived from endowment
FY 2015 budget (1,2)
(3)
Background:
Endowment Dependency
Slide13August 11, 2015
Background: Endowment Returns
08-09
01
90-91
80-82
73-75
Endowment return (%) Recessions
Payout
rate (%)
4.3%
3.1%
4.3%
4.9%
5.2%
5.6%
5.5%
5.6%
5.3%
5.4%
3.7%
5.5%
5.4%
5.6%
5.3%
4.5%
4.6%
4.9%
5.1%
5.1%
5.1%
5.0%
4.5%
4.6%
4.3%
3.9%
3.7%
3.7%
3.5%
3.9%
4.6%
6.1%
5.1%
4.7%
4.2%
4.0%
4.0%
4.8%
5.3%
4.8%
4.4%
FY
3.1%
3.0%
4.1%
Positive in 40 of Past 44 Fiscal Years
Slide14Office ofinvestments
August 11,
2015
Slide15Office of Investments
August 11, 2015
Slide16Office of Investments
August 11, 2015
Staff of 24
Chief Investment Officer: 1
Investment Team
Public Investment Team: 6
Private Investment Team: 5
Risk Management: 1
Operations Team: 8
Assistants: 3
Slide17AssetAllocation
August 11,
2015
Slide18Asset Allocation: Typical US Endowment/Foundation
Among endowments and foundations:Largest allocation to public equitiesSecond largest allocation to hedge funds
August 11, 2015
Source: Cambridge Associates
Slide19Asset Allocation: US Endowment/ Foundation Fund Flows
Decreased flows to bonds and US equityIncreased to hedge funds and global ex-US equity
August 11, 2015
Source: Cambridge Associates
Slide20Asset Allocation: As of 6/30/2015
August 11, 2015
Asset Class
Amount
Percentage
Global Equity
$1,423 million
32.8%
Hedged
Strategies
909
21.0
Commodities
144
3.3
Fixed Income
225
5.2
Private Capital
1,220
28.2
Real Estate
197
4.6
Natural Resources
299
6.9
Cash/Leverage
-85
-2.0
Total
$4,332 million
100.0%
Slide21BetaFactors
August 11,
2015
Slide22Beta Factors: Rationale
Most endowments focus solely on traditional asset classesShortcomings of this frameworkDiversification complacencyAsset classes versus legal structuresBeta factors provide additional perspective on a portfolio’s exposures
August 11,
2015
Slide23Global Equity(32.5%)Hedged Strategies(22.1%)Fixed Income(2.4%)Private Capital(28.7%)Real Estate(5.9%)Natural Resources(8.1%)
Asset Classes
As of February 28, 2013
Beta Factors:
Methodology
Slide24Equity Global Equity(32.5%)Hedged Strategies(22.1%)Fixed Income(2.4%)Private Capital(28.7%)Real Estate(5.9%)Natural Resources(8.1%)
85%
Equity: MSCI All Country World Index (USD)
Asset Classes
As of February 28, 2013
Beta Factors:
Methodology
Slide25Equity (27.6%)Global Equity(32.5%)Hedged Strategies(22.1%)Fixed Income(2.4%)Private Capital(28.7%)Real Estate(5.9%)Natural Resources(8.1%)
85%
Equity: MSCI All Country World Index (USD)
Asset Classes
As of February 28, 2013
Beta Factors:
Methodology
Slide26Equity (54.6%)Global Equity(32.5%)Hedged Strategies(22.1%)Fixed Income(2.4%)Private Capital(28.7%)Real Estate(5.9%)Natural Resources(8.1%)
Credit: Barclays Corporate Bond and High Yield Indices
Commodity: S&P GSCI Total Return Index
Real Estate: FTSE NAREIT US Real Estate Index
Cash: Citigroup 3-month Treasury Bill + 50bps
85%
9
%
0
%
87%
0
%
0
%
71%
0
%
11%
11%
12%
0%
0%
0
%
0%
0%
0%
0%
86%
Equity: MSCI All Country World Index (USD)
3
%
Interest Rate: Barclays US Aggregate Treasury Index
Asset Classes
0%
8%
99%
0%
1%
12%
1%
2%
As of February 28, 2013
Beta Factors:
Methodology
Slide27Equity (54.6%)Credit(19.9%)Commodity(9.1%)Real Estate(8.5%)Interest Rate(4.1%)Cash(3.8%)Global Equity(32.5%)Hedged Strategies(22.1%)Fixed Income(2.4%)Private Capital(28.7%)Real Estate(5.9%)Natural Resources(8.1%)
Credit: Barclays Corporate Bond and High Yield Indices
Commodity: S&P GSCI Total Return Index
Real Estate: FTSE NAREIT US Real Estate Index
Cash: Citigroup 3-month Treasury Bill + 50bps
85%
9
%
0
%
87%
0
%
0
%
71%
0
%
11%
11%
12%
0%
0%
0
%
0%
0
%
0%
0%
86%
Equity: MSCI All Country World Index (USD)
3
%
Interest Rate: Barclays US Aggregate Treasury Index
Asset Classes
0%
8%
99%
0%
0%
1%
12%
1%
2%
3%
0%
5%
64%
30%
0%
1%
As of February 28, 2013
Beta Factors:
Methodology
Slide28Strategic TargetsStrategic RangesEquity55.0%25% to 75%Commodity 10.0%-5% to 30%Credit20.0%-5% to 30%Real Estate 10.0%-5% to 30%Interest Rates12.5%-5% to 30%Cash-7.5%-10% to 10%Total100.0% Non-US Dollar25.0%0% to 50%
Beta Factors: Targets/Ranges
August 11,
2015
Slide29Strategic TargetsStrategic Ranges6/30/15 ExposuresEquity55.0%25% to 75%69.3%Commodity 10.0%-5% to 30%4.6%Credit20.0%-5% to 30%4.8%Real Estate 10.0%-5% to 30%5.8%Interest Rates12.5%-5% to 30%3.5%Cash-7.5%-10% to 10%11.9%Total100.0% 100.0%Non-US Dollar25.0%0% to 50%31.4%
Beta Factors: Targets/Ranges
August 11,
2015
Slide30CapitalMarket Research
August 11,
2015
Slide31Research: Markets
Understanding the market microstructure, especially cross-sectional volatility, can help identify markets with the highest return dispersion
August 11, 2015
Slide32Research: Tools
August 11, 2015
Slide33ManagerSelection
August 11,
2015
Slide34Selection: Core Beliefs
Healthy level of skepticismAlpha is scarceNot easy to deliver superior risk-adjusted returnsBeta (hidden/unhidden) can be a large part of managers’ portfoliosLarge inflows into an asset class or a manager decrease the ability to deliver alphaTrue skill is rareManager selection is key to success
August 11,
2015
Slide35Selection: Flowchart
August 11, 2015
Slide36Can control processCan’t control outcome
Good ProcessBad ProcessGood OutcomeDeserved SuccessDumb LuckBad OutcomeBad BreakPoetic Justice
August 11, 2015
Selection:
Process versus Outcome
Slide37Selection: Process versus Outcome
Principle-based framework (not rules-based)Focus on process keeps us from buying high and selling lowNo substitute for good judgment
August 11, 2015
“Ninety
percent of what passes for brilliance, or incompetence, in investing is the ebb and flow of investment styles.
Since
opportunities by style regress [to the mean], past performance tends to be negatively correlated with future
performance.”
- Jeremy Grantham
Slide38Selection: Philosophy
Focus within fertile opportunity sets with wide outcomes
August 11, 2015
“Active management strategies demand
un-institutional
behavior from institutions, creating a paradox that few can
unravel.
Establishing
and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom
.”
–
David
F. Swensen,
Pioneering
Portfolio
Management
Slide39Selection: Philosophy
Avoid adverse selection issuesSuperior opportunities will rarely find us, we must seek them outActive sourcing process for small, unique, and unscalable opportunitiesLeverage staff pre-existing relationships to create opportunity in areas with limited capacity
August 11,
2015
Slide40Selection: Philosophy
Balance small opportunistic managers withmid-to-large opportunities Calibrate assets under management with opportunityCalibrate manager lifecycle with investment structure, fees, and alignment of interests
August 11,
2015
Slide41Selection: Concentration
Our focus is the concentrated investors, who have typically outperformed other types of active managers over the long runConcentration allows managers to focus on their best ideas rather than diluting returns withlow-conviction ideas just because they belong to benchmarks
August 11,
2015
Slide42Selection: Concentration
August 11, 2015
Slide43Selection: Other Characteristics
Discernible investment edge and investment opportunityAbility to preserve capitalRobust risk management process/policiesPreference for superior security selection or market timing, not both
August 11,
2015
Slide44Selection: Other Characteristics
Preference for low-to-moderate leverageAppropriate assets under management for strategyAvoid black-box or difficult-to-understand strategiesAttractive long-term, net of fees performanceLesser-known, “emerging” managers
August 11,
2015
Slide45ONGOINGDue Diligence
August 11,
2015
Slide46Ongoing Due Diligence: Monitoring
August 11, 2015
On-site visits
Meetings
in
Vanderbilt offices
Ad-hoc
and scheduled phone calls
Weekly
, monthly, quarterly reports
Annual meetings
Log
meeting and call notes in
Backstop
Internal
debates on positions
Portfolio
m
onitoring
Performance
, attribution (alpha/beta/market timing), exposure (strategy, geography, gross/net), liquidity,
holdings-based
(when available)
Slide47TerminationDecision
August 11,
2015
Slide48Termination: Rationale
Consistent underperformance Managers are not terminated just for underperformanceBased on strategy and markets at a point in timeKey and/or high personnel turnoverBetter investment opportunitiesMaterial strategy driftSubstantial and fast asset growth beyond what might be expectedUnexpected events
August 11,
2015
Slide49August 11,
2015
Termination:
Rationale
Slide50RecentActivity
August 11,
2015
Slide51Recent Activity: Since September 2013
Added 24 new Global Equity managers totaling $998 million of market valueLaunched Hedged Strategies separately-managed account platform (11 managers, $513 million of net asset value)Introduced Commodities as a new asset classReduced Fixed Income allocationDeep dives on private investments portfolioPrivate CapitalReal EstateNatural Resources
August 11,
2015
Slide52Completed office remodelingHired 15 new employeesMade 61 new investments in totalPublic investments: 37 investments totaling$1.6 billionPrivate investments: 24 commitments totaling $218 million
August 11, 2015
Recent Activity:
Since
September 2013
Slide53Questions?
August 11,
2015
Slide54Slide55
The Vanderbilt Endowment
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