The Vanderbilt Endowment

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August 11, 2015. Agenda. Endowment Background. Office of Investments. Asset Allocation. Beta Factors. Capital Market Research. Manager Selection. Ongoing Due Diligence. Termination Decision. Recent Activity. ID: 329863 Download Presentation

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The Vanderbilt Endowment




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Presentations text content in The Vanderbilt Endowment

Slide1

The Vanderbilt Endowment

August 11, 2015

Slide2

Agenda

Endowment BackgroundOffice of InvestmentsAsset AllocationBeta FactorsCapital Market ResearchManager SelectionOngoing Due DiligenceTermination DecisionRecent Activity

August 11,

2015

Slide3

EndowmentBackground

August 11,

2015

Slide4

Background: 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

Slide5

Background: 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%

Slide6

Background: 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

Slide7

Background:

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

Slide8

Background: Endowment Growth

August 11, 2015

Slide9

Background: 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

Slide10

Background: 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

Slide11

August 11, 2015

Background: Endowment Dependency

FY 2013 Endowment distribution ÷ Operating revenues

* Includes health system

Slide12

August 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

Slide13

August 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

Slide14

Office ofinvestments

August 11,

2015

Slide15

Office of Investments

August 11, 2015

Slide16

Office 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

Slide17

AssetAllocation

August 11,

2015

Slide18

Asset 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

Slide19

Asset 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

Slide20

Asset 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%

Slide21

BetaFactors

August 11,

2015

Slide22

Beta 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

Slide23

Global 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

Slide24

Equity 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

Slide25

Equity (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

Slide26

Equity (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

Slide27

Equity (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

Slide28

 Strategic 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

Slide29

 Strategic 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

Slide30

CapitalMarket Research

August 11,

2015

Slide31

Research: Markets

Understanding the market microstructure, especially cross-sectional volatility, can help identify markets with the highest return dispersion

August 11, 2015

Slide32

Research: Tools

August 11, 2015

Slide33

ManagerSelection

August 11,

2015

Slide34

Selection: 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

Slide35

Selection: Flowchart

August 11, 2015

Slide36

Can control processCan’t control outcome

Good ProcessBad ProcessGood OutcomeDeserved SuccessDumb LuckBad OutcomeBad BreakPoetic Justice

August 11, 2015

Selection:

Process versus Outcome

Slide37

Selection: 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

Slide38

Selection: 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

Slide39

Selection: 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

Slide40

Selection: 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

Slide41

Selection: 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

Slide42

Selection: Concentration

August 11, 2015

Slide43

Selection: 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

Slide44

Selection: 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

Slide45

ONGOINGDue Diligence

August 11,

2015

Slide46

Ongoing 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)

Slide47

TerminationDecision

August 11,

2015

Slide48

Termination: 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

Slide49

August 11,

2015

Termination:

Rationale

Slide50

RecentActivity

August 11,

2015

Slide51

Recent 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

Slide52

Completed 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

Slide53

Questions?

August 11,

2015

Slide54

Slide55


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