The Waco Foundation. Investment Strategy/Performance Update Investing During Uncertain Times. December 8, 2010

Transcription

1 The Waco Foundation Investment Strategy/Performance Update Investing During Uncertain Times December 8,

2 Goals for the Day Audience to Gain Clarification and Understanding of: How Waco Foundation manages assets in its care (intro) Community foundation role Component fund manager Challenge: to maintain real purchasing power over time Elements of investment policies Recent performance Expectations for future How Waco Foundation monitors Investment Consultant 2

3 Format Presentation of information Intended to be a dialogue Three planned breaks for questions, but ask for clarification at any time We may ask you to defer complex/time consuming questions until the end 3

4 Waco Foundation as Community Foundation Community Foundations exists in every US community Role: Monitored through rigorous National Standards certification process, Council on Foundations(2008) Grantmaker/supporter for nonprofits Philanthropic facilitator/vehicle Neutral convener Facilitator of public/private partnerships Component Fund Manager (scaled fund mgmt) 4

5 How Waco Foundation Maintains Fiduciary Duty to Assets in Care Waco Foundation Board of Trustees: Required to ensure assets managed prudently & productively Investment Policies: Asset allocation guidelines Spending Policy Criteria for Measuring Performance Finance and Investment Committee: Meets regularly with Investment Consultant Regularly reviews investment performance Recommends changes in asset allocation/managers to Board Investment Consultant: Makes recommendations of asset allocation/managers Monitors performance 5

6 The Foundation s Approach Establish a Strategic Asset Allocation Which is Expected to Achieve the Foundation s Long Term Return Objectives (Preserve Purchasing Power Over Twenty Year+ Periods) No Attempt Made to Market Time or Change Strategy Based on Near Term Outlook Diversify Portfolio by Asset Class and Strategy. Increases the Likelihood of Achieving Return Objectives Under Different Economic/Market Conditions 6

7 Investment Objectives Preserve the value of assets through asset allocation and manager selection. Preservation of value has been given the greatest weight in order to assure that the objectives of the Foundation are maintained. Produce a stable stream of funds which grow at a rate which exceeds inflation and spending. Total expected return is %. Earn this return with as little volatility as possible. Objectives embody an entity existing into perpetuity. Very different approach than individual investment, pension, etc. 7

8 Asset Allocation Asset Allocation and The Investment Policy Statement is structured to eliminate emotions during decision-making process. An asset allocation strategy should fundamentally be based on maintaining the purchasing power of the assets. To achieve this goal, the Foundation should follow an approach that intelligently capitalizes on the benefits of asset class diversification. 8

9 Strategic Asset Mix Asset Class Exposures Strategic (% of Total Portfolio) Allocation US Large/Mid Cap Equity 24.0% US Small Cap Equity 7.5% Non-US Developed Large/Mid Equity 18.0% Non-US Emerging Equity 3.5% Total Equity 53.0% US Aggregate Bonds (inc. TIPS) 14.0% Global Bonds 4.0% US High Yield 4.0% Total Fixed Income 22.0% Absolute Return Hedge Funds 7.5% Long/Short Hedged Equity Funds 7.5% Real Assets 10.0% Total Alternatives 25.0% 9

10 Asset Mix: Historical Development The Foundation has diversified the portfolio methodically over time: Target Particularly, the Foundation has slowly added Alternatives to help control ill-liquidity, exposure and opportunity. 10

11 Active vs. Passive Investing The Foundation applies both active and passive strategies where appropriate. Passive Investing owning the market via index fund, ETF, etc Active Investing invest with manager who selects securities to outperform. Benefits and rationale include the following: Using passive strategies can reduce the overall fee structure of the portfolio. Utilizes active management where inefficiencies exist and passive mgmt active out-performance is difficult. 11

12 Active vs. Passive Investing Below we show how successful/unsuccessful the universe of active managers have performed over the last 10 years (ending 9/30/2010 per Morningstar). % of Mgrs Under-Performing 60.0% 50.0% 40.0% 45.6% 53.6% 52.7% 30.0% 26.9% 20.0% 10.0% 0.0% Domestic Large Equity Domestic Small Equity International Equity Emerging Markets Results are mixed, leading to a need for passive consideration and skillful selection. 12

13 Waco Foundation s Success While selection can be difficult, the Foundation has been successful. Below we show the relative out-performance active managers have given in each traditional equity space: 25.0% Added Value 23.2% 20.0% 15.0% 13.3% 10.0% 5.0% 1.3% 5.3% 0.0% Domestic Large Equity (11.5 yrs) Domestic Small Equity (2.4 years) International Equity (2.4 yrs) Emerging Markets (0.4 years) Note: all out-performance is net of underlying investment manager fees. 13

14 Active vs. Passive Investing Core (passive) We invest the majority of assets of a particular class in a passive investment, such as Vanguard or PIMCO. Satellite (active)- When we believe that active management can actually produce a return above an index over time, we invest in Satellite managers. We pay larger fees to those that we believe will truly produce the return over time, and we monitor: Their adherence to the disciplined strategy they believe will generate returns. Their being right about their discipline and strategy in both up and down markets. 14

15 Core-Satellite Approach Luther King DG Capital Satellites PIMCO Stocks Plus Index (CORE) Satellites The positive attributes of a Core-Satellite Policy include : 15

16 Risk Management The Investment Committee and Colonial Consulting place risk as a high priority. Evaluation of Risk is not limited to volatility. Risk also includes: Directional Exposure Liquidity Risk of Loss Failure to Meet Spending Leverage Fraud Risk is any threat to the long-term objectives of the Foundation 16

17 Risk Management Risk is managed & monitored on the overall portfolio via multiple fronts: Diversification among asset classes and within asset classes (i.e. non-us debt, high yield debt) Monitoring market/sector/industry/position exposures Awareness of new risks/concerns (i.e. rising rates) Utilizing Qualitative Diversification among investment managers (via process, philosophy, approach) - Artio/Artisan 17

18 Alternative Investments Alternative Investments include: Hedge Funds Funds that have the ability to hold both long and short positions. Strategies include Market Neutral, Fixed Arbitrage, Distressed Debt, Event-Driven, etc. Real Assets Real Estate, Natural Resources, or direct Commodities, Timber, etc Private Equity Private Investment in companies via debt and/or equity. Buyout, Venture Capital, Special Situations. 18

19 Alternative Investments Risk Considerations Alternative Investments lack transparency and historically most are not registered with the SEC, requiring even higher scrutiny. Due diligence includes audit reviews, background checks, trade/transaction reviews, back-office review, etc Diversification via fund-of-funds (TIFF, Forester and FLAG) Monitor leverage, unnecessary bets, continuity of personnel, etc. 19

20 Q & A Asset Allocation Designed to Focus on Long-Term Also Cognizant of Shorter-Term Market Conditions Re-balancing is Automatic / Pre-Existing Ranges Diversification and Risk Control Any Questions? 20

21 Section II: Manager Selection Investment Excellence is Rare Stable Organizations Permit Consistency Historical Performance is a Relevant but Minor Issue Aligned with Interests of Clients 21

22 Manager Due Diligence Return always accompanied by risk Must understand the strategy, know key personnel, avoid needless complexity. Operational issues: independent custodian, credible auditor, outside administrator Ongoing process 22

23 Current Portfolio Domestic Large Cap Equity: Asset Class Exposures Strategic (% of Total Portfolio) Allocation US Large/Mid Cap Equity 24.0% US Small Cap Equity 7.5% Non-US Developed Large/Mid Equity 18.0% Non-US Emerging Equity 3.5% Total Equity 53.0% PIMCO Stocks Plus DG Capital Luther King US Aggregate Bonds (inc. TIPS) 14.0% Global Bonds 4.0% US High Yield 4.0% Total Fixed Income 22.0% Absolute Return Hedge Funds 7.5% Long/Short Hedged Equity Funds 7.5% Real Assets 10.0% Total Alternatives 25.0% 23

24 Current Portfolio Domestic Small Cap Equity: Asset Class Exposures Strategic (% of Total Portfolio) Allocation US Large/Mid Cap Equity 24.0% US Small Cap Equity 7.5% Non-US Developed Large/Mid Equity 18.0% Non-US Emerging Equity 3.5% Total Equity 53.0% US Aggregate Bonds (inc. TIPS) 14.0% Global Bonds 4.0% US High Yield 4.0% Total Fixed Income 22.0% Advisory Research Tygh Capital Absolute Return Hedge Funds 7.5% Long/Short Hedged Equity Funds 7.5% Real Assets 10.0% Total Alternatives 25.0% 24

25 Current Portfolio International Equity: Asset Class Exposures Strategic (% of Total Portfolio) Allocation US Large/Mid Cap Equity 24.0% US Small Cap Equity 7.5% Non-US Developed Large/Mid Equity 18.0% Non-US Emerging Equity 3.5% Total Equity 53.0% US Aggregate Bonds (inc. TIPS) 14.0% Global Bonds 4.0% US High Yield 4.0% Total Fixed Income 22.0% Artio International Artisan Intl Value Aberdeen Emerging Absolute Return Hedge Funds 7.5% Long/Short Hedged Equity Funds 7.5% Real Assets 10.0% Total Alternatives 25.0% 25

26 Current Portfolio Fixed Income: Asset Class Exposures Strategic (% of Total Portfolio) Allocation US Large/Mid Cap Equity 24.0% US Small Cap Equity 7.5% Non-US Developed Large/Mid Equity 18.0% Non-US Emerging Equity 3.5% Total Equity 53.0% US Aggregate Bonds (inc. TIPS) 14.0% Global Bonds 4.0% US High Yield 4.0% Total Fixed Income 22.0% Absolute Return Hedge Funds 7.5% Long/Short Hedged Equity Funds 7.5% Real Assets 10.0% Total Alternatives 25.0% PIMCO Total Return Vanguard TIPS Colchester Non-US Post High Yield 26

27 Current Portfolio Alternative Investments: Asset Class Exposures Strategic (% of Total Portfolio) Allocation US Large/Mid Cap Equity 24.0% US Small Cap Equity 7.5% Non-US Developed Large/Mid Equity 18.0% Non-US Emerging Equity 3.5% Total Equity 53.0% US Aggregate Bonds (inc. TIPS) 14.0% Global Bonds 4.0% US High Yield 4.0% Total Fixed Income 22.0% Absolute Return Hedge Funds 7.5% Long/Short Hedged Equity Funds 7.5% Real Assets 10.0% Total Alternatives 25.0% Hedge Funds: TIFF Forester Real Assets: PIMCO Commodity FLAG Private 27

28 TIFF Absolute Return Pool Fund Strategy Initial Funding % of Pool Lansdowne UK Equity Fund Limited Long/Short - UK 1Q % FCOI II Holdings, LP (Farallon) Multi-Strategy - Event Driven 3Q % Joho Fund, Ltd. Long/Short - Asia 4Q % The Nomad Investment Company Limited Equity Long 3Q % Convexity Capital Offshore LP Fixed Income Arbitrage 1Q % Double Black Diamond, Ltd. (Carlson) Multi-Strategy - Relative Value 2Q % ESL Partners, LP Equity Long 3Q % Highfields Capital Ltd. Long/Short - Global 4Q % King Street Capital, Ltd. Distressed Debt 2Q % Regiment Capital Ltd. High Yield Debt Arbitrage 3Q % Lone Monterey, Ltd. Equity Long 1Q % Theleme Fund Limited Long/Short - Global 1Q % Southeastern Asset Mgt Equity Long 2Q % Maverick Fund, Ltd. 1 Long/Short - Global 1Q % Stonehill Offshore Partners Limited Distressed Debt 2Q % OZ Overseas Fund, Ltd. Multi-Strategy - Event Driven 2Q % Viking Global Equities III Ltd. Long/Short - Global 2Q % HBK Offshore Fund II Multi-Strategy - Relative Value 4Q % Sowood Alpha Fund Ltd Multi-Strategy - Relative Value 4Q % ARP II Cash % Total 100.0% Investment in this Fund-of-Funds is $3.5M (of $50M total portfolio) 28

29 FLAG Real Estate & FLAG Natural Resources Two Separate Pools / Highly Diversified Fund of Funds Underlying Commitments Already Begun: FLAG Real Estate II FLAG Natural Resources II Fund Phoenix Asia RE Prime Finance Group Type Div Property - Asia Div Property - US Fund Ag Real Value Fund Enervest Partners XII Lyme Forester III Resource Capital V Resource Land Holdings IV Type Agriculture Oil & Gas Acq. Hardwood Timber Mining & Minerals Opportunistic Land 29

30 Endowment vs. Target Benchmark 12.0% 10.0% 9.60% 8.90% 8.0% 6.0% 5.60% 5.10% 4.0% 2.0% 0.0% 2.50% 2.20% -2.0% -4.0% -2.20% -2.70% YTD 1 Year 3 Years 5 Years Waco Foundation Target Benchmark 30

31 Endowment vs. F&E Universe (thru 3Q 10, per Russell Mellon) 12% 10% 8% Median 6% Median 4% 2% Median Median 0% -2% -4% Median -6% -8% 1 Year 2 Years 3 Years 5 Years 7 Years high 11.85% 7.89% 0.29% 5.49% 8.06% 25th % 10.14% 5.09% -1.54% 4.00% 6.73% median 9.11% 3.02% -3.23% 2.91% 5.89% 75th % 8.01% 1.25% -4.83% 1.76% 4.75% low 5.68% -1.67% -6.42% 0.42% 3.40% Waco Foundation 9.60% 6.00% -2.20% 2.50% 4.30% 31

32 Q & A Manager Selection Process is Extensive Diversification vs. Impact Performance Strong / Looking to Improve Any Questions? 32

33 Section III: Non-Endowed Pools Structured in-line with Donor Time Horizon Risk/Return Increase with Each Long-Term Pool Short-Term Pool Asset Class Exposures Strategic (% of Total Portfolio) Allocation US Short-Term Bonds 35.0% Treasury Inflation Protected Sec 15.0% Cash 50.0% Total Fixed Income 100.0% Int-Term Pool Asset Class Exposures Strategic (% of Total Portfolio) Allocation US Large/Mid Cap Equity 15.0% US Small Cap Equity 5.0% Non-US Developed Large/Mid Equity 10.0% Non-US Emerging Equity 0.0% Total Equity 30.0% US Aggregate Bonds 20.0% US Short Term Bonds 20.0% Treasury Inflation Protected Sec 10.0% Cash 20.0% Total Fixed Income 70.0% Asset Class Exposures Strategic (% of Total Portfolio) Allocation US Large/Mid Cap Equity 40.0% US Small Cap Equity 8.0% Non-US Developed Large/Mid Equity 17.0% Non-US Emerging Equity 5.0% Total Equity 70.0% US Aggregate Bonds 17.5% US Short Term Bonds 5.0% Treasury Inflation Protected Sec 7.5% Cash 0.0% Total Fixed Income 30.0% 33

34 Non-Endowed Pools Short-Term Pool: For Donors with Time Horizon 0-2 years Protection of Capital / Little Return Interm-Term Pool: For Donors with Time Horizon 2-5 years Balance of Protection & Growth Long-Term Pool: For Donors with Time Horizon of 6+ years Focus on Growth with Diversification 34

35 Spending Policy Annual income derived from percentage of the asset base averaged over a twenty-eight trailing quarter period. Jun-03 26,109,560 Sep-03 26,520,764 Dec-03 27,740,426 Mar-04 28,412,221 Jun-04 27,875,092 Sep-04 27,571,701 Dec-04 28,619,000 Mar-05 28,334,933 Jun-05 28,378,660 Sep-05 29,170,434 Dec-05 29,091,800 Mar-06 30,003,206 Jun-06 29,010,071 Sep-06 30,193,211 Dec-06 31,201,927 Mar-07 31,369,769 Jun-07 32,156,885 Sep-07 33,015,067 Dec-07 32,219,383 Mar-08 30,459,608 Jun-08 30,541,969 Sep-08 27,278,611 Dec-08 22,648,138 Mar-09 20,839,548 Jun-09 23,035,927 Sep-09 25,760,104 Dec-09 26,557,537 Mar-10 27,339,487 Average 28,266,251 All 28 averaged x 5% = 1,413,313 35

36 Spending Policy Allows for steady stream of income during extremely volatile markets Waco Foundation income in: 2007: $1,444, : $1,435, : $1,406, : $1,413,313 36

37 Waco Foundation Board Oversight How does Waco Foundation monitor performance? Maintain real value of money - performance over time % Portfolio as a whole/each manager - appropriate benchmark How does the Waco Foundation monitor the Investment Consultant? Compares Waco Foundation portfolio to: Average community foundation returns Foundation and endowment Universe Peer community foundations in the region 37

38 Markets Today Inflation vs. Deflation Economic Contraction/Malaise Extended Period of Poor Equity Returns Post Traumatic Stress 38

39 Looking Back to Another Difficult Time 39

40 Consistency Was Not Rewarded 40

41 Until Later 41

42 Keys to Investment Success Consistent Strategy Patient Use of Investment Managers Rigorous Monitoring 42

43 Profile of Colonial Consulting Location: New York, NY Founded: 1980 Number of Employees: % Employee Owned Number of Clients: 99 Client Assets: $ 22 Billion Representative Client List: The San Francisco Foundation The Philadelphia Foundation University of Miami Silicon Valley Community Fnd Triangle Community Fdn The Seattle Foundation Kessler Foundation The Milwaukee Foundation The Minneapolis Foundation Fox Valley Comm. Fdn 43

44 Q & A 44