Minutes are not final until approved by the Board of Regents at the December 2010 meeting

Transcription

1 Minutes are not final until approved by the Board of Regents at the December 2010 meeting BOARD OF REGENTS and its INVESTMENT AND FACILITIES COMMITTEE NEVADA SYSTEM OF HIGHER EDUCATION Sierra Building, Elizabeth Sturm Library Truckee Meadows Community College 7000 Dandini Boulevard, Reno September 9, 2010 Members Present: Other Regents Present: Others Present: Mr. Michael B. Wixom, Chair Mr. William G. Cobb, Vice Chair Mr. Cedric Crear Mr. Ron Knecht Dr. Raymond D. Rawson Mr. Robert Blakely Ms. Dorothy Gallagher Dr. Jason Geddes Mr. Daniel J. Klaich, Chancellor Dr. Maurizio Trevisan, EVC & CEO, HSS Dr. Jane Nichols, Vice Chancellor, Academic & Student Affairs Mr. Mark Stevens, Interim Vice Chancellor, Finance Ms. Crystal Abba, Associate Vice Chancellor Mr. Hank Stone, System Counsel and Director of Real Estate Planning Ms. Ruby Camposano, NSHE Ms. Annie McDonald, NSHE Ms. Ginny Wiswell, NSHE Dr. Michael D. Richards, President, CSN Dr. Stephen G. Wells, President, DRI Mr. Carl A. Diekhans, President, GBC Dr. Lesley A. Di Mare, President, NSC Dr. Maria C. Sheehan, President, TMCC Dr. Neal J. Smatresk, President, UNLV Dr. Milton D. Glick, President, UNR Dr. Carol A. Lucey, President, WNC Ms. Patty Charlton, CSN Mr. William R. Kerney, CSN Mr. Richard Hinckley, CSN Dr. Sondra Cosgrove, CSN-NFA Mr. Greg Bortolin, DRI Mr. Peter Ross, DRI Dr. Cleve McDaniel, DRI Dr. Mike McFarlane, GBC Mr. Buster Neel, NSC Mr. Tim Ill, TMCC (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 1 of 15

2 Investment Committee Minutes Page 2 Mr. Dave Roberts, TMCC Ms. Delores Sanford, TMCC Ms. Delores Wonder, TMCC Ms. Kat Leishman, TMCC-SGA Mr. Justin Grewal, UNLV Mr. Richard Linstrom, UNLV Ms. Laura Guidry, UNLV-CSUN Ms. Roma Patel, UNLV-CSUN Ms. Haley Etchison, UNLV-The Rebel Yell Mr. Gary Bishop, UNR Dr. Marc Johnson, UNR Mr. Tom Judy, UNR Mr. Ron Zurek, UNR Mr. Ben Miller, UNR-Nevada Sagebrush Mr. Dan Neverett, WNC Mr. David Breiner, Cambridge Associates Mr. Dave Cook, Nevada State Board of Education Ms. Mary Arbutina, NVIE Mr. Charles Morton Mr. Charles Walker Faculty senate chairs in attendance were Mr. William R. Kerney, CSN; Ms. Sarah Negrete, GBC; Ms. Laura Edwards, DRI; Ms. Robin Herlands, NSC; Mr. Scott Huber, TMCC; Dr. Cecilia Maldonado, UNLV; Mr. Eric Herzik, UNR; and Mr. Jim Strange, WNC. Student body presidents in attendance were Mr. J.T. Creedon, ASCSN-CSN; Ms. Dymonde King, NSC; Mr. Cesar Benitez, TMCC; Mr. David Rapoport, UNLV; Mr. Kyle George, UNLV- GPSA; Mr. Charlie Jose, UNR; Mr. Jason McGill, WNC. Chair Wixom called the meeting to order at 9:57 a.m. with all members present. 1. Approved-Minutes The Committee recommended approval of the minutes from the June 3, 2010, meeting (Ref. IF-1 on file in the Board office). Regent Knecht moved approval of the minutes from the June 3, 2010, meeting. Regent Cobb seconded. Motion carried. 2. Information Only-Operating Pool Reserve Update (Agenda Item #3) Ms. Ruby Camposano, Director, Banking & Investments, reported on the activities and most current balance of the reserve account of the operating pool fund. Ms. Camposano reported that the operating account reserve balance was in a positive position of $10.6 million as of September 8, Chair Wixom said distributions were suspended effective October 1, 2008, because of fluctuations in the market that resulted in a negative reserve. The (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 2 of 15

3 Investment Committee Minutes Page 3 2. Information Only-Operating Pool Reserve Update (Agenda Item #3) (continued) question now is if the distributions should resume and at what rate. Regent Knecht felt the distributions should not be reinstated. He suggested placing the current positive reserve in a rainy-day fund, which can then be accessed at any time under certain conditions. Regent Crear agreed with Regent Knecht regarding the distributions and the rainy-day fund. Mr. Daniel J. Klaich, Chancellor, explained that investment income distributions were not budgeted in the current biennium. He recommended continuing with the current policy through the remainder of this year and then revisiting the situation as of the next fiscal year in accordance with the budget approved by the Board. 3. Information Only-Review of Management Fees-Pooled Endowment and Pooled Operating Funds (Agenda Item #4) Mr. David Breiner, Cambridge Associates, presented information outlining management fees for the pooled endowment fund and pooled operating fund. The Committee reviewed the risk/return analysis of the pooled endowment fund and pooled operating fund (Ref. IF-4 on file in the Board office). Mr. Breiner said there was information distributed to the Committee summarizing the fees (on file in the Board office) that were paid to the investment managers for both the endowment and the operating pools. For the endowment pool there were fees paid in aggregate of approximately 103 basis points, or essentially 1% of the assets. The operating pool has an estimate of 60 basis points paid to the investment manager, or.6%. Management fees for both pools are approximately $7 million. The information understates the fees because there is a carry component which is profit participation that the alternative managers extract from the hedge funds and private equity funds it is a percentage of profit and without knowing the profit, it is difficult to calculate this type of fee. Regent Crear felt that $7 million in management fees was high. He asked if the cost was competitive. Mr. Breiner explained that it is determined case-by-case and depends on various factors. When Cambridge hires a manager, every effort is made to compare fees to like managers and avoid managers who appear to be overcharging. Mr. Breiner said the question is what value is received for the fees paid which in the past, have paid off. The endowment received its money s worth for the fees paid. Incidentally, all of the performance returns that Cambridge Associates presents are net of fees. Regent Knecht quoted Mr. Lambert of Nevada PERS, as saying that the current costs, all inclusive, are 15 basis points of total assets. The average public pension plan the size of PERS pays 40 basis points. Regent Knecht asked for Mr. Breiner s response to that statement, comparing it to the 103 and the 60 basis points. Mr. Breiner said that NSHE s pools are managed very differently with different approaches and objectives. In addition, PERS has a full-time staff to (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 3 of 15

4 Investment Committee Minutes Page 4 3. Information Only-Review of Management Fees-Pooled Endowment and Pooled Operating Funds (Agenda Item #4) (continued) conduct full-time management oversight. NSHE is paying higher fees with Cambridge s selected managers, but Cambridge considers the risk adjusted outcome. Page 24 of the report shows that for a 10 year period there has been value added for the high fees paid. Regent Knecht said the basis points of 103 and 60 are understated because there is a carry on top of that which can be substantial on those alternative funds when they do well, but it does not take into consideration the internal staff time. Regent Knecht indicated that the PERS 15 basis points covers their staff, managers and is an all-in figure. Regent Knecht favors index versus active management. The fees and risk levels are lower with a higher overall rate of return, historically. Past performance is no indication of future performance or success. The only thing that should matter is the best estimate of future expected value. He agreed that the alternative funds have done better and the System should take the profit and move forward on a different basis to index management. While success has been achieved, Regent Knecht felt the fee rate is high and that it would be a mistake to stay as is. He encouraged the Committee to make a policy decision and move in a different direction. Chair Wixom referred to page 51 of the report where there is a comparison of passive versus active asset allocation with the endowment and operating funds as of June 30, He pointed out that PERS costs are lower because 75% is in passive versus active funds. Chair Wixom asked about the timeline involved in changing the asset allocation, the investment mix, and what the related procedures are. Interim Vice Chancellor of Finance Mark Stevens replied that it depended on the investments. The redemption window for the absolute return investments is only once a year. The private equity funds are more difficult to liquidate than the absolute return category exit from this asset class on short notice would likely result in an investment loss. Most of the other investments can be liquidated either on a daily or monthly basis. Mr. Breiner added that the private equity category is far worse in terms of liquidity. Regent Crear asked if the high fees were based on profitable results. Mr. Breiner indicated that historically the record would justify the high fees that were paid. Regent Knecht noted that by indexing the investment it goes where the market goes, but the fee will be lower. On a long-term basis the expectation is a higher net with lower risk. (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 4 of 15

5 Investment Committee Minutes Page 5 3. Information Only-Review of Management Fees-Pooled Endowment and Pooled Operating Funds (Agenda Item #4) (continued) Regent Cobb suggested that any change to index funds should be decided by the Board and only after there has been some staff analysis. Chair Wixom indicated this was a broader discussion for another meeting. 4. Approved-Handbook Revision, Chancellor Commencing Negotiations for Acquisition or Sale of Real Property (Agenda Item #5) The Committee recommended approval for an amendment to Board policy (Title 4, Chapter 10, Section 1.9) to permit the Chancellor the authority to negotiate the purchase of real property upon consulting with the Chair of the Investment and Facilities Committee and the Chairman of the Board (Ref. IF-5 on file in the Board office). 4. Approved-Negotiation for Cost Efficient Replacement Real Property/Building for Use as a Las Vegas System Office (Agenda Item #6) The Committee recommended approval for the Chancellor to identify and negotiate the purchase or lease with an option to purchase real property and/or a building for use as a cost efficient replacement of the existing Las Vegas System Administration office, subject to Board approval of the final contract (Ref. IF-6 on file in the Board office). Chancellor Klaich said that Agenda Items #5 and #6 are companion items. He said the Handbook Revision is very narrow and parallels the authority he has to give to the presidents if they wish to negotiate on a property. Chancellor Klaich reported that there is no such authority for negotiations of real property with respect to the System Office and the purpose of this request is to turn rent into ownership in Las Vegas. He is requesting authority to dig a little deeper to see if there is a deal to be brought back to the Board. Regent Knecht moved approval for (1) an amendment to Board policy (Title 4, Chapter 10, Section 1.9) to permit the Chancellor the authority to negotiate the purchase of real property upon consulting with the Chair of the Investment and Facilities Committee; and (2) for the Chancellor to identify and negotiate the purchase or lease with an option to purchase real property and/or a building for use as a cost efficient replacement of the existing Las Vegas System Administration office, subject to Board approval of the final contract. Regent Cobb seconded. Regent Cobb noted that the briefing paper states that the consultation the Chancellor is required to undergo is to be with the Chair of the Investment and (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 5 of 15

6 Investment Committee Minutes Page 6 4. Approved-Handbook Revision, Chancellor Commencing Negotiations for Acquisition or Sale of Real Property (Agenda Item #5) (continued) 4. Approved-Negotiation for Cost Efficient Replacement Real Property/Building for Use as a Las Vegas System Office (Agenda Item #6) (continued) Facilities Committee or the Chair of the Board. The actual policy revision just refers to Chair of the Investment and Facilities Committee. He asked if that was an oversight that should be corrected. Chancellor Klaich explained that the recommendation in the policy is that the actual consultation should be with the Chair of the Investment and Facilities Committee. The agenda item was stated as it was in order to give notice in the event that the Board preferred it to go to the Chair of the Board, so that either action would be fully and fairly noticed. Regent Cobb said the briefing paper for negotiation for real property says the current vacancy level in Clark County is very low. Chancellor Klaich said that was an error and should have said it was very high. Regent Rawson requested a friendly amendment to the motion that the Chairman of the Board be included for consultation. Regent Rawson indicated that it seems appropriate to also inform the Chairman of the Board. Chair Wixom clarified that the amendment would be that staff would inform the Chair of the Investment and Facilities Committee and the Chairman of the Board. Regent Knecht accepted the friendly amendment. Regent Cobb accepted the friendly amendment. Motion carried. 5. Approved-Acquisition of Real Property 1115 Evans Avenue, Reno UNR (Agenda Item #7) The Committee recommended approval to purchase real property, a single family residence at 1115 Evans Avenue, Reno, located on the southeast border of the University of Nevada, Reno main campus, for $145,000. Such approval for this purchase is conditioned upon receipt of a No Further Action Letter from the Nevada Department of Environment Protection (Ref. IF-7 on file in the Board office). Mr. Ron Zurek, Vice President, Administration and Finance, UNR, said that Exhibit 1 represented the west side of Evans Avenue on the eastern boundary of the UNR campus. The cost for purchase of the property is $145,000. Importantly, approval is conditioned on the remediation that needed to take place with respect to an oil heater on the property. UNR expects a No Further Action Letter from the Nevada Department of Environmental Protection soon. The work has been done but the approved report is required. (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 6 of 15

7 Investment Committee Minutes Page 7 5. Approved-Acquisition of Real Property 1115 Evans Avenue, Reno UNR (Agenda Item #7) (continued) Regent Cobb asked about the property acquisition account listed as the source of the funds. Mr. Zurek replied that it is a UNR funded account in which rental income is accumulated from the properties rented to students and faculty on campus. The account will have a balance of approximately $400,000 after this transaction. Regent Cobb moved approval to purchase real property, a single family residence at 1115 Evans Avenue, Reno, located on the southeast border of the University of Nevada, Reno main campus, for $145,000. Such approval for this purchase is conditioned upon receipt of a No Further Action Letter from the Nevada Department of Environment Protection. Regent Knecht seconded. Motion carried. 6. Approved-Asset Allocation and Investment Returns (Agenda Item #2) The Committee recommended approval for the complete liquidation of the Farallon funds in the operating pool and to liquidate the other funds in this asset class within the operating pool based on the available redemption dates and for staff to present to the Investment and Facilities Committee at the December 2010 meeting a proposal of where to direct the proceeds from the Farallon funds, to present an updated asset allocation for the operating pool, and for the business officers and staff to present a proposal for creating a rainy-day fund in the operating pool to include disbursement guidelines and parameters. The Committee also recommended approval to terminate the Hoover Management fund from the endowment pool and to invest the proceeds in the Vanguard Small Cap Index fund. Interim Vice Chancellor Stevens said that staff submitted a two-page report on the absolute return category (on file in the Board office). They also offered recommendations on the current allocation within the operating pool, which was endorsed by the business officers. To the extent that the funds in the operating pool are not needed for cash flow purposes, but for long-term investment, the long-term investment should be retained within the operating pool. Given the long-term performance of the absolute return funds, the recommendation was to keep the current allocation in the absolute return asset class as long as those funds are not needed as liquid investments for daily operations. He noted that within the current asset allocation, approximately 55% of the assets can be liquidated daily, 22% on a monthly basis and 22%-23% on an annual basis. (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 7 of 15

8 Investment Committee Minutes Page 8 6. Approved-Asset Allocation and Investment Returns (Agenda Item #2) (continued) Interim Vice Chancellor Stevens indicated that the suggestion from the business officers was that, due to the somewhat more aggressive asset allocation, a market fluctuation account should be established and be considered by the Committee. This account can be utilized to fully or partially fund distributions to institutions during market downturns or when the pool cannot generate sufficient income, on a temporary basis, to make distributions. The goal would be to increase the likelihood of consistent distributions from the operating pool under varying market conditions. Interim Vice Chancellor Stevens continued that the fluctuation account would allow the retention of the existing asset allocation in the operating pool, or with some minor modification. The fluctuation account could be established with an initial funding from the reserve account, or from a portion of the monthly distributions that are sent out to the campuses when those distributions begin. Chancellor Klaich said while the recommendation from the business officers represents a prudent, thoughtful approach to investing, he does not agree with the recommendation. The balance of the operating pool runs approximately $400 to $500 million. The recommendation allows allocation to the absolute return asset class in the amount of over $100 million. He suggested liquidating the absolute return portfolios in the operating pool and request Cambridge Associates to present a proposal of where to direct the liquidated funds. Chair Wixom referred to the report, Appendix C Operating Fund Management by Institution. He observed that our institution showed high liquidity; the shortterm pool identified at $117 million, intermediate at $37 million, and long-term, low liquidity at $307 million. He was concerned because it seems the System has taken a low-liquidity, high-return approach to the operating fund more so than other institutions. Regent Knecht suggested separating the issues. He agreed with Chancellor Klaich about the nature of the absolute return asset class more than its liquidity constraint, while Chair Wixom points to the liquidity constraint. Both are very important central issues that happen to coincide with certain investments. Regent Knecht believes in index management and felt there cannot be an expectation, on a continued basis, to beat the market. The best expectation is to meet the market by managing a diversified portfolio representative of the market and one that tracks the market. That should result in the highest return expected and the lowest risk and fees. However, the best diversification and representation of the market sometimes requires committing to long-term, less liquid investments. Implicit in all of this is recognition of the liquidity constraint. The endowment fund can have a long-term investment perspective and then commit to very illiquid investments fairly extensively, that over time will pay off on (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 8 of 15

9 Investment Committee Minutes Page 9 6. Approved-Asset Allocation and Investment Returns (Agenda Item #2) (continued) expected value. In the operating fund there is a liquidity constraint that may sometimes require unexpected exit from the invested funds, without losses, and with the ability to move out of. The endowment fund should be managed one way and the operating fund should be managed the same way, but with recognition of the liquidity constraint. Regent Knecht asked the business officers for a quantitative answer as to what extent the liquidity constraint was considered, and what it means for departing from the long-term viewpoint in favor of a more highly liquid investment mix. Regent Knecht felt Chancellor Klaich was correct in stating that the endowment and operating funds should not be in these types of hedge funds because they are actively managed strategy and, although managed by competent individuals, the funds may often win or lose big at times, and that it is not what it is about. It should be about meeting the market. Chair Wixom indicated that the proposal of the business officers was to keep the same asset allocation and to establish and maintain a rainy-day fund. He continued that Chancellor Klaich suggested a modification to the proposal to liquidate the Farallon hedge fund which has an account balance of $46 million, and in light of the relatively narrow required redemption notice date of November 2010, it would require action today. Chair Wixom requested a comment from each president or representative regarding the proposal. Dr. Neal J. Smatresk, President, UNLV, Dr. Marc Johnson, Executive Vice President and Provost, UNR, Dr. Lesley Di Mare, President, NSC, Dr. Michael D. Richards, President, CSN, Mr. Carl A. Diekhans, President, GBC, Dr. Maria C. Sheehan, President, TMCC, and Dr. Carol A. Lucey, President, WNC, concurred with the suggestion of the business officers for a rainy-day fund. Dr. Stephen G. Wells, President, DRI, agreed with the business officers regarding the rainy-day fund, but was not certain about leaving the hedge fund now because it performed well in the past. Regent Geddes asked if it might be premature to take action today. He would like more discussion before tying the money up. Chair Wixom said the motion is not to make any re-allocation of the liquidated funds, at least not until the end of the year. Regent Geddes would like to have a full proposal that designates where and how much money will be allotted. Chair Wixom clarified that this was to adopt the business officer s approach with the exception of the hedge fund that will be liquidated. He asked about the two other hedge funds, although that decision does not have to be made today. Regent Knecht asked about the process of re-directing the Farallon funds. Interim Vice Chancellor Stevens said the required redemption notification is November (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 9 of 15

10 Investment Committee Minutes Page Approved-Asset Allocation and Investment Returns (Agenda Item #2) (continued) 16, 2010, with the funds coming in by January 31, He felt there would be a recommended asset allocation or options that the Committee could consider and vote upon. Regent Knecht moved approval for the complete liquidation of the Farallon funds in the operating pool and to liquidate the other funds in this asset class within the operating pool based on the available redemption dates and for staff to present to the Investment and Facilities Committee at the December 2010 meeting a proposal of where to direct the proceeds from the Farallon funds, to present an updated asset allocation for the operating pool, and for the business officers and staff to present a proposal for creating a rainy-day fund in the operating pool to include disbursement guidelines and parameters. Regent Cobb seconded. Upon a roll call vote Regents Crear, Cobb, Knecht, Rawson and Wixom voted yes. Motion passed unanimously. Mr. Breiner referred to page i of the report which looked at the endowment returns through June 30, The endowment fund lost 4.8% in the second quarter, and was down 1.6% calendar year-to-date through June Those returns are above the benchmark. He would not expect the incremental returns relative to peers to stay as high as it has been. Positive factors have been underweight equities and the overweight to absolute return. Mr. Breiner explained that there are 291 institutions listed in the peers sample, and while they report to Cambridge Associates they are not all advised by Cambridge Associates. Mr. Breiner said the following page showed the operating fund performance down 2% for the second quarter, calendar year-to-date down 20 basis points, in line with the benchmark for the quarter, ahead for the calendar year, and trailing one year. Some factors that helped were the international equity managers, underweight equities, and other managers. The bond managers and absolute return managers have done well on a one-year trailing basis. Mr. Breiner explained that there is an action item to terminate one of the endowment fund managers, the small cap manager Hoover Capital. The recommendation is to terminate Hoover and hire a Vanguard Small Cap Index fund. The reasons are that Hoover has underperformed its benchmark by an annualized 3.7 percentage points over the past five years and the change will (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 10 of 15

11 Investment Committee Minutes Page Approved-Asset Allocation and Investment Returns (Agenda Item #2) (continued) eliminate the custodial fees associated with the Hoover separately managed account. Vanguard s fee is 14 basis points with no custody cost because it is a mutual fund. Regent Knecht noted that Och-Ziff and Farallon are also in the endowment fund and would like them to be included in the motion in the same way as the operating fund, depending on the redemption dates. Interim Vice Chancellor Stevens believed that Farallon and Och-Ziff could be liquidated November 15, Regent Knecht moved approval to terminate the Hoover Management fund from the endowment pool and to invest the proceeds in the Vanguard Small Cap Index fund. Regent Crear seconded. Motion carried. Regent Knecht moved approval to give notification to exit the Farallon and Och-Ziff funds in the endowment pool and for staff to bring a proposal for redeployment of those funds to the December 2010 meeting. Chair Wixom asked for the liquidation notice dates for Farallon and Och-Ziff in the endowment pool. Interim Vice Chancellor Stevens responded that November 2010, was the deadline to provide redemption notices for both funds within the endowment pool. The next redemption date would be in November Regent Rawson seconded. Chair Wixom said this reverts back to moving out of the absolute return funds and into indexed funds. The investment issues in the endowment pool are different than those in the operating pool to the extent that liquidity is more of an issue in the operating fund and less of an issue in the endowment fund. It is arguable that it may be appropriate to have different types of investments, including hedge funds, in an endowment pool than it is in an operating fund. So the question is if we are moving out of these types of funds altogether and into indexed funds. If that is the case, it will eventually adjust and change our overall investment policies, which is the implication of this action. Regent Knecht stated that liquidating all of the absolute return positions is not the same as going to a more extensively indexed and less actively managed approach. The same index versus active management percentage could continue, but funds from the absolute return asset class should be liquidated which is the type of evaluation that staff would address so the decision could be made at the December 2010 meeting. (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 11 of 15

12 Investment Committee Minutes Page Approved-Asset Allocation and Investment Returns (Agenda Item #2) (continued) Chair Wixom is concerned that there are investment policies that set the asset allocation in certain types of investments. Taking action to completely move out of absolute returns affects the policy. He said a fundamental shift in the policy has not been discussed. The conundrum is that if action is not taken today, the funds are locked up for another year. He asked for guidance. Interim Vice Chancellor Stevens replied that this is the endowment pool, which is a different situation than the operating pool. The operating pool needs to be liquid. The endowment pool does not require investment in the short-term and allocation to absolute return class strategy in this pool would be more supportable than within an operating pool. Regent Knecht felt the need for different policies. Mr. Breiner understood the frustration with this asset class but it delivers significant benefits to both pools not just returns. He felt it was important to highlight the benefits against the negatives. The question may be the execution dimension and to see if the exposure is implemented correctly, which could result in a safer, more diversified allocation. He recommended staying in the funds for another year. Regent Cobb shared Chair Wixom s concerns. He asked about the comparison of returns between indexed funds and hedge funds. Mr. Breiner said the information on page 24 compares the absolute returns, or marketable alternatives, with returns and volatility of returns. In over 10 years through June 2010, there were much higher returns and much lower volatility. Bonds did almost as well with slightly less risk. In the quantitative models that Cambridge Associates uses, one might assume that just index equities would have a higher return than the hedge funds over time going forward, but with more volatility and possibly higher compounded returns. A lot depends on how the hedge funds are implemented. Chair Wixom asked about the total account balance of the two funds. Mr. Breiner said there is $27.5 million from a total of the $187 million pool, or 14.7%. Chair Wixom asked what policies would have to be addressed in December 2010, if the funds were scheduled for liquidation in November Mr. Breiner indicated that it would require looking at the entire allocation policy. Chair Wixom asked the allocation ranges for absolute returns in the current policy. Mr. Breiner said the strategic allocation is set at 5% to 20%, so the 14% actual allocation is toward the high end. Mr. Breiner added that the return profile would need dampening or it will be too choppy and risky. Regent Knecht noted that when something is taken out, that is an absolute return, it is a stabilizer and the overall mix will have to be examined. That is one of the reasons we have staff and Cambridge Associates. He felt there was adequate time to make the decision by December (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 12 of 15

13 Investment Committee Minutes Page Approved-Asset Allocation and Investment Returns (Agenda Item #2) (continued) Chair Wixom said the operating pool and endowment pool issues are different. He believed in moving towards indexing. However, he is concerned about taking action at this time for the endowment pool because there is not enough time to address the volatility and investment policy issues associated with the decision before December He does not want to be forced into that process now because it should be an informed decision. However, he is concerned about being locked in for a year. Chair Wixom said the underlying assumption is that we are locked in for a year if the decision is not made at this meeting. Regent Crear asked about the worst case scenario. Regent Knecht said that prospectively moving towards more indexing will produce the same expected gross return, lower fees, higher net and less risk. Chancellor Klaich noted that the Committee has advisors with experience and he respectfully cautioned about substituting personal investment opinions without being fully advised by those individuals that are paid to give advice. Regent Knecht restated the motion: Regent Knecht moved approval to give notice at the window of opportunity to liquidate the Farallon and Och-Ziff funds in the endowment pool and for staff to work with Cambridge Associates for recommendations to redeploy those funds. Upon a roll call vote Regents Knecht and Rawson voted yes. Regents Cobb, Crear and Wixom voted no. Motion failed. 7. Approved-Final Report and Recommendations (Agenda Item #8) Space Study Working Group The Committee recommended approval of the final report and recommendations of the Space Study Working Group (Ref. IF-8 on file in the Board office). Interim Vice Chancellor Stevens explained the recommendations are consistent with the Committee s directions to the group and consistent with information contained in previous quarterly reports. The space reports to be redeveloped utilize common data elements and the data warehouse to store information to automatically generate reports. Actual use for all space owned or leased by institutions will be reported and will include non-traditional use of classrooms, including classes offered at odd times during the semester. It will expand the type of space reported to include medical and dental facilities. The reports will be auditable. The development phase is anticipated to be completed in the fall of A Technology and Implementation subcommittee has been formed so reports can be generated within the anticipated time frames. The reference (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 13 of 15

14 Investment Committee Minutes Page Approved-Final Report and Recommendations (Agenda Item #8) Space Study Working Group (continued) document is organized based on 12 approved deliverables as outlined and reviewed previously by the Committee. The recommendations are intended to serve two functions: provide the Committee and Board with a complete analysis of the recommendations and provide a framework to allow the Technology and Implementation subcommittee to begin its work to bring the reports into reality. Requested action is to approve Space Study Working Groups final report. The next report to the Committee will be in a year. Regent Knecht asked if Ms. Sandi Cardinal, Assistant Vice Chancellor, Finance, was satisfied that the proposal meets the needs of internal audit. Ms. Cardinal said she has been involved with the process, felt the data could be audited, and was satisfied. Regent Knecht said that the material indicated that there were rooms and facilities that were subject to the proposal and some were not because they were not budgeted the same way. Ms. Ginny Wiswell, Director of Facilities Planning, Management and Analysis, NSHE, explained that the committee looked at these issues and at the predictors; office space, class labs, library, and research space are specific to the research and instructional missions of the institution. Because they are key to the mission, those elements were segregated for predicting space needs for the future. The actual inventory for all types of space will still be reported in the inventory. It is with respect to predicting space in the future that focus was placed on the mission-specific elements. Regent Knecht said the recommendations for the Utilization Report on page 31, item 5 (eliminate dependence on artificial standards that reduce the expectation for full occupancy) and page 45, item 10 (include mechanisms to quantify inefficient space configuration with the ability to identify surplus space for purposeful reconfiguration), are two very important features and capture the essence of the concerns. Regent Knecht moved approval of the final report and recommendations of the Space Study Working Group. Regent Cobb seconded. Motion carried. 8. Approved-Updates Real Property Reports (Agenda Item #9) The Committee recommended approval of the updates to the Real Property Reports of TMCC and GBC (Ref. IF-9 on file in the Board office). Interim Vice Chancellor Stevens said the Real Property Reports for TMCC and GBC are for the Committee s review. As is past practice a Web link to each of the reports is provided, but the full report is not included in the packet. A listing (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 14 of 15

15 Investment Committee Minutes Page Approved-Updates Real Property Reports (Agenda Item #9) (continued) of the changes of real property for each institution since the report was last reviewed is included on page 1 of the reference material. 9. Public Comment (Agenda Item #10) None. 10. New Business (Agenda Item #11) None. Regent Cobb moved approval of the updates to the Real Property Reports of TMCC and GBC. Regent Rawson seconded. Motion carried. The meeting adjourned at 12:10 p.m. Prepared by: Submitted for approval by: Nancy Stone Administrative Assistant IV Scott G. Wasserman Chief Executive Officer & Special Counsel to the Board of Regents (INVESTMENT AND FACILITIES COMMITTEE 12/02/10) Ref. IF-1, Page 15 of 15