2013 Annual Report of the Investment Committee

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2 2013 Annual Report of the Investment Committee

3 For the fiscal year ending June 30, 2013, the Purdue Endowment produced an investment return of 12.2 percent and had a market value of $2.182 billion. The Endowment s return of 12.2 percent was 110 basis points above the Target Benchmark s return of 11.1 percent. The primary goal of the Endowment, as stated in the Investment Policy, is to generate returns over the long-term that are better than inflation plus spending. The Purdue Endowment s annualized return for the past 20 years is 8.7 percent. The spending distribution for fiscal year from the Endowment increased by about $9 million or 9 percent from the previous year to $106 million. In the NACUBO annual endowment study, 83 endowments were over $1.0 billion. Purdue s market value ranked 33rd in the study, down one position from the previous year, and is the country s 12 th largest endowment held by a public university. Penn State jumped over Purdue in the rankings due to a billion dollar increase this past year from the addition of other University funds. The Purdue Endowment market value is now ranked 5 th in the Big Ten and 5 th in the Strategic Plan peer group by market value reflecting the change. Purdue s one, three and five year returns were above the over $1.0 billion endowments but trailed on the ten year. NCSE Total Return For Fiscal Years Ended June 30, 2012 One Year Three Year Five Year Ten Year Purdue University 12.2% 10.6% 4.3% 7.7% All Institutions Median Public Endowments Over $1.0 Billion $501 Million to $1.0 Billion S&P 500 Index The endowments over $1.0 billion had a range of investment returns from a high of 16.6 percent to a low of 7.5 percent. The institution that produced the highest return of the over $1.0 billion group held the highest asset allocation to U.S. Equity at 32 percent and the institution with the lowest return held only 13.8 percent. The Purdue Endowment s U.S. equity exposure gained 22.5 percent versus the S&P 500 Index return of 20.6 percent for the fiscal year followed by international equities with a gain of 18.5 percent versus the MSCI EAFE Index return of 18.6 percent. The 7 percent allocations to emerging markets produced the lowest return in the portfolio at 0.7 percent versus the MSCI Emerging Markets Index return of 3.2 percent. The Purdue Endowment remained underweight to alternatives by 15 percent, versus the billion dollar peers and overweight to public equities.

4 Most of the difference as in past years was in private equity. Additional asset allocation information is detailed in the supplementary data contained in Appendix B. Asset Class Purdue Asset Allocation Comparison* Purdue Over $1.0 Billion Variance Policy Target Public Equities Alternative Assets (15.1) 49.0 Fixed Income/Cash % 100.0% *Additional Purdue asset allocation information contained in Appendix B Based on the performance of Purdue s international and emerging markets investments in the last two fiscal years, the Investment Committee adjusted the 100 percent active manager strategy in both international and emerging markets allocations to be a combination of active and passive exposures and replaced the individual emerging markets managers. Active investment managers have struggled to generate market returns above an appropriate benchmark net of fees since There are periods of underperformance with any active investment strategy over a 10-year period but the expectation is the return will be above the stated benchmark. In periods of market volatility with sudden declines, followed by market rallies, a core index surrounded by targeted active managers should capture more of the upside. The Purdue Office of Investments completed a successful year of monitoring and maintaining the relationships with the Endowment. The staff held 109 formal meetings over the calendar year. The meetings were a combination of conference calls (73%), annual meetings (7%), manager visits (11%) and meetings on Purdue s campus (9%). This is similar to previous years. The staff talked with approximately 70 percent of the current Purdue investment managers. The goal continues to be to meet with each investment manager over an 18 to 24 month period. Ten managers were placed on the Endowment s Watch List in 2013 for performance. Five of the managers were terminated in the calendar year, three were removed because performance improved and two remain on the Watch List. On December 31, the Endowment s market value increased to $2.3 billion. For the calendar year 2013, the Endowment s performance was 14.8 percent versus the Target Benchmark return of 14.5 percent and the S&P 500 Index return of 32.4 percent. For the two quarters of the fiscal year, the Endowment returned 9.6 percent versus the Target benchmark return of 9.8 percent and the S&P 500 Index return of 16.3 percent. The Endowment will invest across the continuum of asset classes in There continues to be considerable directional uncertainty in the financial markets after the S&P 500 returned 32.4 percent for the 2013 calendar year. The Endowment remains 2 percent overweight to emerging markets, 1 percent underweight to public U. S. real estate, 1 percent underweight to small cap stocks and 3 percent underweight to fixed income with a short duration.

5 Appendix A Comparison Institutions Ranked by Total Endowment Asset Value June 30, 2013 Rank Public Big Ten Universities Assets 1) University of Michigan $8,382 2) Ohio State University 3,149 3) Penn State University 2,958 4) University of Minnesota 2,757 5) Purdue University $2,182 6) University of Wisconsin 2,020 7) University of Illinois 1,926 8) Indiana University 1,735 9) Michigan State University 1,637 10) University of Nebraska 1,338 11) University of Iowa 1,094 Rank Strategic Plan Peer institutions Assets 1) University of Texas System $20,448 2) Texas A&M System 8,732 3) University of Michigan 8,382 4) Penn State University 2,958 5) Purdue University $2,182 6) University of Wisconsin 2,020 7) University of Illinois 1,926 8) Georgia Tech 1,715 9) University of California-Berkeley 1,243 Source: NCSE

6 Appendix B Purdue Asset Allocation Comparison As of June 30, 2013 Asset Class Policy Policy Purdue Over $1.0 Over $1.0 Targets Range Actual Billion Variance U.S. Equity 18.0% 10-35% 21.7% 13.0% 8.7% Non-U.S. Equity % Emerging Markets % 6.7 Total Equities % Private Equity % (9.2) Venture Capital % (0.3) Hedge Funds % (4.0) Real Estate % (2.7) Natural Resources % Total Alternatives % (15.1) Fixed Income/Cash % % 100% 100.0% Source: Office of Investments and the NCSE