FY2018 Q1 Investment Reports

Transcription

1 FY2018 Q1 Investment Reports BACKGROUND The Oregon State University (University) investment reports for the first quarter (Q1) of FY2018 are presented in the following three sections: FY2018 Q1 Market Background This section provides a general discussion of the investment markets and related performance information during the first quarter of FY2018 (i.e., July 1 September 30, 2017). FY2018 Q1 Public University Fund Investment Report This section includes a report on the investments of the Public University Fund (PUF) for the first quarter of FY2018. The PUF is an investment pool that is administered by the university on behalf of all Oregon public university participants, pursuant to legislation adopted by the 2014 legislature. The PUF holds assets of the following participating Oregon public universities: Eastern Oregon University, Oregon Institute of Technology, Oregon State University, Portland State University, Southern Oregon University, and Western Oregon University. FY2018 Q1 Oregon State University Investment Report This section includes a report on the investments of the operating and endowment assets of the university. This report reflects the university s operating assets that are invested in the PUF, the university s endowment and quasi-endowment investments managed by the Oregon State University Foundation, the land held as separately invested endowments, and the land grant endowment that is invested in the PUF. FY2018 Q1 MARKET BACKGROUND (Prepared by Callan Associates, consultants to the Oregon Investment Council) Macroeconomic Environment Last quarter, we wrote about the Goldilocks environment ("Not too hot, not too cold, but just right") and investor complacency keeping volatility at multi-decade lows and propelling stock markets to new highs. The first fiscal quarter followed suit in spite of escalating tensions with North Korea, several severe natural disasters and uncertainty around the prospects for tax reform and other domestic agenda items. In spite of these challenges and questionable valuations, the Standard & Poor s 500 (S&P 500), Russell 2000 and National Association of Securities Dealers Automated Quotations (Nasdaq) all hit record highs on the final trading day of the quarter. It was the Nasdaq s 50th record close this year. Non-U.S. stocks also posted solid single-digit returns, bolstered by improving economies as well as a weakening U.S. dollar. The risk-on environment continued, and emerging market equities and debt posted the strongest returns within their respective asset classes. Commodity indices also rose as crude oil prices surged nearly 20% after falling during the first half of the calendar year. All major asset classes delivered positive results in the first fiscal quarter. Cash has also perked up from its dismal zero% days, posting a 0.3% return for the quarter. In the U.S., second calendar quarter real Gross Domestic Product (GDP) growth was revised up to 3.1% (annualized), the fastest pace since the first calendar quarter of While hurricanes Harvey and Irma may provide a temporary setback to U.S. growth, rebuilding efforts are likely to provide a boost to GDP in the fourth calendar quarter and into And, in a relatively new Finance & Administration Committee Page 1

2 development, the Institute for Supply Management manufacturing index is showing signs of strength. In August, the Index hit 58.8 (anything above 50 signals expansion). The September reading, released in early October, rose to 60.8 with both its employment and new orders components signaling broad-based strength. This marked the highest level in 13 years. Unemployment ticked up slightly in August to 4.4%, but labor conditions remain tight. Inflation continues to fall short of the Federal Reserve s (Fed's) 2% target, puzzling many. The headline Consumer Price Index was 1.9% as of August (year-over-year) while Core was 1.7%. Both were unchanged from levels three months ago. The Fed's favored measure, the Personal Consumption Expenditure price deflator, gained 1.4% year-over-year (also unchanged). The Fed left rates unchanged at its September meeting, but 12 of the 16 Federal Open Market Committee members expect one more hike this year and markets put that probability at about 70%. The Fed also announced that its previously communicated plan to reduce the size of its balance sheet would begin in October of this year. It will reduce reinvestment of its holdings by $10 billion per month, increasing this amount gradually each quarter to $50 billion per month at the end of In other Fed news, Vice Chairman Stanley Fischer resigned for ''personal reasons," leaving a fourth vacancy on the Fed s governing board. Further, Janet Yellen's term as chair expires in February 2018 with no clear replacement as of yet. Non-U.S. developed economies continued to gain traction. Second calendar quarter GDP growth in the euro zone was 2.3% (year-over-year) with consumer confidence and demand both showing strength. The European Central Bank s Governing Council left monetary policy unchanged, but Bank President Mario Draghi indicated that decisions around the timing of a tapering program would be made in October. The euro gained ground versus the U.S. dollar and the pound continued to strengthen on hawkish comments from the Bank of England. German Chancellor Angela Merkel's party won an impressive fourth term but her victory was tarnished by the showing of the right-wing nationalist party. The Alternative for Deutschland party attracted 13% of voters, marking the first entry of a far-right party into Parliament in more than 60 years. Also noteworthy was Catalonia's overwhelming vote for independence from Spain, as the quarter ended. The outcome remains uncertain but is a reminder that the cohesion of the European Union continues to face challenges. Outside of Europe, Japan's economy continued to slowly recover; second calendar quarter GDP growth was 2.5% (annualized). While this was lower than expected, the economy has now expanded for six consecutive quarters. In China, economic news has generally been positive but the country was downgraded to A+ by Standard and Poor s, which cited growing concerns over credit growth. Equity Market Results The S&P 500 Index gained 4.5% in the first fiscal quarter (third calendar quarter) and is up 14.2% for the calendar year. Several U.S. stock market indices hit record highs going into quarter-end as investors shrugged off bad news and pinned their hopes on meaningful tax reform. Small cap equities outperformed large cap equities across styles for the quarter, but trail on a calendar year-to-date basis. Growth outperformed value for the quarter and calendar yearto-date, as growth has outperformed value by more than 10%age points across the capitalization spectrum. Technology, namely a handful of stocks, continued to fuel the growth indices' returns, especially in the large cap space (see below). The FAAMG (Facebook, Apple, Amazon, Microsoft and Google) stocks have an average return of 31% calendar year-to-date and have contributed 7.3% of the 20.7% calendar year-to-date return for the Russell 1000 Growth Index. Technology stocks now comprise 23% of the S&P 500 Index and 38% of the Russell Growth Index. Along with Technology (+8.6%), Energy (+6.8%) and Telecommunications (+6.8%) were strong sectors. Consumer Staples ( 1.3%) was the sole sector to deliver a negative result for the first fiscal quarter. Finance & Administration Committee Page 2

3 3Q Y-T-D (Calendar) (Calendar) Facebook 13.2% 48.5% Apple 7.4% 34.7% Amazon 0.7% 28.2% Microsoft 8.6% 21.9% Google (Alphabet A & C shares) 5.1% 23.6% Russell 1000 Growth Index 5.9% 20.7% S&P 500 Index 4.5% 14.2% Overseas, the Morgan Stanley Capital Indices (MSCI) European Australasia Far-East (EAFE) Index (+5.4%) outperformed U.S. markets in the first fiscal quarter and posted a strong 20.0% return for the calendar year-to-date period. Gains were broad-based with several countries (Austria, Portugal, Italy, and Norway) posting double-digit returns. The U.S. dollar continued to weaken, down 3.4% versus the euro, Canadian dollar, and the U.K. pound. Within the MSCI EAFE, Europe ex-united Kingdom (U.K.) was up 6.9%, the U.K gained 5.2%, and Japan increased 4.0%. From a sector perspective, Energy and Materials posted double-digit gains while Health Care and Consumer Staples were laggards with results of less than 1%. Emerging markets modestly outperformed developed (MSCI Emerging Markets USD: +7.9%) and the Index is up an impressive 27.8% calendar year-to-date. Emerging Asia continued to be the key driver (as was the case in the first and second calendar quarters), with China (+14.7%) taking the lead. The only emerging market country to deliver a negative return was Greece ( 12.1%). Elsewhere, Russia and Brazil (+17.6% and +22.9% respectively) both posted sharp gains as their economies improved, reversing second calendar quarter declines. India, where second calendar quarter growth did not meet expectations, posted a more muted return at 3.0%. Fixed Income Market Results Interest rates were range-bound during the first fiscal quarter. The yield on the 10-year U.S. Treasury closed the quarter at 2.33%, only two basis points higher than at the end of the previous quarter. The yield curve continued its flattening trend and the 2-year Treasury yield ended the quarter at 1.47%, its highest level since August The Bloomberg Barclays Aggregate U.S. Bond Index posted a 0.8% result with corporate bonds outperforming other investment grade sectors. The Bloomberg Barclays U.S. Corporate Index was up 1.3% for the quarter. High yield corporates fared even better, with the Bloomberg Barclays U.S. Corporate High Index up 2.0%. Treasury Inflation Protected Securities (TIPS) regained some of their underperformance from the previous quarter. The Bloomberg Barclays U.S. TIPS Index rose 0.9% and the 10-year breakeven spread (the difference between nominal and real yields) rose to 1.84% as of quarter-end from 1.73% at the end of the second calendar quarter. Rates were also steady overseas, though dollar weakness boosted returns. The U.S. dollar lost nearly 3% versus a broad basket of developed markets currencies. The Bloomberg Barclays Global Aggregate Index returned 1.8% (unhedged) versus 0.8% for the hedged version. Emerging markets debt posted solid returns. The JP Morgan Emerging Market Bond Global Diversified Index ($ denominated) was up 2.6%. Gains were broad-based with only beleaguered Venezuela ( 10.6%) posting a negative return. The local currency JP Morgan Global Bond Emerging Market Global Diversified Index returned 3.6%. Returns were mixed for this Index with Brazil (+10.8%) being the best performer on improving economic and political news and Finance & Administration Committee Page 3

4 Argentina's first-ever local bonds ( 4.1%) being the worst on worries over the success of reforms. Calendar year-to-date, the two emerging markets debt indices are up 9.0% and 14.3%, respectively. The municipal bond market also performed well, benefiting from favorable supply/demand dynamics and steady rates. New issue supply was down 17% from 2016 (through the first three calendar quarters of 2017). The Bloomberg Barclays Municipal Bond Index returned 1.1% for the quarter and the shorter duration 1-10 Year Blend Index was up 0.7%. Puerto Rico remained in the headlines in the aftermath of the devastating hurricane with its bonds trading at less than 50 cents on the dollar. Other Asset Results Brent crude oil prices rose nearly 20% for the quarter on relatively strong demand and signs that OPEC's production cuts may be easing the supply glut. The energy-heavy S&P Goldman Sachs Commodity Index gained 7.2% while the more diversified Bloomberg Commodity Index was up 2.5%. The Alerian Master Limited Partnership (MLP) Index ( 3%) was hurt by one of its larger constituents cutting its dividend, and its performance illustrates that MLP prices do not always move in tandem with oil prices. Gold gained 3.4% and Real Estate Investment Trusts (REITs) were up modestly (S&P Global REIT: +1.4%; MSCI U.S. REIT: +0.9%). U.S. TIPS outperformed nominal Treasuries; the Bloomberg Barclays U.S. TIPS Index returned 0.9%. The Dow Jones Brookfield Global Infrastructure Index gained 3.3% and is up 15.2% calendar year-to-date. Closing Thoughts We entered 2017 with U.S. stock markets at record highs and historically low volatility. We approach calendar year-end with markets at new record highs, continued low volatility, and valuations stretched across most areas of the investment markets. Meanwhile, challenges remain both geopolitically as well as with respect to the domestic legislative agenda. Finally, inflows from overseas buyers have contributed to the appreciation in markets, but it is impossible to predict what will cause these flows to reverse course. Callan cautions investors to temper return expectations and, as always, we encourage investors to maintain a long-term perspective and prudent asset allocation with appropriate levels of diversification. Finance & Administration Committee Page 4

5 FY2018 Q1 PUBLIC UNIVERSITY FUND INVESTMENT REPORT (Prepared by the Public University Fund Administrator) Performance The Public University Fund (PUF) gained 0.5% for the first fiscal quarter ended September 30, The PUF s three-year average return was 1.5% through September 30, The Oregon Short-Term Fund returned 0.4% for the quarter, outperforming its benchmark by 10 basis points. The Core Bond Fund returned 0.6% for the quarter, performing in line with its benchmark. In October, Oregon State Treasury fixed income portfolio manager, Tom Lofton, conducted a quarterly performance review with university staff and its investment advisor. The Core Bond Fund s 8.3% cash position at quarter end was a result of unsettled trades. Mr. Lofton is deploying current cash balances into the mortgage-backed securities sector. Upon review and analysis of the participant s FY2018 cash flow forecast submissions, Public Financial Management (PFM) and University Shared Services Enterprise (USSE) staff have determined the PUF has excess liquidity available for longer-term investment into the Core Bond Fund. Approximately $70 to $80M will be systematically invested into the Core Bond Fund over the coming months. A snapshot of each investment pool s portfolio characteristics and market exposures is included with this report. Oregon Short Term Fund Benchmark 91 day T-Bill Quarter Ended Prior Fiscal YTD Current Fiscal YTD 3-Year Avg. Asset Allocation 0.4% 0.2% 0.4% 0.8% $240,942, % 0.3% 0.1% 0.3% 0.3% Policy Allocation $150 million target ¹ PUF Core Bond Fund 0.6% N/A 0.6% N/A $313,019, % Blended Benchmark ² 0.6% N/A 0.6% 2.9% Public University Fund 0.5% 0.4% 0.5% 1.5% $553,962, % ¹ The PUF policy guidelines define investment allocation targets based upon total participant dollars committed. Core balances in excess of liquidity requirements for the participants are available for investment in the Core Bond Fund. Maximum core investment allocations are determined based upon anticipated average cash balances for all participants during the fiscal year. ² The Blended Benchmark is comprised of the Bloomberg Barclay s Aggregate 3-5 Years Index (75%) and the Bloomberg Barclay s Aggregate 5-7 Years Index (25%). Finance & Administration Committee Page 5

6 Investment Income and Participant Ownership During the quarter, investment earnings distributed to the participants totaled $2,510,377. Earnings Distribution ¹ as of 9/30/17 % Ownership Oregon State University ² $ 1,126,430 $ 242,120, % Portland State University 852, ,876, % Western Oregon University 221,224 49,034, % Oregon Institute of Technology 112,943 23,524, % Southern Oregon University 100,299 20,590, % Eastern Oregon University 97,466 20,814, % Grand Total $ 2,510,377 $ 553,962, % ¹ The earnings available for distribution to participants were earned during the months of June 2017 through August 2017 and distributed to participants in September Earnings are distributed to participants based upon average cash and investment balances on deposit during the same period, which differs from the total market value at the end of the quarter. ² As of September 30, 2017, Oregon State University s total PUF market value consisted of operating assets, valued at $241,793,441, and the land grant endowment, valued at $327,147. Finance & Administration Committee Page 6

7 Oregon Short-Term Fund Exposures September 30, 2017 Gain (Loss) Gain (Loss) Sector Rate Spread Rating Rate Spread Corporates 51.6% 0.6% % AAA 41.7% 0.0% % Treasuries 19.6% 0.0% % AA+ 0.9% 0.0% % Government Related 13.7% 0.0% % AA 5.8% 0.0% % Securitized 13.1% 0.0% % AA- 13.9% 0.1% % Investment Funds 1.3% 0.0% % A+ 12.5% 0.2% % Cash 0.6% 0.0% % A 12.6% 0.2% % Municipals 0.1% 0.0% % A- 9.7% 0.1% % BBB+ 1.2% 0.0% % No Rating 0.4% 0.0% % Investment Funds 1.3% 0.0% % Total 100.0% 0.6% % Total 100.0% 0.6% % Industry Gain (Loss) Rate Spread Top Exposures Banking 34.2% 0.5% % United States Treasury 19.6% Treasuries 19.6% 0.0% % JP Morgan Chase & Company 4.4% Government Related 13.7% 0.0% % Federal Home Loan Banks 4.3% A.B.S. 13.1% 0.0% % Wells Fargo & Company 3.8% Consumer Cyclical 5.8% 0.0% % Goldman Sachs Group Incorporated (The) 2.7% Capital Goods 3.5% 0.0% % Toyota Motor Corporation 2.7% Consumer Non-Cyclical 2.8% 0.1% % Morgan Stanley 2.4% Technology 2.8% 0.0% % Federal Farm Credit Banks Funding Corporation 2.4% Investment Funds 1.3% 0.0% % Bank of America Corporation 2.1% Insurance 1.0% 0.0% % Caterpillar Incorporated 1.9% Cash 0.6% 0.0% % Honda Motor Company Limited 1.7% Communications 0.6% 0.0% % Citi Bank N.A. 1.4% Utility 0.3% 0.0% % Chase Issuance Trust 1.4% Finance Companies 0.3% 0.0% % Citibank Credit Card Issuance Trust 1.4% Industrial Other 0.2% 0.0% % Barclays Plc 1.4% Transportation 0.1% 0.0% % American Express Company 1.4% Municipals 0.1% 0.0% % Credit Suisse Group A.G. 1.3% Oregon Local Government Intermediate Fund 1.3% Lloyds Banking Group Plc 1.2% Westpac Banking Corporation 1.2% Total 100.0% 0.6% % Source: Oregon State Treasury Finance & Administration Committee Page 7

8 P.U.F. Core Bond Fund Exposures September 30, 2017 Gain (Loss) Rate Spread Sector Rating Rate Spread Securitized 34.5% 0.0% % AAA 70.8% 0.0% % Treasuries 29.0% 0.0% % AA+ 0.0% 0.0% % Corporates 21.0% 0.2% % AA 8.7% 0.0% % Cash 8.3% 0.0% % AA- 1.1% 0.0% % Government Related 7.2% 0.1% % A+ 0.0% 0.0% % A 2.2% 0.1% % A- 3.8% 0.0% % BBB+ 6.8% 0.1% % BBB 4.2% 0.1% % BBB- 2.4% 0.0% % Total 100.0% 0.3% % Total 100.0% 0.3% % Gain (Loss) Industry Gain (Loss) Rate Spread Top Exposures Treasuries 29.0% 0.0% % United States Treasury 33.8% M.B.S. Pass-Through 13.3% 0.0% % Oregon State Treasury 8.3% A.B.S. 9.6% 0.0% % Federal Home Loan Mortgage Corporation 5.4% Cash 8.3% 0.0% % Federal National Mortgage Association 5.4% C.M.B.S. 6.8% 0.0% % Citibank Credit Card Issuance Trust 2.6% Banking 6.0% 0.0% % European Investment Bank 2.4% C.M.O. 4.8% 0.0% % Ford Motor Company 2.2% Consumer Non-Cyclical 4.8% 0.1% % Citigroup Incorporated 1.9% Agency 4.2% 0.1% % Capital One Multi-Asset Execution Trust 1.8% Capital Goods 2.9% 0.1% % Goldman Sachs Group Incorporated (The) 1.6% Consumer Cyclical 2.6% 0.0% % Wells Fargo Commercial Mortgage Trust 1.6% Supranational 2.4% 0.0% % Dr. Pepper Snapple Group Incorporated 1.5% Insurance 1.5% 0.0% % Morgan Stanley Capital Trust 1.4% Basic Industry 1.4% 0.0% % Sherwin-Williams Company (The) 1.4% R.E.I.T.s 1.0% 0.0% % Freddie Mac F.H.L.M.C % Technology 0.8% 0.0% % C.N.H. Equipment Trust 1.0% Local Authority 0.6% 0.0% % Freddie Mac F.H.L.M.C % Astrazeneca Plc 1.0% Synchrony Financial 0.9% Teva Pharmaceutical Industries Limited 0.9% Total 100.0% 0.3% % Source: Oregon State Treasury Finance & Administration Committee Page 8

9 FY2018 Q1 OREGON STATE UNIVERSITY INVESTMENT REPORT The schedule of Oregon State University s investments is shown in the investment summary below. Public University Fund Performance Oregon State University s operating assets and the land grant endowment are invested in the Public University Fund (PUF). The report on the investment performance of the PUF provided in the separate section above, shows the PUF returned 0.5% for the first quarter. OSU Endowment Asset Performance The OSU Endowment Assets, including those managed by the OSU Foundation, earned a total return of 3.4% during the quarter. The total market value of the OSU endowment assets as of September 30, 2017 was $52,294,870. The OSU Foundation, pursuant to an investment management contract, is managing the majority of the university s endowment assets. The OSU Foundation s Endowment Pool earned a total return of 3.7% during the quarter, underperforming its benchmark by 80 basis points. RECOMMENDATION Staff recommend the Finance & Administration Committee accept the FY2018 First Quarter Public University Fund Investment Report and the FY2018 First Quarter Oregon State University Investment Report. Finance & Administration Committee Page 9

10 OSU Operating Assets Invested in Public University Fund Quarter Prior Current Actual Policy Ended Fiscal Fiscal Market Asset Allocation 9/30/2017 YTD YTD 3 Yr Avg 5 Yr Avg 10 Yr Avg Value Allocation Range Oregon Short - Term Fund 0.4% 0.2% 0.4% 0.8% 0.7% 1.1% $ 105,166, % 1 Benchmark - 91 day T-Bill 0.3% 0.1% 0.3% 0.3% 0.2% 0.5% P.U.F. Core Bond Fund ² 0.6% N/A 0.6% N/A N/A N/A 136,626, % 1 Blended Benchmark ³ 0.6% N/A 0.6% 2.9% 1.7% N/A Total Operating Assets Invested in Public University Fund 0.5% 0.4% 0.5% 1.5% $ 241,793, % OSU Endowment Assets OSU Endowment Assets Invested in the OSUF Endowment Pool Total Global Equity 5.5% 5.4% 5.5% $ 25,253, % 50.0% Benchmark - M.S.C.I All Country World Index 5.2% 5.3% 5.2% Total Global Fixed Income 2.3% 1.1% 2.3% 5,078, % 5.0% Benchmark - Bloomberg Barclays Global Agg. Bond Index 1.8% 0.8% 1.8% Total Absolute Return -0.2% 2.3% -0.2% 5,391, % 10.0% Benchmark - H.F.R.I. Fund of Funds Index 2.3% 2.4% 2.3% Total Real Assets 0.8% 3.5% 0.8% 5,306, % 10.0% Benchmark - Real Assets Custom ⁴ 1.7% -0.5% 1.7% Total Private Capital 6.1% -1.6% 6.1% 4,973, % 25.0% Benchmark - No benchmark provided Total Cash 0.0% 0.0% 0.0% 1,457, % 0.0% Total OSU Endowment Assets Invested in OSUF Endow. Pool ⁵ 3.7% 3.3% 3.7% 47,460, % 100.0% Benchmark-80% M.S.C.I. A.C.W.I./20% BBG Barclays Global Agg. 4.5% 2.8% 4.5% Other OSU Endowment Assets Oregon State University Investment Summary as of September 30, 2017 (Net of Fees) Land Held as Separately Invested Endowment Funds 0.0% 0.0% 0.0% 4,507,362 6 Other Endowment Assets Invested in the P.U.F. 0.5% 0.4% 0.5% 327,147 Total Other OSU Endowment Assets 4,834,509 Total OSU Endowment Assets 3.4% 3.0% 3.4% $ 52,294,870 (continued on next page) Finance & Administration Committee Page 10

11 Oregon State University Investment Summary as of September 30, 2017 (Net of Fees) 1 The Public University Fund (P.U.F.) policy guidelines define investment allocation targets based upon total participant dollars committed. Core balances in excess of liquidity requirements for the participants are available for investment in the Core Bond Fund. Maximum core investment allocations are determined based upon anticipated average cash balances for all participants during the fiscal year. 2 The P.U.F. Core Bond Fund was established on April 3, 2017, to incorporate policy updates and sector exposure restrictions. The securities held in the Oregon Intermediate-Term Pool and Long-Term Pool (excluding fossil-fuels) were transferred into the P.U.F. Core Bond Fund on April 3, Blended Benchmark Composition: 75% Bloomberg Barclay's Aggregate 3-5 Years Index, 25% Bloomberg Barclay's Aggregate 5-7 Years Index. 4 Real Assets Custom Benchmark: 1/3 Financial Times Stock Exchange European Public Real Estate Association/National Association Real Estate Investment Trust Developed Index, 1/3 Bloomberg Commodity Index, 1/3 Bloomberg Barclays U.S. Treasury Inflation Protected Securities. 5 Investment returns are reported net of investment manager fees; gross of the Foundation's administrative fees. 6 Physical appraisals completed every five years. Valuations in interim years provided by faculty. Investment returns updated annually during the fiscal fourth quarter. Land held as separately invested endowments may not be sold. The Matteson agreement, however, allows an option to sell land beginning 2/25/2035. Land use is restricted to teaching and research. Partial harvests, consistent with good forestry management practices are allowed, with specified uses for ongoing funding for scholarships and an endowed chair. Note: Outlined returns underperformed their benchmark. Finance & Administration Committee Page 11