Endowment Funds Performance (Year ending June 30 th, 2014) prepared for Investment Subcommittee (Note: all returns and values are expressed in Canadian Dollars- CAD s) 1
Quarterly Market Overview Equity markets remained resilient through the first half of 2014 despite a number of geopolitical risks. Canadian Equity The S&P/TSX index was a strong performer once again advancing more than 6.1% in the quarter. All sectors except healthcare finished higher in the period. The leading sectors Energy, Materials and Industrials. Energy was a strong performer, posting double digit returns over the quarter. The relatively strong performance of small cap stocks lifted the small cap index ahead of the broader market over the period. U.S. Equity US equities continue to hit record highs as the Federal Reserve winds down its quantitative easing program. The S&P 500 was up 1.5% for the quarter and up 7.4% year to date. Within the S&P 500 Utilities, Energy and Health care were the strongest performers year to date, while Consumer Discretionary, Telecom and Industrials were the weakest. Value stocks outperformed growth stocks and large cap indices outperformed small cap indices for the first half of 2014. International Equity Foreign investment returns were hampered by currency effects, as the Canadian dollar appreciated against most major currencies over the quarter. The loonie gained 3.6% vs the USD during the second quarter finishing close to US$0.94. The MSCI EAFE ( CAD) was up just 0.5%. European equities were positive in the quarter even though Q1 GDP growth was sluggish. The ECB cut rates and introduced measures to boost lending to small business. Japan recovered some of its early losses over the last two months advancing 2.9% in the quarter. Emerging markets on the whole recovered sharply from first quarter declines. The MSCI emerging markets index (CAD) was up 3.0% for the quarter. Fixed Income Bonds also extended their gains from the first quarter. The bond universe gained 2.0% for the quarter and 4.8% year to date. The yield on the Canada 10 year stood at 2.3% at he end of June as compared to 2.4% at the end of Q1. Corporate spreads were unchanged over the quarter, while the yield curve flattened slightly. REAL ESTATE : The IPD index returned 4.5% for the quarter. A steady level of investment activity and availability of capital remains prevalent in the market. 2
Endowment Results Overview (Gross Returns for the 12 Months Ended June 30 th, 2014) The Total Plan returned 19.9% for the last 12 months reflecting strong equity returns across asset classes. Canadian Equity Outperformed the SPTSX index by 0.2%. Within the industry sectors, Materials was the largest contributor to relative outperformance. Manager stock selection led to outperformance. Outperformance within the energy sector also benefitted the portfolio. Strong commodity prices in Q2 of this year aided the gains in the energy sector. The largest detractor to relative performance came from the consumer discretionary sector. The minimal exposure to the health care sector also detracted from performance. U.S. Equity Outperformed the S&P 500 index by 2.9% Exposure to US small and mid cap stocks continued to benefit the portfolio, however tear to date small cap has underperformed other size segments. The most significant contributor to outperformance was the Energy sector, which added 1.2% over the period. Other sectors that aided results over the period included consumer staples and telecom, while health care and technology detracted from overall performance. International Equity Outperformed the MSCI EAFE (Net) index by 4.6% After consistently outperforming the index for the last few years Tweedy Browne underperformed (by 0.1%) as a result of their rising cash reserves. LSV had better relative performance beating the index by 4.2%. LSV s Emerging Markets mandate beat the index by 4.8%. The portfolio s small cap bias relative to the benchmark was a detractor whereas the value style bias was a positive contributor over the period. Emerging market stocks look cheap compared to developed market countries, particularly after the run up in developed market stocks over the past several years. Fixed Income 5.5% versus 5.3% for the Dex Bond Universe. This is a passive mandate and normal variance to the index is expected to be relatively small Infrastructure On May 16 th, 2013 the Investment Subcommittee hired Brookfield Asset Management Inc. as the Infrastructure manager committing $19 million to Brookfield Infrastructure Fund II Approximately $ 7.9 mill of the $ 19 mill has been called thus far. 3
Total Endowment Portfolio Vs Benchmark (Gross Of Fees) Annualized Periods Ending June 30 th, 2014 Endowment Policy Benchmark : 30% DEX Bond Universe + 20% S&P/TSX Composite + 25% S&P 500 ($CAD) + 20% MSCI EAFE Net ($CAD) + 5% MSCI Emerging Markets Index 4
Asset Class Performance Annualized Periods Ending June 30 th, 2014 YTD 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr % % % % % % % % % % % Total Gross of Fees 7.6 19.9 17.5 12.0 13.0 12.1 8.5 5.7 6.7 6.3 6.6 *Total Net of Fees 7.3 19.4 16.9 11.5 12.5 11.6 7.9 5.2 6.2 5.8 6.1 Total Fund ex Currency Overlay (Gross) 1 7.7 20.5 18.1 12.7 **Endowment Benchmark 7.2 19.3 15.7 10.7 11.6 10.8 6.3 4.2 5.6 5.7 5.8 Canadian Equity 12.3 28.8 23.2 12.3 14.1 13.1 7.1 6.6 8.4 8.9 10.9 S&P/TSX Comp Index 12.9 28.7 17.8 7.6 10.8 11.0 3.8 4.2 6.4 7.8 8.8 US Equity 8.9 28.7 28.9 21.7 21.6 19.3 13.6 7.9 8.7 7.2 6.0 S&P 500 Total Return Index ($CAD) 7.4 25.8 25.3 20.5 20.0 16.8 10.7 6.2 7.3 6.3 5.3 Non-North American Equity 7.0 29.4 27.4 16.1 17.6 14.9 9.0 4.8 7.0 7.8 7.3 MSCI EAFE Net ($CAD) 5.0 24.8 23.8 11.7 13.3 9.8 3.9 1.0 3.4 4.6 4.5 Fixed Income 4.9 5.5 2.9 5.0 5.1 5.5 6.0 6.0 5.8 5.0 5.6 Dex Bond Universe 4.8 5.3 2.5 4.8 4.8 5.2 5.5 5.7 5.6 4.9 5.5 **Endowment Policy Benchmark: 30% DEX Bond Universe + 20% S&P/TSX Composite + 25% S&P 500 ($CAD) + 20% MSCI EAFE Net ($CAD) + 5% MSCI Emerging Markets Index 1 Currency hedging manager was added in November 2010 * 9-10 Year Net of Fee returns are internal estimates 5
Endowment Fund Results: Relative to Endowment Policy Benchmark (for the 12 Months Ended June 30 th, 2014) Endowment Fund Policy Benchmark: 30% DEX Bond Universe + 20% S&P/TSX Composite + 25% S&P 500 ($CAD) + 20% MSCI EAFE Net ($CAD) + 5% MSCI Emerging Markets Index 12 month Total Gross Portfolio return of 19.9% versus Composite Benchmark returns of 19.2%. The chart below summarizes the attribution of returns relative to the Benchmark. The selection effect measures the investment manager s ability to select securities within a given segment relative to a benchmark. The allocation effect measures the value added by deviating from the benchmark weights. The combined effect is the Net Management Effect. The Chart below shows positive security selection and negative allocation effect stemming from cash. % Performance Attribution by Asset Class 2.00 1.50 1.0 1.00 0.8 0.7 Allocation Effect Selection Effect 0.50 0.00 0.1 0.6 Net Management Effect 0.50 1.00 1.5 1.50 2.00 Total Fund Canada Equity US Equity International Equity Fixed Income Cash Note : Emerging Market equity is combined with EAFE equity and shown as international equity. Cash return includes currency hedging effect. 6
Endowment Asset Mix as of June 30 th, 2014 (Total Assets $ 317.0 Million) EM Equity $16.8M, 5% EAFE Equity, $60.5M, 19% Actual Infrastructure $5.2M, 2% Cash $16.8M, 5% Canadian Fixed Income, $80.3M, 25% EAFE Equity 20% Policy EM Equity 5% Cash 0% Canadian Fixed Income 30% U.S. Equity, $75.5M, 24% Canadian Equity, $61.9M, 20% U.S. Equity 25% Canadian Equity 20% 5.00% Asset Allocation vs. Policy 0% 2% 0.00% 0% 1% 1% 5.00% Cash 5% Canadian Fixed Income Canadian Equity U.S. Equity EAFE Equity EM Equity Infrastructure Note : Cash includes manager residual cash balances. Internal cash balance of $ 762 k and a positive currency hedging position of $ 1.4 mill 7
Endowment Currency Exposure as of June 30 th, 2014 100.00% 90.00% 80.00% 70.00% Other 60.00% Swiss Franc 50.00% Japanese Yen British Pound 40.00% 30.00% Canadian Dollar, 45.9% Canadian Dollar, 72.4% Euro Currency U.S. Dollar Canadian Dollar 20.00% 10.00% 0.00% June 30th 2014 Unhedged June 30th 2014 Hedged Currency June 30 th, 2014 Unhedged % Gross Exposure (CAD in millions ) Hedge (CAD in millions) June 30 th, 2014 Hedged % Net Hedged Exposure (CAD in millions) Canadian Dollar 45.9 $144.7 $84.6 72.4 $229.4 U.S. Dollar 37.2 $117.3 -$57.1 19.0 $60.2 Euro Currency 6.6 $20.8 -$10.6 3.2 $10.2 British Pound 3.5 $11.0 -$5.4 1.8 $5.6 Japanese Yen 2.3 $7.3 -$3.6 1.2 $3.7 Swiss Franc 2.5 $7.9 -$4.0 1.2 $3.9 Other 2.1 $6.7 $-2.4 1.3 $4.1 8
Growth of Endowment Assets Net Annual Returns and Market Values at June 30 th, 2014 $M Endowment Market Value $350 $300 $250 $200 $150 $100 $50 8.5% $152.8 3.2% $161.0 13.6% $182.3 $166.7 $153.4-10.1% -8.8% 8.1% $181.8 15.6% $215.8 $226.4 1.4% 14.5% $262.9 19.4% $317.0 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Net Annual Returns $0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-15.0% Heritage General Total % CAD$ Return (Net) Total Endowment portfolio increased $ 54.1 M to $ 317.0 M consisting of: Net additions of $2.8 M Annual return (net of investment management fees) of 19.4% compares to 14.5 % for the same period in 2013. 9