March 31, 2015 Endowment Quarterly Investment Report

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Performance Review

University of Guelph Endowment Funds

Prepared by:

Pavilion Advisory Group Ltd.
1250 René-Lévesque Blvd. West, Suite 4030
Montreal, Quebec
H3B 4W8

Endowment Funds Results Overview

(Gross Returns for the 12 months ended March 31st, 2015)

The Total Endowment Funds returned 13.1% for the last 12 months versus 15.2% for the benchmark.

Canadian Equity U.S. Equity
  • The Canadian equity portfolio returned 3.6% over the past year, 3.3% below the return of the S&P/TSX index.
  • Both the plan's Canadian equity managers (Burgundy, Sionna) underperformed the index for the year.
  • The lack of dedicated small cap exposure helped returns as small caps underperformed large caps by more than 15% over the past year.
  • U.S. equity markets performed extremely well in Canadian dollar terms with a 1-year return of 29.4% for the S&P500.
  • The Endowment's U.S. equity investments performed well with a return of 30.6%, outperforming the benchmark by 120 basis points.
  • While the U.S. large cap manager (Fiduciary) was effectively in line with the S&P500 index, significant value was added versus their respective indexes by the small-(7.3%) and mid-cap (8.1%) portfolios managed by Wedge.
Non-North American Equity Fixed Income
  • In Canadian dollars, non-North American equity underperformed the U.S. but outperformed Canada with a return of 13.7% for developed markets and 15.7% for emerging markets.
  • The developed markets managers (with 20.6% of the total endowment funds) performed poorly in the past year. Both LSV and Tweedy Browne underperformed the MSCI EAFE benchmark by 2.2%.
  • The emerging markets manager (LSV) performed slightly better than the MSCI Emerging Markets index over the past year and two years.
  • The Canadian fixed income portfolio is indexed to the FTSE TMX Universe and, as expected, closely matched its return of 10.3%
  • The cash return was negative due to losses on internal foreign exchange transactions.
  • The Infrastructure portfolio managed by Brookfield outperformed its index by 20.2% in one year. There is a large difference between the gross and net of fees returns due to accounting adjustments that occurred in August 2014.
  • Currency hedging, which is implemented for risk control rather than to generate returns, was a drag on performance over the past year as it cost the portfolio 240 basis points.

Total Endowment Portfolio Vs Endowment Policy Benchmark

As of March 31, 2015 (Gross of Fees, Annualized for Periods over 1 year)

Vertical bar graph illustrating total endowment portfolio vs endowment policy benchmark as of March 31, 2015 gross of fees annualized for periods over one year. Quarter to date total endowment return 6.1% benchmark return 7.9%. One year total endowment return 13.1% benchmark return 15.2%. Three year total endowment return 14.2% benchmark return 13.8%. Five year total endowment return 11.6% benchmark return 10.7%. Ten year total endowment return 6.9% benchmark return 6.8%.

Returns are presented gross of fees in CAD
Endowment Policy Benchmark: 30% FTSE TMX Bond Universe + 20% S&P/TSX Composite + 25% S&P 500($CAD) + 20% MSCI EAFE Net ($CAD) + 5% MSCI Emerging Markets Index.

Annualized Asset Class Performance

As of March 31, 2015 (Gross of Fees)

   
  Allocation Performance(%)
Market Value ($) % of Portfolio Year to Date 1 Year 2 Years 3 Years 4 Years 5 Years 6 Years 7 Years 8 Years 9 Years 10 Years
Canadian Equity 63,890,641 18.5 1.9 3.6 11.6 12.4 7.3 9.2 9.4 6.1 5.4 6.3 7.8
S&P/TSX Composite Index     2.6 6.9 11.4 9.6 4.4 7.4 12.5 4.6 4.6 5.3 7.4
Relative Performance     -0.7 -3.3 0.2 2.8 2.9 1.8 -3.1 1.5 0.8 1.0 0.4
US Equity 94,190,333 27.3 11.9 30.6 31.0 27.8 22.3 21.7 23.3 15.4 10.1 10.5 9.6
S&P 500     10.4 29.4 30.8 25.7 22.0 19.6 19.9 12.3 8.3 8.6 8.5
Relative Performance     1.5 1.2 0.2 2.1 0.3 2.1 3.4 3.1 1.8 1.9 1.1
Non-North American Equity 70,867,809 20.6 12.6 12.0 20.5 19.3 15.0 13.7 15.9 7.9 4.7 5.7 6.6
MSCI EAFE (net)     14.7 13.7 20.4 18.0 12.3 10.9 13.1 4.7 2.2 3.9 5.4
Relative Performance     -2.1 -1.7 0.1 1.3 2.7 2.8 2.8 3.2 2.5 1.8 1.2
Emerging Markets Equity 18,386,747 5.3 9.6 16.1 11.7 10.1 6.1 N/A N/A N/A N/A N/A N/A
MSCI Emerging Markets Index     11.9 15.7 11.4 8.9 5.0 6.6 12.5 4.0 4.6 6.1 9.3
Relative Performance     -2.3 0.4 0.3 1.2 1.1 N/A N/A N/A N/A N/A N/A
Canadian Fixed Income 83,118,207 24.1 4.2 10.4 5.6 5.4 6.5 6.3 6.6 6.2 6.0 5.9 5.7
FTSE TMX Universe Index     4.2 10.3 5.4 5.1 6.3 6.0 5.9 5.8 5.8 5.7 5.6
Relative Performance     0.0 0.1 0.2 0.3 0.2 0.3 0.7 0.4 0.2 0.2 0.1
Infrastructure 13,739,164 4.0 14.0 26.5 N/A N/A N/A N/A N/A N/A N/A N/A N/A
CPI + 5%     1.7 6.3 6.4 6.3 6.5 6.8 6.8 6.7 6.6 6.7 6.8
Relative Performance     12.3 20.2 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Internal Cash 779,551 0.2 -1.8 -2.6 -2.6 -1.8 0.3 2.0 1.6 1.7 N/A N/A N/A
FTSE TMX Canada 91 Day T-Bill - C$     0.2 0.9 1.0 1.0 1.0 0.9 0.8 1.1 1.5 1.8 1.9
Relative Performance     -2.0 -3.5 -3.6 -2.8 -0.7 1.1 0.8 0.6 N/A N/A N/A
Total Endowment (Net of Fees) 344,500,014 100.0 5.9 12.3 13.9 13.6 10.8 11.0 13.2 7.8 5.4 6.1 6.4
Endowment Policy Benchmark     7.9 15.2 16.0 13.8 11.0 10.7 12.4 6.9 5.4 6.0 6.8
Relative Performance     -2.0 -2.9 -2.1 -0.2 -0.2 0.3 0.8 0.9 0.0 0.1 -0.4
Total Endowment (Gross of Fees) 344,500,014 100.0 6.1 13.1 14.5 14.2 11.4 11.6 13.7 8.4 5.9 6.6 6.9
Endowment Policy Benchmark     7.9 15.2 16.0 13.8 11.0 10.7 12.4 6.9 5.4 6.0 6.8
Relative Performance     -1.8 -2.1 -1.5 0.4 0.4 0.9 1.3 1.5 0.5 0.6 0.1
Total Endowment ex. Currency Overlay 344,972,452 100.1 8.2 15.5 17.1 15.9 12.7 N/A N/A N/A N/A N/A N/A
Endowment Policy Benchmark     7.9 15.2 16.0 13.8 11.0 10.7 12.4 6.9 5.4 6.0 6.8
Relative Performance     0.3 0.3 1.1 2.1 1.7 N/A N/A N/A N/A N/A N/A
Effect of Passive Currency Hedge -472,438 -0.1 -2.1 -2.4 -2.6 -1.7 -1.4 N/A/ N/A N/A N/A N/A N/A

Endowment Policy Benchmark: 30% FTSE TMX Bond Universe + 20% S&P/TSX Composite + 25% S&P 500 ($CAD) + 20% MSCI EAFE Net ($CAD) + 5% MSCI Emerging Markets Index.

All returns are reported gross of fees in CAD except for the Total Endowment where returns are displayed both net and gross of fees. EAFE stands for Europe, Australasia and Far East.
Cash amounts and percentages presented exclude residual manager cash balances and currency overlay (currency hedging).

Performance Attribution

Total Endowment Funds vs Endowment Policy Benchmark
1 Year Ending March 31, 2015

Total endowment performance bar graph illustrating total endowment performance. Total endowment 13.07% total endowment policy benchmark 15.19% total value added negative 2.12%. Total value added: negative 2.12%. Bar graph illustrating total value added: negative 2.12%. FX Hedge, Other negative 2.48%. Manager Value Added negative 0.62% Asset Allocation 0.98%. Active Weights (Asset Classes) Bar graph illustrating average active weight. Internal cash 0.24% infrastructure 2.33% canadian fixed income negavtive 5.10% emerging markets 0.35% non north american equity negative 0.04% US equity 2.73% canadian equity negative 0.13%. Total Asset Allocations: 0.98%. Bar graph illustrating asset allocation value added internal cash negative 0.04% infrastructure 0.41%% canadian fixed income 0.24% emerging markets negative 0.02% non north american equity 0.00% US equity 0.37% canadian equity 0.02%. Total manager value added: negative 0.62%. Bar graph illustrating manager value added internal cash 0.00% infrastructure 0.00% canadian fixed income 0.03% emerging markets 0.04% non north american equity negative 0.35% US equity 0.37% canadian equity negative 0.71%.

Returns are presented gross  of fees in CAD
Endowment Policy Benchmark: 30% FTSE TMX Bond Universe + 20% S&P/TSX Composite + 25% S&P 500 ($CAD) + 20% MSCI EAFE Net ($CAD) + 5% MSCI Emerging Markets Index.
The Benchmarks do not assume currency hedging.
“Other” includes the effects of all other factors on the Total Endowment's relative returns, including rebalancing and residual trading activity.

Endowment Asset Mix

Actual Allocation vs Investment Policy Allocation
As of March 31, 2015

March 31, 2015: $344,500,014. Bar graph illustrating Endowment Asset Mix Canadian Equities $63,851,393 target allocation 20.0% actual allocation 18.5% allocation differences negative 1.5% US equities 82,990,893 target allocation 25.0% actual allocation 24.1% allocation differences negative 0.9% non north american equities $68,415,385 target allocation 20.0% actual allocation 19.9% allocation differences negative 0.01% emerging markets $18,386,747 target allocation 5.0% actual allocation 5.3% allocation differences 0.3% canadian fixed income 83,118,207 target allocation 30.0% actual allocation 24.1% allocation differences negative 5.9% infrastructure $13,303,577 target allocation 0.0% actual allocation 3.9% allocation differences 3.9% cash $14,433,812 target allocation 0.0% actual allocation 4.2% allocation differences 4.2%

Note: this actual allocation displays the aggregate managers' holdings regardless of their mandate: Cash includes internal cash directly owned by the Endowments and manager residual cash balances (data from CIBC Mellon).

Endowment Currency Exposure

As of March 31st, 2015

Stacked bar graph illustrating endowment currency exposure March 31, 2015 unhedged as detailed in the following table. Stacked bar graph illustrating endowment currency exposure March 31, 2015 hedged as detailed in the following table.

Currency March 31, 2015 Unhedged Gross Exposure (CAD) Hedge (CAD) March 31, 2015 Hedged Net Hedged Exposure (CAD)
Canadian Dollar 42.4% 146,263,460 102,060,166 72.1% 248,323,625
US Dollar 39.8% 137,428,488 -73,369,115 18.6% 64,059,373
Euro 6.8% 23,441,768 -11,520,606 3.5% 11,921,162
British Pound 3.6% 12,260,527 -6,256,273 1.7% 6,004,254
Swiss Franc 2.7% 9,453,673 -4,617,094 1.4% 4,836,579
Japanese Yen 2.5% 8,637,524 -4,237,517 1,3% 4,400,007
Other 2.2% 7,487,012 -2,531,998 1.4% 4,955,014

Note: The Net Hedged Exposure equals the fund's original currency exposure to its total investments (Gross Exposure) plus the currency hedge implemented by Mesirow, which is designed to protect the endowment fund from excessive foreign currency fluctuations.

Growth of Endowment Assets

Combined bar and line graph illlustrating year over year comparison of the March market values and net annual returns as of March 31, 2015. $M endowment market value Heritage and General for 2006 $166.5 2007 $186.9 2008 $170.8 2009 $138.5 2010 $179.6 2011 $215.1 2012 $227.4 2013 $263.8 2014 $306.5 2015 $344.5. Percentage Cad$ return net for 2006 9.5% 2007 12.0% 2008 negative10.3% 2009 negative19.2% 2010 24.4% 2011 11.9% 2012 2.9% 2013 13.0% 2014 15.4% 2015 12.3%.

Over the last 12 months the total Endowment portfolio increased $38.0 M to $344.5 M consisting of:

  • -Total contributions of $7.5 M and distributions of $7.0 M.
  • -1 year return (net of investment management fees) of 12.3% compared to 15.4% for 2014.