annual report on the long-term investment program (for the ...– the portfolio’s diversification...

Submitted by: William Decatur, Vice President for Finance and Business Operations

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BUDGET AND FINANCE COMMITTEE AGENDA JANUARY 27, 2017

Annual Report on the Long-Term Investment Program

(For the Endowment Funds)

For the Fiscal Year Ending September 30, 2016

In accordance with the Board of Governors Statutes (WSUCA) 2.73.02, the Administration

presents the annual report (the Report) of our long-term investment program for the fiscal year

ending September 30, 2016. This Report was prepared by the Wayne State University

Foundation’s independent consultants, New England Pension Consultants (NEPC). The long-term

investment program includes all investment activity performed for the endowment fund by

external managers and represents approximately 99 percent of all the endowment resources. At

September 30, 2016, the fund was approximately $311 million. (Included in this amount is

approximately $1.7 million in gift annuity assets which were pooled with the endowment fund

investments effective October 1, 2005, in order to enhance their investment returns.) This Report

was presented to the Foundation’s Investment Committee (the Committee) on October 26, 2016

and accepted by the Committee. It was also presented to the Foundation Board on November 9,

2016, and was accepted by the Board.

In 2000, the University created the Wayne State University Foundation (the Foundation) as a

Michigan non-profit corporation. The Foundation was established by the University to assist it

with various functions with special emphasis on fundraising and oversight of the investment

portfolio for endowments. The Board of Governors approved the transfer of existing and future

endowments to the Foundation for holding and the investment thereof. The official date for the

transfer of the endowment assets was October 1, 2002, the beginning of a new fiscal year for the

University and the Foundation. The Foundation established its Investment Committee to

specifically oversee and manage the endowments, especially those held in the “Common Trust”

pool (the Pool) of assets. The Committee employs external investment managers to manage all of

the funds held in the pool.

The Foundation assets managed by external managers had a total investment gain of 9.3% for the

fiscal year 2016. This performance was better than the Investor Force peer performance

benchmark gain of 8.5% for the same period and ranked in the top 35th percentile of this peer

universe of endowments and foundations.


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(The peer universe database contains over $2 trillion in foundation, endowment and pension fund

assets and represents 20% of institutional assets in the country.) The portfolio’s diversification had

a positive impact in fiscal year 2016, particularly with regards to its allocations to international

equities, fixed income and hedge funds. However, peer performance was less than median for the

three, five and seven years, respectively (63rd, 67th and 73rd).

Last fall, the Investment Committee begun the process of evaluating and identifying the best

investment advisory model to be used for the investment and administration for the pool. The

Committee reviewed the advantages and disadvantages of the various models. These models

covered the continuum from using a non-discretionary investment advisor, as the Foundation had

been using, or to use a discretionary advisor, which is commonly referred to as the outsourced

chief investment officer (OCIO) model. With the OCIO model, the investment advisor is delegated

a major role in investment management (including asset allocation changes within investment

policy targets and investment manager selection and hiring) as well as portfolio

administration. The Foundation Board would retain authority for approving the pool’s investment

policy. The Investment Committee decided to use the OCIO model. It used a request for proposal

(RFP) process in order to select the investment advisor to be retained. As a result of the RFP

process, the Committee selected Strategic Investment Group (SIG) as the OCIO.

Since that time, the Foundation, working with SIG, has focused on reevaluating the pool’s strategic

asset allocation. In order to enhance the Pool’s investment return potential, the Investment

Committee recommended a number of updates to the Investment Policy asset allocation. The major

recommendations are to increase the use of active managers, hedge funds, private equity (and

reduced domestic equity exposure) and introduce the use of a portable alpha overlay strategy.

Liquidity levels would be reduced to enhance portfolio returns from the illiquidity premium. The

Foundation Board has approved these revisions to the asset allocation portion of the Investment

Policy. Over the next few months, the portfolio will begin to make the transition to the new asset

allocation and investment manager lineup. The transition to the new investment managers that use

liquid investment strategies will take place much sooner than will the transition to the investment

managers that have illiquid investments strategies.

In addition to the Report prepared by NEPC, attached is a list of the current members of the

Committee and a historical graph of the fiscal year end values of the endowment funds.


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Investment Committee of the Wayne State University Foundation

Members During Fiscal Year 2016

Paul A. Glantz, Chair

President, Proctor Financial Inc.

Chairperson, Wayne State University Foundation Investment Committee

Susan Burns

Vice President, Development and Alumni Affairs

President, Wayne State University Foundation (Starting February 2016)

Paul Cavazos

Chief Investment Officer, DTE Energy (Through May 2016)

William Decatur

Vice President for Financial and Business Operations

Treasurer and Chief Financial Officer

Chacona W. Johnson

Vice President, Development and Alumni Affairs

President, Wayne State University Foundation (Through February 2016)

Denise Lewis

Partner, Honigman, Miller, Schwartz and Cohn, LLP (Starting February 2016)

Howard M. Perlman

Senior Vice President, Friedman Integrated Real Estate Solutions

Leonard Smith, Chair of the Board of Trustees and Chief Investment Officer,

Ethel and James Flinn Family Foundation

Stephen Strome

Retired Chairman and Chief Executive Officer, Handleman Company


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WAY

NE STATE UNIVERSITY FOUNDATION

WAYNE STATE UNSITY FOUNDATION

WAYNE STATE UNIVERSITY F0U~~0ATION

l01Al CASH AND INVESTMENTS 10F THE CONSOLIDATED ENDOWMENT FUND flSCAL YEARS IEND1ING SEPTEMBER 30, 2007 TIHROVGH 2016

~ In ,.,Illian~

,35(1

$327 $325

$300

$275

$250 $244

$ill

,200

=•= $175 , 2007 2008 2009 2:010 20J1 .20l2 20.IJ 2:014 2:015 2:016

Wayne State University Foundation2016 Annual FoundationInvestment Performance ReportFiscal Year Ending September 30, 2016

Paul R. Kenney, Jr., CFA, PartnerOleksandra Goysan, Analyst

WAYNE STATE UNIVERSITY

• The US economy is nearly 7 years removed from the previous recession but the health of US consumers can extend the expansion

• US dollar strength is interconnected with US Federal Reserve policy– Fed must balance the path of future interest rate increases relative to the disruptive

effects of a strong dollar on global markets

• Influence of central bank policies in the developed world remain broadly supportive for risk assets but come with long term effects

– Path of Fed policy over next 2 years matters more than timing of the next Fed action– ECB and BoJ likely to maintain and extend accommodative policies

• Weak growth should not lead to a financial crisis in emerging markets– Negative asset returns reflect adjustments necessary for future economic success

• The Fed moved slower than expected in 2016; Appears more concerned with aggravating global financial risks and dollar strength

• Early 2016 US recession concerns have dissipated; We continue to believe the US economy is in an extended expansionary cycle

• Effectiveness of ECB and BoJ monetary policy has been questioned; We continue to believe central bank easing provides support for positive equity returns in Europe and Japan

Key Macro Themes From Beginning of the Year and Update as of September 30, 2016

2 September 30, 2016~ NEPC, LLC

• Equity market returns reversed course in 2016 for the fiscal year ending September

– S&P 500 was up 15.4% for the year as of September 30th

– Developed International (MSCI EAFE) recovered in 2016, earning 6.5% for the fiscal year period

– Emerging markets had the strongest rebound earning 16.8% for the fiscal year period, compared to a -19.3% loss for the fiscal year 2015

Equity Market Overview

Source: Standard & Poor’s, MSCI (fiscal years shown)

September 30, 2016

1.1

-9.4

-16.1

30.2

13.816.9

19.323.8

1.0

19.7

4.3 4.3

-0.6

-8.7

-19.3

15.4

6.5

16.8

‐30

‐20

‐10

0

10

20

30

40

S&P 500 MSCI EAFE Emerging Markets

Return (%

)

2011 2012 2013 2014 2015 2016

.

3

• • • • • •

~ NEPC, LLC

Fixed Income and Hedge Fund Market Overview

Source: Barclays Capital, Hedge Fund Research, Inc. (fiscal years shown)

• Returns in investment grade bonds, high yield and hedge funds were positive during the fiscal year 2016

- High-yield corporate bonds benefited from spreads narrowing below historical average levels; hedge funds results have been disappointing

5.3

1.8

-1.8

5.2

19.4

2.9

-1.7

7.1 6.5

4.0

7.26.2

2.9

-3.4

-0.1

5.2

12.7

0.6

‐10.0

‐5.0

0.0

5.0

10.0

15.0

20.0

25.0

Investment Grade Bonds High Yield Bonds Hedge Fund of Funds

Return (%

)

2011 2012 2013 2014 2015 2016

..

September 30, 20164

• • • • • •

~ NEPC, LLC

• Total assets at fiscal year end were $311.4 million, up $23.4 million compared to $ 288.0 million from the prior year

• The total return for the 2016 fiscal year was 9.3% net of fees, ranking in the 35th percentile(a rank of 1 is highest, 100 is lowest)

• Performance for the three and five years ranked in the 3rd quartile

• Seven year results are in the 73rd percentile with 10 year results in the second quartile (41st percentile)

• Active management was additive to performance over most time periods while slightly detracting from results over the three years

- Difference between Composite and Allocation index below represents the value added or subtracted by active management

2016 Performance Summary

September 30, 20165

1 Yr Rank 3 Yrs Rank 5 Yrs Rank 7 Yrs Rank 10 Yrs Rank

Composite 9.3% 35 4.1% 63 7.3% 67 6.3% 73 5.1% 41Allocation Index 8.9% 44 4.3% 57 7.2% 71 6.1% 81 4.4% 73Policy Index 10.6% 10 6.3% 8 9.0% 29 7.6% 39 5.4% 33Peer Median 8.5% 4.5% 8.0% 7.1% 5.0%

~ NEPC, LLC

• FYE 2013: Return of 9.5% vs. 10.4% vs. peer median


• FYE 2015: Return of -4.0% vs. -2.1% vs. peers median


• Returns in 2013 & 2014 consistent with expectations– The portfolio took less risk than peers (higher fixed income allocation) and

equity markets were generally strong

• Returns in 2015 were disappointing– Roughly half of the underperformance was driven by managers and half

through asset allocation – The portfolio’s diversification was a negative in 2015

• Favorable performance relative to peers in 2016 – International equity, fixed income and hedge fund allocations contributed

to outperformance, portfolio benefited from emerging market exposure

Overview of Recent Performance

September 30, 20166~ NEPC, LLC

Total Fund Asset Allocation

Opportunistic allocation is slightly below the policy range

All other asset classes are within their policy ranges

*”Target” is the Policy Target. “Range” is the Policy Ranges.

September 30, 20167

Equity - Domestic Equity - International Fixed Income - Domestic Balanced - GAA OpportunisticHedge FundsReal AssetsCash

Policy Current

I,,

18.0% 22.4 %

13.0%

14.0%

~ NEPC, LLC

CJ -CJ CJ -CJ --

40.0

Equity -Domestic

0.9

Actual vs. Policy Target

22.0 25.0 10.0 10.0

J_ 22.4 15.0 15.0 10.0 8.4

14.0

10.0 5.0 0.0 10.0 4.5 0.0

Equity - Fixed Balanced - Opportunis Hedge Real Cash

lnternat i ... Income ... GAA tic Funds Assets

Over/Under (%)

-0.3 4.4 1.0 -8.5 -1.5 3.4 0.6

- Target Range • Current

Asset Allocation Over Time

Hello my friend

• The allocations to Cash and Hedge Funds have decreased over time

• The Balanced – GAA and Real Assets segments of the portfolio have underperformed

Balanced - GAA

Real Assets

September 30, 20168

Cash

Hedge Funds

ro ::::, 60% t5 ~ C 0

~ (.)

_Q <( 40% ;;R. 0

2012

Equity - Domestic • Equity - International

~ NEPC, LLC

Asset Allocation History 5 Years Ending September 30, 2016

2013

D Fixed Income - Domestic D Balanced - GAA

2014

• Opportunistic • Hedge Funds

2015

• Real Assets • cash

2016

• Equity and credit markets have rallied during 2016, with emerging market securities having one of the strongest recoveries

• Specific manager highlights are noted below

– Domestic Small Cap: Ironbridge trailed the small cap index by 3.0%

– Emerging Markets: Aberdeen EM beat MSCI Emerging Markets by 200 bps, while Aberdeen EM Small Cap outperformed the small cap benchmark by 3.3%

– Fixed Income: Loomis, PIMCO and Monroe beat their benchmarks, while BlackRock trailed

– Global Asset Allocation (GAA): Both Wellington Opportunistic and GMO Benchmark Free, lagged their benchmarks by 1.1% and 4.9% respectively

– Hedge Funds: AQR Gibraltar beat the benchmark by 6.4%

– Real Assets: PIMCO All Asset exceeded its benchmark by 5.5% while Gresham trailed the Bloomberg Commodity Index by 2.6%

– Opportunistic: Collectively, the managers slightly outperformed their benchmark

Individual Manager Performance Summary

September 30, 20169

Notes:• Returns are net of fees.• Fiscal YTD represents one year period.

Fiscal YTD Fiscal

(%) YTD (%)

Com osite 9.3

Allocation Index 8.9 BlackRock Strategic Income Opportunities Fund 2.3

Over/Under 04 Barclays Aggregate 5.2

Policy Index 10.6 Over/Under -2.9

Equity • Domestic 14.7 Balanced - GAA 7.3

75% S&P 500 I 25% Russell 2000 15.5 65% MSC/ ACWI (Net) I 35% BC Agg 9.8

Over/Under -0.8 Over/Under -2.5

Rhumbline 15.3 Wellington Opportunistic 8.7

S&P 500 15.4 65% MSC/ ACWI (Net) I 35% BC Agg 98


lronBridge Small Cap 12.5 GMO Benchmark Free 6.2

Russell 2000 15.5 65% MSC/ ACWI (Net) I 35% BC Global Agg ill


SSgA S&P 500 Equal Weighted Index 164 CPI+ 5% (Unadjusted) 6.5

S&P 500 Equal Weighted 1.§J_ Private Equity/Opportunistic 1.2

Over/Under 0.3 Credit Suisse Event Driven Distressed 0.9

Over/Under 0.3 Equity - International 11.2

MSC/ ACWI ex USA 9.3 8% Flat Rate Index 8.0

Over/Under 1.9 Renaissance Venture Capital Fund II 2.5

Aberdeen EM 18.8 Perella Weinberg -5.1

MSC/ Emerging Markets 16.8 Marathon European Credit 5.7

CarVal 12.1 Over/Under 2.0

SSgA EAFE Index 6.3 Hedge Funds 6.9

MSCIEAFE 6.5 AQR Gibraltar Fund 6.9

Over/Under -0.2 HFRI Fund of Funds Composite Index 0.5

Aberdeen EM Small Cap 15.9 Over/Under 64

Real Assets 9.9 MSC/ Emerging Markets Small Cap 12.6

Over/Under 3.3 PIMCO All Asset 13.6

Fixed Income - Domestic 6.1 PIMCO All Asset Index §J_

Loomis Sayles Fixed Income 9.7 Over/Under 5.5

Barclays Aggregate 5.2 Gresham ETAP Fund LLC -5.2

Over/Under 4.5 Bloomberg Commodity Index -2.6

PIMCO Low Duration Fund 24 Over/Under -2.6

Barclays 1-3 Yr Govt/Credit 1.3 Cash 0.8

Over/Under 1.1 Money Market 0.0

Monroe Capital Senior Secured Direct Loan Fund 10.2 PIMCO Short-Term Fund 2.6

S&P!LSTA US Leveraged Loan 5.5 Ford Interest Rate Advantage Demand Note 1.1

Over/Under 4.7

~ NEPC, LLC

Appendix: Manager Historical Performance and Disclosure

~ NEPC, LLC

Investment Manager Allocations

September 30, 201611

Market Value % of ($) Portfolio

Composite 311,419,415 100.0

Equity - Domestic 86,909,858 27.9

Rhumbline 30,522,497 9.8

lronBridge Small Cap 29,439,634 9.5

SSgA S&P 500 Equal Weighted Index 26,947,727 8.7

Equity - International 45,660,602 14.7

Aberdeen EM 10,678,804 3.4

SSgA EAFE Index 24,139,971 7.8

Aberdeen EM Small Cap 10,841,827 3.5

Fixed Income - Domestic 69,840,628 22.4

Loomis Sayles Fixed Income 25,450,619 8.2

PIMCO Low Duration Fund 9,937,022 3.2

Monroe Capital Senior Secured Direct Loan Fund

10,905,878 3.5

BlackRock Strategic Income Opportunities 23,547,110 7.6

Fund

Balanced - GAA 43,710,803 14.0

Wellington Opportunistic 19,525,682 6.3

GMO Benchmark Free 24,185,121 7.8

Private Equity/Opportunistic 13,897,132 4.5

Renaissance Venture Capital Fund II 364,282 0.1

Perella Weinberg 6,988,739 2.2

Marathon European Credit 2,278,206 0.7

CarVal 4,265,905 1.4

Hedge Funds 17,029,282 5.5

AQR Gibraltar Fund 17,029,282 5.5

Real Assets 26,222,948 8.4

PIMCO All Asset 21,681,677 7.0

Gresham ETAP Fund LLC 4,541,271 1.5

Cash 8,148,161 2.6

Money Market 5,059,523 1.6

PIMCO Short-Term Fund 1,833,696 0.6

Ford Interest Rate Advantage Demand Note 1,254,942 0.4

~ NEPC, LLC

PIMCO Low Duration Fund

3.2%

PIMCOAII Asset 7.0%

Perella Weinberg

2.2 %

Monroe Capital Senior

Secured Direct Loan

3.5 %

Money Markel 1.6 %

Marathon European

Credit 0.7%

Loomis Sayles Fixed Income

8.2 %

Iron Bridge Small Cap

9.5 %

Gresham ETAP Fund LLC

1.5 %

GMO Benchmark Free

7.8 %

Ford Interest Rate

Advantage Demand Note

0.4 %

CarVal 1.4%

Current Allocation

f I

I J

PIMCO Short-Term Fund 0.6 %

Renaissance Venture Caprral Fund II 0.1 %

/

/

Rhumbline 9.8 %

SSgA EAFE Index 7.8 %

SSgA S&P 500 Equal We9hted Index 8.7%

Wellington Opportunistic 6.3%

Aberdeen EM 3.4%

Aberdeen EM Small Cap 3.5 %

AQR Gibraltar Fund 5.5 %

BlackRock Strategic Income Opportuntties Fund 7.6 %

Manager Return History and Ranks (1 is highest, 100 is lowest)

* Returns are net of fees

September 30, 201612

Fiscal 3 Yrs 5 Yrs Fiscal 3 Yrs 5 Yrs Fiscal 3 Yrs 5 Yrs YTD YTD YTD (%)

(%) (%) (%)

(%) (%) (%)

(%) (%)

Com osite 9.3 4.1 7.3 PIMCO Low Duration Fund 2.4 1.3 2.1 CarVal 12.1 Allocation Index 8.9 4.3 7.2 Barclays 1-3 Yr. Govt/Credit 1.3 1.1 1.0 eA US High Yield Fixed Inc Net Rank 10 Policy Index 10.6 6.3 9.0 eA US Short Duration Fixed Inc Net

21 56 18 Hedge Funds 6.9 6.6 6.2

lnvestorForce All E&F Net Rank 35 63 67 Rank AQR Gibraltar Fund 6.9 6.8 Equi!Y - Domestic 14.7 9.7 15.3 Monroe Capital Senior Secured Direct Loan

10.2 HFRI Fund of Funds Composite Index 0.5 2.2 3.2 75% S&P 500 I 25% Russell 2000 15.5 10.1 16.3 Fund eV Alt All Multi-Strategy Rank 37 38

eA All US Equity Net Rank 31 29 50 S&P/LSTA US. Leveraged Loan 5.5 3.4 5.2 Real Assets 9.9 -1.3 1.9 Rhumbline 15.3 11.0 16.3 eA US High Yield Fixed Inc Net Rank 48 PIMCO All Asset 13.6 2.0 4.9

S&P 500 15.4 11.2 16.4 BlackRock Strategic Income Opportunities 2.3 PIMCO All Asset Index 8.1 4.6 4.8

eA US Large Cap Core Equity Net Rank 14 20 25 Fund eA Global TAA Net Rank 7 71 59 lronBridge Small Cap 12.5 7.4 13.6

Barclays Aggregate 5.2 4.0 3.1 Gresham ETAP Fund LLC -5.2 -13.3 -9.4

Russell 2000 15.5 6.7 15.8 eA US Core Plus Fixed Inc Net Rank 99 Bloomberg Commodity Index -2.6 -12.3 -9.4 eA US Small Cap Core Equity Net Rank 59 46 80

Balanced - GAA 7.3 2.9 5.9 eA Commodities Net Rank SSgA S&P 500 Equal Weighted Index 16.4 10.7

65% MSC/ ACWI (Net) I 35% BC Agg 9.8 4.9 8.1 Cash 0.8 0.7 0.7 S&P 500 Equal Weighted 16.1 10.8 17.4 eA Global Balanced Net Rank 81 81 88 Money Market 0.0 0.0 0.0

eA US Large Cap Equity Net Rank 12 23 Wellington Opportunistic 8.7 4.4 6.7

eA US Cash Management Net Rank 99 99 99 Equity - International 11.2 0.1 6.3 65% MSC/ ACWI (Net) I 35% BC Agg 98 4.9 8.1 PIMCO Short-Term Fund 2.6 1.5

MSC/ ACWI ex USA 9.3 0.2 6.0 eA Global TAA Net Rank 44 27 38 eA US Cash Management Net Rank eA All ACWI ex-US Equity Net Rank 36 81 86

GMO Benchmark Free 6.2 1.6 Ford Interest Rate Advantage Demand Note 1.1 1.1

Aberdeen EM 18.8 -0.3 4.3 65% MSC/ ACWI (Net) I 35% BC Global

11.1 4.2 7.6 eA US Cash Management Net Rank 12 MSC/ Emerging Markets 16.8 -0.6 3.0

Agg CPI + 5% (Unadjusted) 6.5 6.1 6.3

eA Emg Mkts Equity Net Rank 34 63 48 eA Global TAA Net Rank 69 79

SSgA EAFE Index 6.3 0.3 7.2 Private Equity/Opportunistic 1.2 5.2

MSC/ EAFE 6.5 0.5 7.4 Credit Suisse Event Driven Distressed 09 1.6 5.4

eA All EAFE Equity Net Rank 60 78 78 8% Flat Rate Index 8.0 8.0 8.0

Aberdeen EM Small Cap 15.9 -0.3 6.9 Renaissance Venture Capital Fund II 2.5 -3.6

MSC/ Emerging Markets Small Cap 12.6 1.3 4.7 Perella Weinberg -5.1 3.5

eA Emg Mkts Small Cap Equity Net 34 97 17 eA US High Yield Fixed Inc Net Rank 99 82 Rank

Fixed Income - Domestic 6.1 3.2 5.0 Marathon European Credit 5.7 6.4

eA All US Fixed Inc Net Rank 39 60 35 eA All EAFE Equity Net Rank 66 11

Loomis Sayles Fixed Income 9.7 3.8 6.7 Barclays Aggregate 5.2 4.0 3.1

eA US Core Plus Fixed Inc Net Rank 8 79 5

~ NEPC, LLC

annual report on the long-term investment program (for the ...– the portfolio’s diversification...

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