The Farhampton Endowment,

University of New York

Taposh Dutta Roy & Team

About Us

• We manage $200MM endowment fund for University of New York in Farhampton

• Mission: to generate significant financial resources for research and developing new programs

• Spending policy to our beneficiaries is 4.25%

• Annual gift inflows: Approximately 1% on average

• Investments through alumnus and other investment professionals

Team StructurePortfolio Manager

Asset Portfolio Role of Asset Class

ShrinathDevarajan

Private Equity High return potential, Long term growth

Nate Hinton Equities High return potential, Long term growth

Mohi Pillai Hedge Funds Strong risk-adjusted returns, “Absolute” Returns / Downside Protection, Diversification

Tabitha Lay

Cash Liquidity, Risk reduction

Bonds Risk Reduction, Diversification, Deflation hedge.

Taposh Dutta Roy

Commodities Diversification, Inflation hedge, Global growth bet

Gaurav SethiReal Estate(REITs)

Income, Total Return

Investment Philosophy and

Objectives• Risk budget: 60% of the long-term annualized

volatility of stocks or < 10%.

• Returns: 7% Spending policy (4.5%) + projected average inflation

over next 5 years (2.5%)

• Outperform our peer group, the 2013 NACUBO-COMMONFUND Study of Endowments $101-$500MM Asset Allocation - 46% stocks, 15% bonds, 8% private

equity, 19% hedge funds, 4% commodities, 3% real estate, and 5% cash.

Investment Philosophy and

Objectives

• Superior risk-adjusted return versus our

peer group and in-line with our benchmark

• Framework: mean-variance analysis to

estimate expected risk and return profiles.

• Test the sensitivity of results to changes in

input assumptions.

Limitations

• Our endowment size can limit access to

managers who require large investment

minimums that we cannot meet.

• Limited human resources and time.

• Individual security selection is not our

strength

Addressing Limitations

Use our strengths: macro, multi-asset

portfolio management

Hire new managers

Invest in indexes to gain specific portfolio

exposures rather than managing the portfolio

ourselves bottom up.

Use alumni and connections

Invest in Private Equity and Hedge Funds

that have smaller minimum investments

Market Outlook

Economic Outlook

More Volatility

• Potential Catalysts

for Higher Volatility

– End of QE – liquidity

coming out of the

markets

– Upcoming Elections

– China Recession

and/or credit crisis

driven by real estate

bubble

– Declining profits

Credit Cycle Outlook

Asset Class Analysis

Bonds and Cash

• Cash: Expected Return: 1.5% , Standard Deviation: 0.7%

– Overweight

• Bonds: Expected Return: 0%, Standard Deviation: 3.5%

– Late Cycle, Underweight

• Interest rate movement & economic or geopolitical shocks

• Potential beginning of a bear market in bonds

Barclays Aggregate Bond Index Duration 5.2 years

As of 5/30/2014

30day

SEC Yield 2 %

6/2014 -

6/2015

6/2015-

6/2016

6/2016-

6/2017

6/2017-

6/2018

6/2018-

6/2019

Expected Fed Funds Rate Increase 0 0.5 0.75 1 1

Total Return

Contribution

Income 2.00% 2.50% 3.25% 4.25% 5.25% 3.45%

Return from Duration 0.00% -2.60% -3.90% -5.20% -5.20% -3.38%

Return from Supply/Demand 2.00% 2.00% 1.00% -2.40% -3.00% -0.08%

Total 4.00% 1.90% 0.35% -3.35% -2.95%

Expected Return 0%

Standard Deviation 3.15%

Stocks

• Stocks: Expected Return: 7.25% , Standard Deviation: 18%

– Mid, approaching Late Cycle, Neutral

– Lower expected returns vs. history, higher volatility

• Expected Return Stocks = Projected Equity Risk Premium + Expected Return Bonds + Expected Return of Cash

– = 5.75% + 0% + 1.5% = 7.25%

• Standard Deviation = S&P 500 20yr Ann. Volatility (ending 1Q 2014) + Add’l Risk Factor

– = 16.9% + 1.1% = 18%

Hedge Funds

• Hedge Funds: Expected Return: 8.1% , Standard Deviation: 8.5%– Mid Cycle, Overweight

– Strong expected risk adjusted returns vs. other asset classes in volatile environments

• more investment tools to be able to generate strong alpha vs. the market, using leverage, long/short capabilities, and derivatives

• Standard Deviation = HFRI Composite Index 20yr Ann. Volatility = 8.5%

• We project hedge funds will have similar volatility to 20 year average

HFRI Fund Weighted Composite Risk Free Rate 3.5 5 yr projected avg

As of 5/30/2014 Beta 0.65

[E]x = Risk free rate + Beta (Rm-Rf) + Alpha Equity Risk Premium 5.75

Alpha Assumption 3.1

Expected Return 8.1

Private Equity

• Private Equity: Expected Return: 10.25% , Standard Deviation: 23%– Mid to Late Cycle, Neutral

– Valuations getting richer in certain sectors, increasing LBO deals and rising debt levels

– Still opportunity in healthcare and energy sectors, internationally

• Illiquidity premium: 3.5%, adjusted returns -0.5% for “pooled average” returns

• Standard Deviation = Projected StdDev of Stocks + Illiquidity Premium + Add’l Adjustments (higher than average expected market volatility)

– = 18% + 3.5% + 2.5% = 23%

Cambridge Associates Pooled Average Stocks Expected Return 7.25

As of 5/30/2014 Iliquidity Premium 3.5

[E]x = Stock Return + Illiquidity Premium + Adjustments Adjustments -0.5 Pooled average

Expected Return 10.25

Real Estate (REITs)

• Real Estate: Expected Return: 10.5% , Standard Deviation: 20%

– Mid Cycle, Neutral/Slight overweight

– Valuations a bit rich in REITs, sensitive to interest rates

– Strong real estate demand – can potentially slow, need for income, inflation

– Fannie and Freddie Implications

• Expected Return = FTSE NREIT US REIT Index Ann. Return Last 5 yrs (Q2 2009 – Q1 2014) – Adjustments for slower growth

– = 17.1% - 6.6% = 10.5%

• Standard Deviation = FTSE NREIT US REIT Index 20yr Ann. Volatility = 20%

Commodities

• Commodities: Expected Return: 2% , Standard Deviation: 18%

– Mid Cycle, Neutral

– Relative valuation cheaper than other asset classes

– Worried about slowdown in emerging markets – affects demand

– Uncertainty about Inflation and global demand = higher volatility

• Expected Return = Expected Cash Return + Commodity Risk Premium

– = 1.5% + 0.5% = 2%

• Standard Deviation = DJ Spot Return Index 20yr Ann. Volatility (ending 1Q 2014) + Adjustments

– = 16.7% + 3.3% = 18%

Our Portfolio Recommendations

“The most stable and profitable portfolio that

can weather uncertain market situations.”

Portfolio Allocations

Commodities7%

Hedge Funds 28%

Stocks20%

Cash15%

Bonds10%

PE10%

Real Estate10%

Our Decision Making Strategy

WEATHER MARKET CHANGES

HIGH SHARPE RATIO

LOWSTANDARD DEV

LOW FEES

Decision Making Process

Risk Return History & Forecast

Portfolio Candidates

16% 20%

Risk Return History & Forecast contd.

Current Portfolio.

Historical Return & Volatility

Final Selection

Scenario & Stress Testing

FRONTIER MARKETSStrategic Investment Opportunity

Investment Problem:

Growth is slowing down around

the world and correlations

between asset classes have

increased.

Where else can we find growth

AND diversification, that’s

liquid?

“True Emerging Markets of Today”

• Frontier Country classification determined by:

– Economic development –Current status and the sustainability of economic development in each country

– Market size and liquidity –Aggregate size of the equity market and minimum investability requirements for each security

– Accessibility to offshore investors – International investors’ ability to invest in each market

Why Frontier Markets:

Diversification• Source assets from

Stocks – both EM and Developed

• Frontier countries have low correlations to each other and other asset classes– 0.59 correlation to S&P

500 vs. Emerging Markets 0.89 vs. S&P 500

• Risks: Heightened idiosyncratic and country specific risks

Why Frontier Markets: Growth

• Higher Growth: – Long-term growth opportunity – China 20 years ago

– Frontier Markets is forecasted to be among the world’s fastest growing economies

– The region represents 30% of global population

– Unlike the developed markets, many of them are young and could be consumers of the future

Thank You

Expected Returns and Standard

Deviations

Cash 1.5% 0.7% n/a Overweight

Bonds 0.00% 3.2% Late Underweight

Hedge Funds 8.1% 8.5% Mid Overweight

Real Estate (REITs) 10.5% 20% Mid Overweight

Stocks 7.25% 18% Mid to Late Neutral

Commodities 2.00% 18% Mid Neutral

Private Equity 10.25% 23% Mid - Late Neutral

View

Long Term Risk and

Return Assumptions

Expected

Return

Annual

St. Dev. Stage of

Cycle