Endowment investing

1. Endowment Investing
Managing the KU Endowment

2. Goals
• What is an endowment? Why does it matter?
• Understand the three methods to generate returns
• Understand the historical importance of favoring
equities in generating returns
• Gain familiarity with various asset classes,
particularly alternative asset classes
2

3. KU Endowment
• Founded 1891
• Independent, fundraising and asset management
arm of KU
– Provides >6,500 scholarships a year
– Supports major capital projects – like Capitol Federal Hall
and ~2/3 of buildings on campus
• $1.35 billion in long-term investments + >$300
million in ‘short-term’ portfolio
3

4. What is an endowment?
• Very long-term focus – perpetual
• No shareholders (investors)
• University endowments have a higher purpose, can
generate loyal support
• Long-time horizon is nearly unique in the investment
world
4

5. Endowment Management
• Endowments support ~8% of university operating costs
– Ivy League endowments pay >25% of schools’ operating costs…with
some >50%
– KU Endowment pays for ~6%
• Cautionary Tales
– Yale University / Eagle Bank (1825) - Yale lost virtually its entire endowment
– University of Bridgeport (1992) – financial problems led to $100m infusion
from “Unification Church”
– Boston University / Seragen (1997) – Lost 18% of endowment ($84m) on a
single stock; S&P 500 rose 250% during same time period
– Harvard’s “Financial Meltdown” (2008-09) - $2.5 billion bond offering to meet
liquidity needs (Yale & Princeton forced to borrow, too)
Sources: Cambridge Associates; KU Endowment; Swensen, Pioneering Portfolio Management (2009); “Unification Church School on Campus Raises Alarms,” NY Times, Dec. 2, 1997;
“Loving a Stock, Not Wisely but too Well,” NY Times, Sept 20, 1998; “Harvard: the Inside Story of its Financial Meltdown,” Forbes, Feb. 26, 2009.

6. Investment Objectives
• Investment objectives should:
– Reflect the financial policy objectives of the institution
– Be clearly quantified
– Incorporate specific time horizons
– Be specified in real (inflation-adjusted) terms
• KU’s primary investment objective calls for annual
real total returns that at least equal total spending
(generally 5.5%), net of fees, over long time periods
(i.e. rolling 10 year periods)
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7. Sources of Return
• Three ways to make money
– Security Selection
– Market Timing
– Asset Allocation
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8. Security Selection
8
Source: CNBC

9. Market Timing
9
Missing the Best Days of the S&P 500: 20 Years (1996-2015)

10. Market Timing
10
Missing the Best Days of the S&P 500: 20 Years (1996-2015)
Return if invested all 5,036 days
Return if you missed the 40 best days

11. Asset Allocation
• Asset allocation accounts for >100% of the absolute level of
returns
• Three approaches to asset allocation
– 1) Quantitative
– 2) “Hedging” or “Role in the Portfolio”
– 3) Peer comparison
 All three methodologies are imperfect - limitations in the data
and markets are inherently uncertain
11
Sources: Ibbotson & Kaplan, “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?”, Financial Analysts Journal, Jan/Feb 2000 and
Brinson, Hood & Beebower, “Determinants of Portfolio Performance,” Financial Analysts Journal, Jan/Aug 1986

12. Asset Classes
12
Source: JP Morgan, July 31, 2016
Note: Asset allocation refers to 25% S&P 500, 10% Russell 2000, 15% MSCI EAFE, 5% MSCI EME, 25% Barclays Aggregate, 5% Barclays 1-3m Treasury, 5% Barclays High
Yield, 5% Bloomberg Commodities Index, and 5% NAREIT Equity REIT Index. Annual rebalancing.

13. Quantitative: Asset Allocation
13
return
σ

14. Role in the Portfolio: Asset Allocation
14
Source: Adapted from Bridgewater Associates, LP

15. Peer Comparisons: Asset Allocation
15
Institution Equities Bonds
Private Equity/
Venture Capital Other1
Bowdoin College 26.1 0.9 37.0 36.0
Yale University 18.6 4.9 46.5 30.0
Massachusetts Institute of Technology 35.0 6.0 34.0 25.0
University of Virginia 22.5 9.0 25.4 43.1
Princeton University 23.3 3.5 42.3 31.0
Dartmouth College 32.4 11.1 20.9 35.6
Williams College 24.0 8.2 24.7 43.1
University of Notre Dame 27.5 5.0 34.9 32.6
Duke University 34.0 3.0 27.0 36.0
Columbia University 26.3 2.8 26.4 44.5
Carnegie Mellon University 32.6 10.5 34.2 22.7
Rice University 31.4 6.6 25.6 36.5
Baylor College of Medicine 59.1 11.4 24.5 5.1
University of Pennsylvania 41.4 5.7 17.0 35.9
University of Tulsa 35.7 18.1 16.0 30.2
University of Minnesota Endowment 32.6 17.2 28.1 22.1
Stanford University 26.5 5.3 33.0 35.2
Middlebury College 28.0 8.0 24.0 40.0
Smith College 33.0 6.0 32.0 29.0
University of Richmond 30.2 4.4 20.1 45.3
Average (equal-weighted allocations) 31.0 7.4 28.7 32.9
Median 30.8 6.0 26.7 35.4
University of Kansas / KU Endowment 52.0 10.4 9.7 27.9
All Endowments >$1 billion
NACUBO (equal-weighted)
2
35.9 8.3 19.4 36.3
NACUBO (dollar-weighted)
2
32.0 7.0 26.0 35.0
Sources: NACUBO-Commonfund Study of Endowments, Standard & Poor's Money Market Directory, KU Endowment

16. Principles of Endowment Investing
• Invest in equities, because it is better to be an owner rather
than a lender.
• Hold a diversified portfolio, avoid market timing, and fine-
tune allocations at extreme valuations.
• Invest in private markets (“alternatives”) that have
incomplete information and illiquidity to increase long-term
incremental returns.
• Use outside managers except for all but the most routine or
indexed investments.
• Allocate capital to investment firms owned and managed by
the people actually doing the investing to reduce conflicts of
interest.
Source: Swensen, David. Pioneering Portfolio Management, 2009. 16

17. Growth Matters
17
Sources: Cambridge Associates / BoA/Merrill Lynch, Citigroup, Federal Reserve, Global Financial Data, S&P, US Dept of Labor

18. Growth Matters
18
Sources: Cambridge Associates / BoA/Merrill Lynch, Citigroup, Federal Reserve, Global Financial Data, S&P, US Dept of Labor
Note: equities in above note refers to S&P 500 and bonds refers to Barclays Aggregate
Over the last 15 years,
bonds have beaten
equities: 5.4% vs 4.1%

19. What are Alternatives?
19Source: Endowment Wealth Management

20. Role of Hedge Funds
Sources: Barclays, BofA Merrill Lynch, Cambridge Associates LLC, MSCI Inc., Frank Russell Company, and Thomson Reuters Datastream. MSCI data provided
"as is" without any express or implied warranties.
Notes: Cambridge Associates LLC's (CA) manager universe statistics are derived from CA's proprietary database covering investment managers.
Performance results are generally reported net of investment management fees and performance fees. Performance results do not include returns for
managers that exclude reserves (cash) from reported total return. Returns for inactive (discontinued) managers are included if performance is available for
the entire period measured. Average annual compound returns have been calculated from net quarterly returns. In many cases the net quarterly returns
include estimates of the annual performance-based fee. Since the performance-based fees are not actually paid until year-end, using actual net annual
returns to calculate the average annual compound returns would produce slightly different results.
Note: Slide reproduced from Cambridge Associates
Hedge fund risk/return characteristics by strategy – June 30, 2005 through June 30, 2015
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21. The Lure of Private Equity
¹Pooled end-to-end return, net of fees, expenses and carried interest.
Source: Cambridge Associates LLC Private Investments Database, Standard & Poor’s, MSCI, Inc. and Thompson Reuters Datastream. MSCI data provided “as is” without any
express or implied warranties.
Notes: Data as of 3/31/2015. Cambridge Associates Public Market Equivalent (PME) replicates private investment performance under public market conditions. The public index’s
shares are purchased and sold according to the private fund cash schedule, with distributions calculated in the same proportion as the private fund, and PME net asset value
(NAV) is a function of PME cash flows and public index returns.
Source: Slide reproduced from Cambridge Associates
C|A Global ex U.S. Developed Markets
Private Equity & Venture Capital Index¹ versus
Public Market Equivalent (PME)
C|A U.S. Private Equity & Venture Capital Index¹ versus
Public Market Equivalent (PME)
+ 232 bps
+ 366 bps
+ 112 bps
+ 749 bps
+ 668 bps
+ 456 bps
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22. Less Efficient → Opportunity for Alpha
22Source: Cambridge Associates