The document discusses managing the endowment at the University of Kansas (KU). It provides background on KU's endowment, which stands at $1.5 billion and supports over 6,500 scholarships annually. The three main methods for generating investment returns are discussed as security selection, market timing, and asset allocation, with asset allocation noted as accounting for over 100% of returns. Various asset classes and their historical returns are presented, including alternatives. Principles of endowment investing emphasize holding a diversified portfolio with investments in private markets to increase long-term returns.

1. Endowment Investing
Managing the KU Endowment
James G. Clarke
Senior Vice President, Investments & Treasurer
March 2019

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
• $1.5 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% ($191m in FY 2018) vs. 17% from the
State of Kansas
• Cautionary Tales
– Yale University / Eagle Bank (1825) - Yale lost virtually its entire endowment
– 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)
6

7. Sources of Return
• Three ways to make money
– Security Selection
– Market Timing
– Asset Allocation
7

8. Security Selection
8
Source: CNBC

9. Market Timing (January 1980 – January 2019)
9
17.4%
16.0%
14.2%
11.4%
9.4%
8.0%
6.8%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%
Less 30 Worst Days
Less 20 Worst Days
Less 10 Worst Days
US Equities
Less 10 Best Days
Less 20 Best Days
Less 30 Best Days
Sources: S&P and Thomson Reuters Dotastream (137x)

10. 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
10
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

11. Asset Class Returns (2004 – Jan 2019)
11
Source: JP Morgan, January 2019
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.

12. Quantitative: Asset Allocation
12
return


13. Role in the Portfolio: Asset Allocation
13
Source: Adapted from Bridgewater Associates, LP

14. Peer Comparisons: Asset Allocation
14
Institution Equities Bonds
Private Equity/
Venture Capital Other
1
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

15. 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. 15

16. What are Alternatives?
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Source: Endowment Wealth Management

17. The Search for Alpha
17
Source: Cambridge Associates (593a)