This document provides an overview and agenda for a presentation on fixed income and endowment portfolio management. It discusses the role of bonds in a portfolio, focusing on providing defense, liquidity and yield. It notes that bond returns have diminished with low yields. It then explores alternative credit strategies like direct lending, asset-based lending and collateralized loan obligations (CLOs) as higher returning alternatives. CLOs in particular are discussed, showing their historical returns have been higher than bonds.

1. Fixed Income and Endowment
Portfolio Management
James G. Clarke
November 17, 2020

2. Agenda
• Intro to KU Endowment
• Investment Grade Fixed Income
– Role in the Portfolio: Defense, Liquidity, Yield
– Rates Near Zero…so now what?
• Alternative Credit
– Direct Lending
– Asset-based lending
– CLOs
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
• $1.7 billion in long-term investments + >$400 million
in ‘short-term’ portfolio
– Provides >$170 million a year to support KU
– ~6% of KU’s total budget vs. ~16% from the State
3

4. Role in the Portfolio
4
Source: Adapted from Bridgewater Associates, LP

5. Bond Flavors: From Mild to Jabanero
PotentialReturn
Credit risk / correlation to equities
Protection
• Treasuries
• TIPS
• Other Government
Securities (including
non-US)
• Highest quality and
liquidity
• Lower expectedreturns
• Effective protection in a
downturn
Core Investment
Grade Credit
• Investment Grade Credit
• Mortgage-backed(MBS),
Asset-backed (ABS), and
Commercial Mortgage
backed (CMBS)
securities
• High quality bonds,
strong liquidity
• Higher yieldsthan
treasuries
• Modest increase to
volatility and equity
correlation
Private/illiquid
Credit:
• Direct lending
• Special Situations
• Distressedfor Control
• Trading distressed
• Higher returning,
illiquid.
• Serves different purpose
than Fixed Income
allocation
• Often part of Diversifiers
or Private Equity
allocation
Below-Investment
Grade Credit
• High Yield Bonds
• Senior securedfloating
rate debt (Bank Loans)
• EM Debt
• Increased potential for
yield and total return
• Greater potential for
default
• Significant correlation
to equities, particularly
in down markets

6. Endowments Own Few Bonds
6
Source: NACUBO-CommonFund Study of Endowments, 2019
• Large endowments own fewer bonds, more alternatives
• Smaller endowments own more bonds, fewer alternatives

7. Role of the Bond Allocation
• Defense against equity market corrections or economic
slowdowns
– This primarily comes in the form of government bonds, with
intermediate to long duration

8. Role of the Bond Allocation
8
Source: PIMCO

9. Role of the Bond Allocation
• Defense against equity market corrections or economic
slowdowns
– This primarily comes in the form of government bonds, with
intermediate to long duration
• Liquidity in nearly any environment
– High quality bonds continue to show strong liquidity…recently aided
by the Fed
– Low quality bonds are generally less liquid, more volatile

10. Role of the Bond Allocation
• Defense against equity market corrections or economic
slowdowns
– This primarily comes in the form of government bonds, with
intermediate to long duration
• Liquidity in nearly any environment
– High quality bonds continue to show strong liquidity…recently aided
by the Fed
– Low quality bonds are generally less liquid, more volatile
• Source of yield
– Increasing yield generally comes with increased credit risk and
volatility. As you move down the credit (quality) ladder, there is also
increasing correlation to equity markets

11. Now What?
Return prospects have diminished across all fixed income sectors
– Yields are near all time lows for Treasuries, with little room for further
decline
– Spreads have narrowed since blowing out in March, but are more
attractive than they were in last year
11
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
rate
End of the >30 Year Bond Bull?
Source: S&P Capital IQ

12. Bonds Under Stress
2020 CO VID-19 Q 3 2011
February 19,2020 -M arch 23,2020 July 1,2011-Septem ber30,2011
2008 GREAT RECESSIO N PO ST DO T-CO M BUBBLE CRASH
O ctober7,2007 -M arch 9,2009 Septem ber1,2000 -O ctober9,2002
-47.77
29.23 23.56 23.27 23.22 22.10 20.32
-9.51
S&P 500 L-T
Treasury
Int. Gov. Int.
Gov/Credit
Agg. Bond MBS Corp. High Yield
-55.35
21.32 13.18 8.35 7.22 12.95
-5.92 -28.50
S&P 500 L-T
Treasury
Int. Gov. Int.
Gov/Credit
Agg. Bond MBS Corp. High Yield
-14.01
24.66 3.19 2.40 3.82 2.36 2.85
-6.06
S&P 500 L-T
Treasury
Int. Gov. Int.
Gov/Credit
Agg. Bond MBS Corp. High Yield
-33.83
12.74
3.53 1.30
-0.94
1.16
-12.28
-20.76
S&P 500 L-T
Treasury
Int. Gov. Int.
Gov/Credit
Agg. Bond MBS Corp. High YieldAgg. Bond Agg. Bond
Agg. Bond Agg. Bond
Source: Cambridge Associates

13. How Will I.G. Bonds Perform Next Time?
13
Source: PIMCO

14. Are “Hedge Funds” a Bond Substitute?
14
Asset Class (Inception)
Trailing
3-yr
Trailing
5-yr
Trailing
10-yr
Since
Inception
Trailing
10-yr
Vol
Trailing
10-yr
Beta
Total Bonds/Cash
(6/30/92) 3.9% 3.7% 2.5% 6.1% 4.5% 0.04
Total Stocks
(6/30/92) 4.9% 9.1% 8.5% 9.1% 15.7% 1.00
Total Hedge Funds
(6/30/04) 6.6% 5.1% 4.8% 5.0% 6.0% 0.33
Source: KU Endowment

15. Role for Extra-Spicy?
PotentialReturn
Credit risk / correlation to equities
Protection
• Treasuries
• TIPS
• Other Government
Securities (including
non-US)
• Highest quality and
liquidity
• Lower expectedreturns
• Effective protection in a
downturn
Core Investment
Grade Credit
• Investment Grade Credit
• Mortgage-backed(MBS),
Asset-backed (ABS), and
Commercial Mortgage
backed (CMBS)
securities
• High quality bonds,
strong liquidity
• Higher yields that
treasuries
• Modest increase to
volatility and equity
correlation
Private/illiquid
Credit:
• Direct lending
• Special Situations
• Distressedfor Control
• Trading distressed
• Higher returning,
illiquid.
• Serves different purpose
than Fixed Income
allocation
• Often part of Diversifiers
or Private Equity
allocation
Below-Investment
Grade Credit
• High Yield Bonds
• Senior securedfloating
rate debt (Bank Loans)
• EM Debt
• Increased potential for
yield and total return
• Greater potential for
default
• Significant correlation
to equities, particularly
in down markets

16. Direct Lending
16
Source: Oaktree Capital Management (circa 2017)

17. Asset-based Lending
17
Redacted
Source: Real Estate Loan Manager

18. Collateralized Loan Obligations (CLOs)
18
Source: HPS Investment Partners

19. Collateralized Loan Obligations (CLOs)
19
Range of IRRs for CLO Equity of U.S. CLOs by Vintage Year1
35.1%
28.0%
21.4%
28.9%
42.2%
36.7%
25.6%
19.0%
11.7% 11.1%
16.9%
20.0%
22.1%
19.5%
13.5%
5.6%
7.1%
14.0%
17.0%
18.5%
12.2%
8.1%
2.0%
3.6%
10.0%
13.1%
15.6%
6.5%
(0.6%)
(17.8%)
(8.4%)
(4.4%)
(5.8%)
(11.8%)
(3.9%)
-20%
-10%
0%
10%
20%
30%
40%
50%
2002
(15)
2003
(34)
2004
(51)
2005
(81)
2006
(148)
2007
(135)
2008
(18)
CLOEquityIRR(%)
CLO Vintage
(# Vintage)
75th Percentile Median 25th Percentile
Source: Eagle Point Credit