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 fin...
Team Structure
Portfolio
Manager
Asset Portfolio Role of Asset Class
Shrinath
Devarajan
Private Equity High return potenti...
Investment Philosophy and
Objectives
• Risk budget: 60% of the long-term annualized
volatility of stocks or < 10%.
• Retur...
Investment Philosophy and
Objectives
• Superior risk-adjusted return versus our
peer group and in-line with our benchmark
...
Limitations
• Our endowment size can limit access to
managers who require large investment
minimums that we cannot meet.
•...
Addressing Limitations
 Use our strengths: macro, multi-asset
portfolio management
 Hire new managers
 Invest in indexe...
Market Outlook
Economic Outlook
More Volatility
• Potential Catalysts
for Higher Volatility
– End of QE – liquidity
coming out of the
markets
– Upcoming E...
Credit Cycle Outlook
Asset Class Analysis
Bonds and Cash
• Cash: Expected Return: 1.5% , Standard Deviation: 0.7%
– Overweight
• Bonds: Expected Return: 0%, Standar...
Stocks
• Stocks: Expected Return: 7.25%
, Standard Deviation: 18%
– Mid, approaching Late Cycle, Neutral
– Lower expected ...
Hedge Funds
• Hedge Funds: Expected Return: 8.1% , Standard Deviation: 8.5%
– Mid Cycle, Overweight
– Strong expected risk...
Private Equity
• Private Equity: Expected Return: 10.25% , Standard Deviation: 23%
– Mid to Late Cycle, Neutral
– Valuatio...
Real Estate (REITs)
• Real Estate: Expected Return: 10.5% ,
Standard Deviation: 20%
– Mid Cycle, Neutral/Slight overweight...
Commodities
• Commodities: Expected Return: 2%
, Standard Deviation: 18%
– Mid Cycle, Neutral
– Relative valuation cheaper...
Our Portfolio Recommendations
“The most stable and profitable portfolio that
can weather uncertain market situations.”
Portfolio Allocations
Commodities
7%
Hedge Funds
28%
Stocks
20%
Cash
15%
Bonds
10%
PE
10%
Real Estate
10%
Our Decision Making Strategy
WEATHER
MARKET CHANGES
HIGH SHARPE
RATIO
LOW
STANDARD 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 MARKETS
Strategic Investment Opportunity
Investment Problem:
Growth is slowing down around
the world and correlations
between asset classes have
increased.
Where e...
“True Emerging Markets of Today”
• Frontier Country
classification determined
by:
– Economic development –
Current status ...
Why Frontier Markets:
Diversification
• Source assets from
Stocks – both EM and
Developed
• Frontier countries have
low co...
Why Frontier Markets: Growth
• Higher Growth:
– Long-term growth opportunity – China 20 years ago
– Frontier Markets is fo...
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% ...
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Multi Asset Endowment Investment Strategy

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Multi Asset Endowment Investment Strategy

  1. 1. The Farhampton Endowment, University of New York Taposh Dutta Roy & Team
  2. 2. 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
  3. 3. Team Structure Portfolio Manager Asset Portfolio Role of Asset Class Shrinath Devarajan 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 Sethi Real Estate (REITs) Income, Total Return
  4. 4. 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.
  5. 5. 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.
  6. 6. 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
  7. 7. 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
  8. 8. Market Outlook
  9. 9. Economic Outlook
  10. 10. 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
  11. 11. Credit Cycle Outlook
  12. 12. Asset Class Analysis
  13. 13. 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%
  14. 14. 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%
  15. 15. 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
  16. 16. 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
  17. 17. 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%
  18. 18. 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%
  19. 19. Our Portfolio Recommendations “The most stable and profitable portfolio that can weather uncertain market situations.”
  20. 20. Portfolio Allocations Commodities 7% Hedge Funds 28% Stocks 20% Cash 15% Bonds 10% PE 10% Real Estate 10%
  21. 21. Our Decision Making Strategy
  22. 22. WEATHER MARKET CHANGES HIGH SHARPE RATIO LOW STANDARD DEV LOW FEES Decision Making Process
  23. 23. Risk Return History & Forecast
  24. 24. Portfolio Candidates 16% 20%
  25. 25. Risk Return History & Forecast contd. Current Portfolio. Historical Return & Volatility
  26. 26. Final Selection
  27. 27. Scenario & Stress Testing
  28. 28. FRONTIER MARKETS Strategic Investment Opportunity
  29. 29. 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?
  30. 30. “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
  31. 31. 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
  32. 32. 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
  33. 33. Thank You
  34. 34. 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

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