I-4 Office of the Treasurer TO MEMBERS OF THE COMMITTEE ON INVESTMENTS / INVESTMENT ADVISORY GROUP: DISCUSSION ITEM For Meeting of February 22, 2012 ASSET ALLOCATION REVIEW FOR THE GENERAL ENDOWMENT POOL EXECUTIVE SUMMARY Per a request of the Chair of Committee on Investments at the December 2011 meeting, the Chief Investment Officer (CIO) will present recommendations for the General Endowment Pool (GEP) asset allocation. If the Committee agrees with these recommendations, the CIO will present revised Investment Guidelines and a detailed transition plan at the May 2012 Committee on Investments meeting. BACKGROUND An analysis of asset allocation strategy for the endowment includes the following elements: 1. Review GEP investment objectives: in order to preserve and, if possible, increase the inflation-adjusted value of the assets over time, a return of approximately 8.00 percent per annum is required. 2. Review relationship of risk and expected return: a given return objective implies a given level of investment risk, as it is generally acknowledged that investors demand higher expected returns to hold investments with higher potential for loss. 3. Review GEP liquidity requirements: the current asset allocation - and the balance of liquid and illiquid assets - is sufficient to insure adequate liquidity, given that outflows (distributions) exceed inflows (new gifts) by a factor of at least 2x. However, a significant increase to illiquid assets will stretch this balance. 4. Review GEP asset allocation relative to peers: compared to a group of large private and public endowments, the GEP is highest in public equity, second highest in fixed income, median in hedge funds, near the bottom in private real estate, and lowest in private equity. Given the significantly higher risk involved in illiquid, private assets, the Committee needs to consider if the allocations of peer endowments are consistent with the Regents’ historically conservative risk tolerance.
COMMITTEE ON INVESTMENTS/ INVESTMENT ADVISORY GROUP February 22, 2012
5. Recommendations: a. Increase Hedge Fund type strategies (Cross Asset Class) from 2 percent to 5 percent. b. Differentiate the Absolute Return Strategies pool between two broad uses of hedge fund strategies: as diversifiers / risk reducers and as equity substitutes / return enhancers. Allocate a higher proportion of return enhancing strategies to the GEP than to the UCRP, thus increasing the risk profile and expected return of the GEP.