updated September 21, 2016
This presentation can be accessed anywhere at URL: bit.ly/EAC-003
EAC Update Archive
Endowment Advisory Committee: Chris Bittman, John Ege*, John Fenley*, Paul McPheeters*, Bryan Ritz and Minyoung Sohn with Mike Davis and Heather Miller as Ex Officio members. Our Investment Consultant is Paul Schreder of Ellwood Associates.
Executive Summary of the current Investment Policy Statement. Note that the Target Rate of Return is CPI +5%.
- June 30, 2016: $24,580,841 Year to date, CA +3.5% versus Policy Index of +1.4% and Peer Group +2.2%
- July 31, 2016: $25,165,931
- August 31, 2016 (preliminary): $26,673,427
CA ASSET ALLOCATION
(as of 8/31/16) Endowment Value $26,673,427
Since the last update: (1) Equity has been reduced from 58.9% to 55.6% (2) Fixed Income has been reduced from 25.3% to 20.4% (3) Alternatives have increased from 15.7% to 24.0%
COMMITTEE CONTINUES TO MOVE THE ENDOWMENT TO MORE DEFENSIVE POSTURE WITH A FOCUS ON U.S. STOCKS, CASH, FLOATING RATE SECURITIES and PURPOSE-SPECIFIC BETS IN "ALTERNATIVES" including MLPs, ENERGY & GOLD
Closer look at Equity allocation
Committee has been reducing exposure to Equity, which was weighted as high as 70% in 2015. By Geographic focus, Endowment remains heavily weighted to U.S. stocks and underweight Europe. Endowment is slightly overweight Emerging Markets.
We are using mostly passive strategies for U.S. and European Large Cap stocks while using Best-in-Class active managers for Asia-Pacific and Emerging Markets.
Closer Look at Fixed Income Allocation
CA's Fixed Income allocation is 50% cash and 50% floating rate securities (and therefore has very little exposure to "fixed" interest rates and therefore, the portfolio has relative little exposure to rising interest rates)
Closer Look at Alternatives Allocation
At the May 12th meeting, Committee voted to Eliminate the entire 8.2% position in BlackRock Strategic Partners, a fund of funds. Redemption notice was given and our investment will be priced on September 30, 2016 with Proceeds to be received in mid-October. Therefore, Endowment still has price exposure to this fund until September 30. Beginning October 1st, the Endowment's cash position will increase by 8% to 18%.
(Best Effort Assessment of the Current Investment Backdrop) INTEREST RATES HAVE NEVER BEEN LOWER
SINCE 1962, THE U.S. 10-YEAR BOND HAS NEVER TRADED AT A LOWER YIELD
How does the Fed impact the stock market? The Fed sets the price of money through the overnight lending rate, which is called the Fed Funds Rate. This overnight rate influence the cost of borrowing for longer term money as well. Even before the Y2K and the Dot.com Bubble, Fed Chairman Alan Greenspan established a pattern of cutting interest rates to support the stock markets. Specifically, the Fed would lower interest rates below the rate of inflation (for a negative real interest rate) and thereby inject sufficient liquidity into the Financial Markets to restore prices. This has famously became known as the Greenspan Put, and it established the precedent for the Bernanke Put (Housing Bubble) and the Yellen Put.
As can be seen in this chart, Interest Rates have been on a generational 35-year decline. Two statements of fact: (1) U.S. 10-year interest rates have never been lower (2) No living Investment Professional today has managed money an in any environment other than one in which rates have gone straight down
(NOTE) INTEREST RATES HAVE NEVER BEEN LOWER: COROLLARY: INTEREST COUPON PAYMENTS HAVE NEVER BEEN VALUED SO RICHLY (OVER-VALUED)
- Before the Dot.com Bubble, 10-Year Treasuries earned 6%. So, a 10-Year T-Bond owner would earn his full principal in 16.6 years at this Risk-Free Rate.
- Before the Housing Bubble, 10-Year Treasuries earned 5%. So, a 10-Year T-Bond owners would earn his full principal over 20 years, but Risk-Free.
- However since the Housing Bubble, through massive money printing operations (called "QE" for Quantitative Easing), the Fed has flooded the market with $4 trillion in liquidity, in the process, pushing down short-term interest rates to 0.25%.
- Today, the holder of 10-Year T-Bond at a 1.5% yield, would have to wait 67 for the coupons to total the principal investment.
- Most investors recognize these low bond yields to be unattractive, or insufficient for their investment objectives and have been "forced" into riskier asset classes, including Equities and Junk Bonds.
- Or, Investors have been forced to trade liquidity for returns (meaning, they are willing to commit capital for 5+ years to earn above market returns)
IN GENERAL, LOWER INTEREST RATES LEAD TO HIGHER STOCK PRICES
- Mechanically, through the formulaic application of "Time Value of Money" adjustments, stocks are worth more than interest rates are lower.
- Practically, when it is cheap to borrow, Companies become more active in M&A activity. As companies are acquired, often at a premium, other company share prices also tend to rise.
- Unfortunately, by design, this extended period of lower interest rates has pushed Investors into riskier asset classes, a process, Ben Bernanke euphemistically called the Portfolio Theory.
- This explains why stocks are trading at record valuation (despite the fact their are not increasing their profits. This also explains by bonds are trading at record valuation, as it has never been cheaper for Junk-rated companies to borrow money. We are currently in a very rare moment where both the Stock Market and the Bond Market are at record highs.
The S&P 500 Index from January 1, 2006 to September 20, 2016
COLORADO ACADEMY'S ENDOWMENT PORTFOLIO STRATEGY AND TRENDS OVER TIME
- Since June 30, 2015, Committee shifted to a more defensive posture in Equities by reducing the Overweight Equity position from 70% to 55% (per IPS, 60% is considered to be"Neutral").
- Fixed Income allocation is currently 21% of the portfolio and remains Highly Liquid with over Half of the Investments held in Cash, with the remaining allocation divided 5 parts Floating-Rate Corporate Loan securities and 1 part Fixed-Rate securities.
- Alternatives allocation has shifted away from Hedge Funds*, Fund of Funds* and other Black Boxes to purpose-specific opportunistic investments currently comprised of 8% MLPs 3% Energy 4% Gold
COMMITTEE VOTING HISTORY
- August 21, 2015: Committee voted to sell 5% of Leveraged Loan Exposure and designated these funds for an opportunistic energy trade later in the year
- October 15, 2015: Committee voted to Increase MLP Exposure by 1%
- November 11, 2015: Committee voted to Increase MLP Exposure by another 1%
- February 9, 2016: Committee voted to sell 1.2% TLT (20-year Treasury Bond ETF) and hold the proceeds in cash
- March 16, 2016 [Interim Meeting]: Committee voted to reduce Equity Positions by 5%, moving closer to the "Neutral" 60% target allocation to Equity, and we moved the proceeds to cash
- May 12, 2016: Committee voted to sell 1.2% position in Templeton Global Bond Fund
- May 12, 2016: Committee voted to sell entire 9% position in Blackrock Hedge Fund of Funds
- August 19, 2016: Committee voted to increase exposure to Master Limited Partnerships from 4.4% to 8.8% by adding 2.2% to JP Morgan Alerian MLP ETN and 2.2% to UBS ETRACS Alerian MLP Infrastructure
- August 19, 2016: Committee voted to increase Gold position from 2.7% to 4.0% by adding to our existing holdings in Sprott Physical Gold Trust
APPENDIX AND OTHER INFORMATION
Endowment Returns by Time Period
CA is beating its Policy Index across every time period, including short-term horizons ending June 30, 2016, which included #Brexit as well as two China-inspired market corrections.
CA is beating the Universe, the Policy Index and our Peer Group (165 Portfolios) with significantly less risk
CA Endowment returns would rank us in the Top 21% of all Endowments under $50 million
However, when adjusted for Risk, nobody did better than us with respect to Risk-Adjusted Returns as our Portfolio would sit on this Efficiency Line (in green)
Total Peer Universe, Performance & Rankings
(These are Unconventional Times. We need to devise Unconventional Strategies.)