Endowment Investment Strategy
Smith investments are managed by Investure LLC along with those of the other Investure consortium of clients.
The investment office (Investure) is charged with the responsibility for implementing and administering the college's investment policy. Its goals are to assist in the attainment of the stated objectives while complying with all Investment Policy guidelines and standards.
The investment office serves as the primary contact for all money managers and the custodian.
The investment office reports to the investment committee monthly and meets with the committee no fewer than three times per year.
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Investing Strategies and Considerations
The long-term investing horizon for the endowment allows for a large allocation to equity-oriented strategies where the potential for long-term capital appreciation exists. Other assets, including but not limited to hedging, derivative, or diversification strategies, are also used to reduce risk and overall portfolio volatility.
Smith manages its endowment investments to maximize annualized returns net of costs over rolling 10-year periods while adhering to stated risk parameters. The investment committee seeks 1) to avoid 25 percent or greater peak-to-trough declines in inflation adjusted unit value; and 2) to avoid annualized shortfalls exceeding 3 percent relative to the mean return of the 50 largest endowments reporting to NACUBO, over rolling 10-year periods.
The investment committee recognizes the need to maintain adequate liquidity in the endowment portfolio. At least 60 percent of total endowment assets are held in investment vehicles utilizing lock-ups of five years or less, recognizing that private partnership cash flows are unpredictable. Under normal circumstances, private partnership investments, including unfunded capital commitments, will not exceed 65 percent.
How We Analyze Risk
The college analyzes risk in the endowment portfolio from the following six perspectives:
Geographic Net Exposure (geographic risk)
Geographic risk arises when an investment portfolio is too heavily concentrated within certain geographic areas. The college investment portfolio evaluates its geographic concentration in domestic, international and emerging markets according to approved asset allocation guidelines.
Currency Exposure (currency risk)
Currency risk looks at the potential for changes in a currency's value to affect the value of certain investments. The college evaluates its currency concentration in domestic, international and emerging markets, according to approved asset allocation guidelines.
Assets that can be easily bought or sold are known as liquid assets. In other words, liquidity is the ability to convert an asset to cash quickly. The college actively monitors the liquidity of its portfolio to insure that there is adequate cash flow to meet spending needs and respond to investment opportunities when they exist.
Leverage is defined as the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. If an investment manager uses leverage to make an investment and the investment moves against the investment manager, the portfolio's loss will be much greater than it would have been if the investment had not been levered. In other words, leverage magnifies both gains and losses. The college's investment committee monitors leverage on its long and short positions including the gross leverage of the portfolio (long exposure plus short exposure equals gross leverage).
The college monitors the capital structure of the underlying investments of the portfolio to ensure broad diversification. Types of capital structure include equities (stocks) or equity-like derivative instruments, debt (bonds) and cash. Investment managers move funds among these categories of assets as they actively manage the funds under their control.
PE NAV and Unfunded Liability Lookthrough
Commitments to private equity (PE) investments are often made long before the transactions take shape and the capital commitments are "called"—that is, that cash is transferred from the investor and put to work. There are, therefore, often extensive "un-called" commitments waiting for action. Private equity investments and un-called commitments are closely monitored as a percent of the total pooled investment portfolio, and the two values are added together and measured against the college's investment policy. The investments committee has established a maximum amount of gross PE exposure, investments plus un-called commitments, and monitors this aggregate exposure on a monthly basis.