The key Foundation function is the management and administration of endowments. Endowments are invested in a globally diversified portfolio, monitored on an ongoing basis and periodically rebalanced in an effort to achieve the Foundation's investment objective of earning long-term attractive risk-adjusted returns while preserving the purchasing power of the endowments in perpetuity. Investment returns are the source of distributions to fund scholarships and other programs supporting the University of North Texas in accordance with donors' intent. The UNT Foundation seeks to maintain "generational neutrality." In other words, the goal is to ensure that future recipients of endowment distributions receive a similar level of direct or indirect support as do current recipients. The UNT Foundation does this through its Investment Committee. Because this committee monitors investment performance, its members must have a high level of financial literacy and be familiar with investment strategies, asset allocations, and spending policies. An additional layer of expertise is achieved through the use of an investment consultant who advises the Committee and implements its policies. The investment consultant for the UNT Foundation is Mercer Investment Consulting. UNT Foundation's financial results and reports, which includes investment activities, are monitored and reviewed by a separate Audit Committee of the Board of Directors.
The UNT Foundation invests to have a lasting beneficial impact to the University of North Texas. The Foundation’s investment goal is to earn attractive long-term risk-adjusted returns to preserve the purchasing power of gifts made to endowments; fund distributions which provide a dependable revenue source to the University; and cover Foundation expenses. The endowment assets have an indefinite time horizon, consistent with supporting the University of North Texas in perpetuity. Through the use of professional management, portfolio diversification and regular rebalancing, a reasonable balance between investment returns and volatility should be achieved.
Investment risk is monitored taking into consideration the portfolio as a whole. Investing involves substantial risks, including the possible loss of principal. Every investment is also characterized by different types and degrees of risk, and investors must frequently assume one type of risk in the effort to avoid another. Time-tested practices are used to control investment risk, including asset-allocation, portfolio diversification, periodic rebalancing, valuation assessment, correlation statistics, manager due diligence, investment research and ongoing monitoring. Because financial markets are inherently volatile, and will ebb and flow over time, the Foundation does not employ market-timing as part of its long-term strategy.
Several basic tenets to the Foundation’s investment policy include core fundamental investment beliefs:
Growth Assets – Equities: History has shown that owning attractively valued equity investments in companies that grow their earnings and cash-flow rewards the patient investor and generates real long-term wealth. Additionally, current income is recognized from dividends. While annual returns can be quite volatile, risk of loss from equity investments diminishes over time. Equities may be owned through both public and private investment vehicles.
Risk Reduction – Fixed Income Securities: Rather than participating as an owner of assets through equities, fixed income positions the Foundation as a lender of funds to asset owners. Varying levels of risk are assumed based on the credit worthiness of the borrower and the positioning in the debt structure relative to other lenders, but in all cases the risk level is lower than for the equity owners in these companies. Fixed income investments may include government and agency securities, investment grade corporate or municipal bonds, bank loans, high-yield debt, mezzanine lending, or other forms of lending. The primary purposes for owning fixed income securities is to provide current income to the portfolio, and to reduce overall portfolio risk by virtue of fixed income securities being less volatile than equities, and in some cases negatively correlated. Fixed income securities may be owned through both public and private investment vehicles.
Risk Reduction – Alternative Strategies: Alternative Strategies are intended to enhance the investment portfolio’s overall risk/return profile by providing less-correlated return streams that generate excess return (or “alpha”) compared to the general market. Strategies may include long-short equity, long-short debt, distressed assets, global macro, option strategies, special situations, and others. As many of these strategies are not available or suitable for public investment vehicles (i.e. mutual funds), Alternative Strategies are owned primarily through limited partnership interests in private funds. These partnership interests typically involve restrictions on liquidity and are thus less fluid than public investments which can be more readily rebalanced.
Risk Reduction – Cash: While cash is perceived an extremely safe asset due to its negligible risk of lost principal, for a portfolio with a perpetual time horizon, cash is also risky because of its low long-term returns relative to other financial assets and inflation. As such, endowment assets tend to hold minimal amounts of cash, which is held primarily to provide liquidity for transactional purposes. On occasion, the Foundation may tactically raise cash to control overall portfolio risk.
Inflation Protection – Real Assets: Real Assets include investments in commodities and real estate. Commodities includes oil and gas, precious metals, industrial metals, agricultural and industrial chemicals. Real estate includes not only land and buildings, but also may include timber and farming real estate. Tangential investments may also be included in this category such as oil & gas transportation infrastructure, or mortgage Real Estate Investment Trusts (“REITs”). Real assets protect against inflation either through direct price increases of the underlying commodity or property, or through the ability to raise rents or service charges for the use of their property or infrastructure. Real Assets may be owned through both public and private investment vehicles. Ownership is primarily through equity ownership of companies operating in these areas.
Inflation Protection – Inflation Protected Bonds: Inflation Protected Bonds are fixed income securities that adjust their interest and principal payments with inflation to protect the bond investor from unanticipated increases in inflation. When inflation is positive, interest payments and the principal to be returned at maturity increase, and vice-versa. The vast majority of inflation protected bonds are issued by the U.S. Treasury and known as “TIPS” for treasury inflation protected securities.
The Foundation’s Investment Policy establishes a curent strategic target allocation of 60% Growth Assets, 30% Risk Reduction Assets, and 10% Inflation Protection Assets to achieve a diversified portfolio allocation.
In addition to its strategic target allocation, the Foundation’s Investment Policy establishes tactical ranges around each of the strategic targets. Tactical ranges are 50 - 70% for Growth Assets, 20 – 40% for Risk Reduction Assets, and 5 – 15% for Inflation Protection Assets. The Investment Committee is responsible for monitoring and rebalancing to the Foundation’s strategic target allocation ranges, and within the tactical ranges, has discretionary authority for setting, monitoring, and making reallocations to the portfolio’s specific underlying assets. Allocation changes which would exceed the established ranges require prior approval from the Foundation’s Board of Directors.
62% of the portfolio in Growth Assets is split between US Equity and International Equity categories.
In the US All-Cap Equity group are the Vanguard Total Stock Market Index, Sands Capital Management, and Vanguard Value Index. The US Large-Cap Quality managers are Vanguard Dividend Appreciation Index Fund and Jensen Large Quality Growth.
Representing the International Equity group are Vanguard Developed Markets, MFS International Value, and Morgan Stanley International Equity in the International Large-Cap and Quality stocks sector. International Small Stocks include the TS&W International Small Cap Equity. Vanguard Emerging Markets Stock Index and Sands Emerging Markets Growth make up the Emerging Markets sector. Non-Traditional Equity consists of the investments in Renaissance Institutional Equity, L.P. and Parametric Defensive Equity.
30% of the policy portfolio in Risk Reduction Assets is divided between US/Global Fixed Income, Absolute Return Funds and Cash
The US/Global Fixed Income section consists of Vanguard Total Bond Market, JP Morgan Core Bond Fund, and Loomis Sayles Core Plus.
Absolute Return Funds include Forester Diversified, Ltd. and Pinehurst Institutional Limited.
Cash held in the portfolio is typically minimal due to its poor long-term performance expectation. However, cash is held to facilitate rebalancing transactions and may be tactically increased from time to time if considered a prudent risk mitigation strategy.
8% of the policy portfolio serves as Inflation Protection Assets and are invested in Real Assets.
The Real Assets category includes Van Eck Global Hard Assets, and Principal Global Real Estate.
While the equity-weighted position likely will track the direction of the equity market, the portfolio is structured to be less volatile than the overall equity market due to the portfolio's broad diversification.
The Foundation’s Investment Committee has chosen a return benchmark consisting of an investment policy-weighted composite of relevant indexes for each of the asset classes in which it is invested (i.e., S&P 500, Russell 1000, MSCI ACWI, MSCI EAFE, MSCI EM, Barclays Aggregate, S&P Natural Resources, FTSE EPRA/NAREIT, HFR Fund of Funds, etc.). Prior to March 2016, the Foundation used a weighted strategic index of the MSCI All-Country World Index (60%), and the Barclays Capital Aggregate Bond Index (40%) as a reference to assess its risk-adjusted returns. Beginning March 1, 2016 the global weighted strategic index was revised to consist of the Dow Jones U.S. Total Stock Market Index (40%), MSCI All-Country World ex U.S. Index (20%), Barclays Capital Aggregate Bond Index (30%), and the U.S. Consumer Price Index (10%).
The portfolio increased 5.2% for the quarter ended February 28, 2017 and increased 4.5% fiscal year to date. Global equities rallied post the U.S. Presidential election last November. Both U.S. and international equities posted high single-digit returns in the quarter. Despite the Federal Reserve increasing short-term interest rates, long-term interest declined slightly and corporate credit spreads tightened. This resulted in modest gains for fixed income investments in a low-interest rate environment. Lower long-term interest rates provided a tailwind for REITs which achieved high single-digit positive returns for the quarter. Hedge Fund investments experienced low double-digit returns in line with their benchmarks. Energy/commodities was the lone difficult area in the quarter, declining 5.7% on a mild pull back from recent commodity price gains. The energy markets remain in the early phases of recovery and we expect investments in this space will provide attractive long-term returns, but the road will be bumpy. The U.S. Federal Reserve remains on pace for several interest rate increases in 2017 so long as the economy and employment remain on firm footing. International economic growth appears to be stable and slightly improving.
After consideration of investment management fees, the portfolio has performed in line with its strategic benchmark over the past ten years. Absolute returns over the past five years have been dampened due to allocations to international equities which did not keep pace with U.S. equities, and by weakened commodities markets and a stronger U.S. dollar. There are times when U.S. markets outperform global markets, and vice versa. The recent history has favored U.S. markets over international markets. History and relative valuations suggest that a shift towards global markets is in order at some point in the future, and recently performance across the globe has been more balanced. Graphical comparisons of actual and benchmark performance over multiple time periods are accessible in the chart accompanying the link below.
The UNT Foundation Investment Committee meets at least quarterly with its investment consultant to review the portfolio's performance and to address any issues or concerns. National and international economic trends, corporate earnings results and outlooks, and the anticipated performance of markets in future periods are discussed in consideration of the portfolio’s positioning. Actual individual and composite results for the portfolio are compared to the policy benchmark returns. In addition, changes in key management for the funds, internal and/or external changes affecting any asset class, and any other changes in the investment process are evaluated.
Since asset allocation is the most critical component of the Foundation's return, the portfolio is rebalanced at least annually, or more frequently as necessary. Due to their more limited liquidity options, alternative investment assets may require a longer period of time to effect rebalancing to achieve the target allocation.
The Investment Committee is responsible for monitoring and rebalancing to the Foundation’s strategic target allocation ranges, and within the tactical ranges, has discretionary authority for setting, monitoring, and making reallocations to the portfolio’s specific underlying assets. Allocation changes which would exceed the established ranges require prior approval from the Foundation’s Board of Directors.