Board of Governors, September 28, 2000 - APPENDIX II, Annex 3
This report outlines the performance of the investment portfolio and the recent activities of the Investment Committee.
The portfolio returns for various periods were as follows:
|Asset Class||Annual to June 30
|Annual to June 30
|Annual to June 30
|Annual to June 30
|Non North American equities||15.1||7.0||16.9||8.3|
|Return of Median fund||17.3%||4.0%||14.9%||23.2%|
As indicated above, except for the current year and 1997, the performance of the University's portfolio exceeded the performance of the median fund in the Frank Russell universe of approximately 57 Canadian portfolios.
Over the five year period ending June 30, 2000, the annualized performance of the portfolio was 14.6% in comparison to the median return of 14.3% in the Frank Russell universe. This represents second quartile performance for our portfolio.
For additional information, please refer to the attached pages which show amounts held by each investment manager at June 30, 2000, the annual and annualized returns by manager over the five years ending June 30, 2000 and the returns in relation to other Canadian balanced portfolios in the Frank Russell universe.
Returns in relation to the objective of a 5% real rate of return
One of the Investment Committee's objectives is to earn a 5% real rate of return over the long term. (i.e. to earn 5% over the rate of inflation, as measured by the Consumer Price Index). Inflation has averaged 1.7% per year for the past five years.
For the five years ending June 30, 2000 the annualized real rate of return for the portfolio was 12.9%, which consisted of a nominal (actual) annualized return of 14.6% less 1.7% for inflation. For the four years ending June 30, 2000, the annualized real rate of return was also 12.9%, consisting of a nominal return of 14.7% less inflation of 1.8%. These returns exceed the Investment Committee's performance objective of a real rate of return of 5%.
Value added by Active Management
Another of the Investment Committee's objectives is to earn the return produced by the asset mix policy, based on the returns of the market indices, and a premium to reflect the additional fees related to active management. In order to achieve this objective, investment managers with active investment mandates need to outperform their benchmark indices. For example, Canadian equity managers need to outperform the TSE 300 index over time and Canadian bond managers need to outperform the SCM universe index over time.
Over the five years ending June 30, 2000, the actual returns for the portfolio were 14.6% and the returns generated by the market indices for the portfolio were 15.5% (the policy return). Over this period, the Canadian bond managers have met their benchmark, but the Canadian equity managers have not. For some markets, such as US equities, the Committee selected an index manager. Over the past four years, this has resulted in first quartile performance for US equities, since the majority of active US managers have been unable to outperform the return of the Standard and Poor 500 stock index.
Book and Market Value of the Portfolio
As at June 30, 2000, the operating and endowment portfolio had a book value of $174,048,000 and a market value of $206,016,000, as follows:
|Actual Asset Mix||Target Asset Mix|
|Non-North American equities||21,307||29,275||14.2||15.0|
The Committee agreed to rebalance the portfolio back to the target mix in September 2000, by transferring funds among the investment managers as required.
At June 30, 2000 the portfolio consisted of the following components:
Portion related to Endowed funds $ 99,097,000 48.1%
Portion related to Operating and non-endowed funds 106,919,000 51.9%
Total market value of portfolio $206,016,000 100.0%
Canadian Equity Review
The Investment Committee's strategy for the Canadian equity portion of the portfolio (20% of total investments) is to divide this portion equally between two active managers. Beutel Goodman follows a "value" approach and seeks to invest in companies which have low share prices in relation to their earnings potential. The second manager, Laketon, follows a "growth" style of investing and seeks to invest in companies which have above average growth in earnings.
Although the Committee anticipates that over time the investment returns realized from this combination of investment styles will exceed the return of the TSE 300 index, this has not been the experience over the most recent five year period and the Committee feels that some adjustment may be necessary.
During the five years ending June 30, 2000, the returns of the TSE 300 index were 19.7% per year, the returns of the median manager in the Frank Russell Company universe were 18.8% and the returns for this portion of the portfolio were 16.1%. Our recent short term performance has improved. For the quarter ending June 30, 2000, the returns on the TSE 300 index were 8.1%, the returns of the median manager in the Frank Russel Company universe were 8.4% and the returns for this portion of the UWO portfolio were 10.4%.
The Committee is exploring the following alternatives for Canadian equities:
This strategy would delegate the responsibility for manager selection to a third party consultant.
This strategy would involve shifting a portion of assets from the current Canadian equity managers to a manager who invests across all categories of the market without following either a "growth" or a "value" style over time.
Much of the recent strong performance of the TSE 300 index has been due to Nortel. Since the beginning of 1999, the price of Nortel's shares has grown by over 300% and this company now represents 32% of the TSE 300 index. As recently as1998, Nortel was only 5.5% of the TSE 300 index.
Much of the shortfall in performance of the Canadian equity portion of our portfolio compared to the return of the TSE 300 index has been due to our lower weighting in Nortel Networks. As a result of the investment decisions of our managers, Nortel Networks represented about 12.6% of the value of the Canadian equity portion of our portfolio at June 30, 2000. As indicated above, since the value of Nortel represents 32% of the TSE 300 index, changes in the price of Nortel's shares have had and will have less of an impact on our fund than such price changes will have on the value of the TSE 300 index as a whole.