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Prepared by John C. Alexander, Jr., Ph.D.
Chief Investment Officer, CUF
While the primary goal of the Clemson University Foundation (“CUF” or the “Foundation”) is to increase the quantity and quality of the returns generated for the endowments managed by the Foundation, we also have a mission to educate stakeholders on the benefits associated with the management style adopted by the Foundation. The Foundation constantly searches for new products and portfolio management techniques to improve returns and/or control the risks associated with these returns. The Foundation will provide an attractive alternative in which donors may entrust their assets designated for the benefit of Clemson University.
The focus of these comments is limited to the endowment assets owned and managed by CUF. These are funds which have been given to CUF to be managed in perpetuity for purposes specified by the donors. In addition, some funds are given to the unrestricted endowment, to be used for the betterment of the University as determined by the CUF Board of Directors in concert with University Administration.
Our endowment holds a variety of assets dedicated to the long-term benefit of Clemson University. When referring to long-term benefit, a college endowment takes a multi-generational focus in investing the assets provided by donors. More specifically, the endowment invests with the understanding that it is not only for future Clemson students yet to be born, but also to assist recurring University income needs related to the students currently enrolled.
Each of the endowments managed by CUF essentially operates as an independent account. The assets of the individual funds or accounts are pooled and invested as a single portfolio. In addition to reducing administrative expense, this provides additional investment opportunities for these funds due to economies of scale associated with many of the asset classes. CUF invests the managed endowment so as to maximize long-term returns, while simultaneously mitigating risks through maintaining a diversified portfolio. Investing for a truly long-term window requires a different mindset than investing for one’s own retirement. A long-term multi-generational window, not only allows for the typical diversification across asset classes, but also for time-diversification across both bull and bear markets which could alternate across decades. This allows CUF to pursue investment strategies that may not be prudent for the ordinary investor with a shorter investment horizon.
The managed endowment seeks to invest in asset classes that have proven to provide superior returns over time. There are three equity classes (domestic, international, and alternative investments), and one fixed income class. In addition, there are classes that represent hard assets, such as real estate or commodities. Within these broad classes there are many finer distinctions. More specifically, domestic equity may be segmented based upon market capitalization, international equity segmented based upon region, and fixed income segmented based upon maturity and debt issuer.
Following a discipline that seeks out asset classes that have investable indexes to represent them, the managed pool is comprised of mutual funds and exchange traded funds. This gives us complete transparency for much of the investment pool. In instances where there may be an asset class that is considered important for portfolio construction, however, there may be no suitable investable index; CUF leverages its investment consultant to gain access to active managers within the asset class. These managers will have expertise in a particular field and can provide the necessary diversification within the asset class.
The selection of investment classes has been shown to be one of the most important determinants of the portfolio return. In fact, research in portfolio management has shown that the allocation among assets explains up to 90% of the volatility of portfolio returns, whereas stock selection explains less than 10%. We use well-respected quantitative investment models, to assist us in determining which asset classes we will hold and what proportion we will hold in each class. These models consider not only the trade off between the return and risk associated with each asset class, but also the co-movement in returns across asset classes. The signals generated by the models provide important input into the decision processes, however we do not blindly follow the model recommendations. Each recommendation is evaluated by the Investment Committee relative to reasonableness and timeliness to what is going on in the worldwide economy.
Our investment process attempts to constantly add new asset classes based upon their characteristics of return, risk and co-movement with the existing asset classes. Although the future may not mirror the past relative to the magnitude of returns, it is more frequently the case that it does so relative to the risk and co-movement of returns. Our Investment Committee tries to include enough asset classes to aid in enhancing the return generating process of the portfolio, but not so many to merely create increased monitoring costs. Although we might have up to 30 different asset classes we monitor and track, we seldom will be invested in more than half of these monitored classes. After all, diversification is a two edged sword, the benefit of diversification is that it can reduce the volatility of portfolio returns; the cost is that it can also reduce portfolio returns.
The managed endowment of CUF, and its growth, is a very important part of the vision Clemson has for the future. The Foundation recognizes this importance, and seeks to discharge its duties relative to the endowment, in a manner that will not only be diligent, but will also be competitive relative to other investment opportunities available to our donors.
All investment decisions fall under the supervision of the Investment Committee of the CUF Board. The Investment Committee meets at least quarterly, with key points being performance, strategy, and analysis. The Chief Investment Officer (CIO) has the discretion to shift assets among sectors pre-approved by the Investment Committee, with each sector having a minimum and maximum allocation. After appropriate deliberations, the Investment Committee decides on the investment allocations, and directs the CIO to execute the positions.
Assets are placed with vendors or managers selected and approved by the Investment Committee based upon safety, reputation, service, fees, and execution. These assets may be reallocated or moved by an authorized individual; however a number of individuals will review the transaction documents. Trades are reconciled on a quarterly basis by the Offices of the Chief Financial Officer and Accounting for Related Organizations. In addition to these reconciliations, the Investment Committee reviews portfolio allocations on a monthly basis.