InvestingINSEAD s Endowment Overview March 203
Overview of the INSEAD Endowment INSEAD s 52 million endowment supports the school s mission and provides a permanent source of funds to build its competitive advantage. It allows INSEAD to plan, sustain and invest in faculty Chairs, research projects, programmes, scholarships and facilities. A robust endowment is fundamental for INSEAD s growth; building it is a high priority for the school. The INSEAD endowment is managed by the Endowment Management Committee originally formed in 995, and has been advised by Partners Capital since the beginning of 2007. Partners Capital advise on the 34m investment portfolio with a further 8m invested in directly held property, cash and other assets. While we expect the next few years to be challenging and volatile for investments, the endowment remains well positioned for both capital preservation and long-term capital appreciation through a diversified multi-asset class strategy and allocation to specialist asset managers of the very highest quality, similar to that of leading endowments around the world. Endowment Management Committee Members of the INSEAD Endowment Management Committee, listed below in Figure, have substantial financial and investment experience and are responsible for the management oversight and performance of the endowment. The Committee is supported by the finance team under Eric Ponsonnet, Director General of Administration. Investment Advisor Since 2007, INSEAD has been advised by Partners Capital LLP, a private investment office which is one of the leading advisors to endowments and foundations globally. The firm currently advises on approximately $8.5 billion of assets, and employs 80 professionals in offices in London, Boston and Hong Kong across investment research, client management and operations. Additional information on Partners Capital can be found at www.partners-cap.com. Figure : INSEAD Endowment Management Committee standing members Name RémyBest (Chairman) Jaime Arguello Stéphane Corsaletti Michel Guillet François Hériard Dubreuil Claude Janssen Remmert Laan Pascal Maenhout Massimo Massa Georges Muller Todd Ruppert Mirjam Staub-Bisang Current / Former Professional Experience Managing Partner, Pictet& Cie Managing Director, Barclays Wealth Managing Director, ABN AMRO; CEO, Banque Neuflize OBC s asset management unit Co-Founder, BC Partners President, FondationINSEAD; Chairman, Orpar; Chairman, RémyCointreau; Chairman of the Executive Board, Andromède Honorary Chairman, INSEAD; President, Fondation Mondiale INSEAD Chairman, Leonardo Bank; Senior Adviser, Lazard Frères Associate Professor of Finance, INSEAD Professor of Finance and Rothschild Chaired Professor of Banking, INSEAD Chairman, Lemantrust Founder and CEO, RTR International Inc Founder and CEO, Independent Capital Management INSEAD endowment valuations as of 3 st August 202. This consists of a 34m portfolio advised by Partners Capital and a 8m portfolio invested in directly held property, cash and other assets.
Investment Strategy The core tenets of INSEAD s investment strategy remain () to manage the portfolio to deliver longterm absolute returns without specific regard to income generation (2) to diversify the portfolio across multiple asset classes, and (3) to identify and select the most skilled asset managers within each asset class. We believe that this combination will result in long-term outperformance of the INSEAD endowment relative to more traditional investment strategies, in particular, by protecting the portfolio on the downside during periods of market disruption and decline. The endowment remains broadly diversified across a variety of asset classes including traditional allocations to equities and fixed income, alternative allocations including hedge funds and commodities, as well as illiquid strategies in private credit, private equity and private equity real estate. INSEAD also maintains an allocation to property through the ownership of school sites. The identification and selection of best-of-class investment managers is at the core of the investment strategy. Investment managers are constantly reviewed and monitored by Partners Capital to ensure that endowment assets are being allocated to the highest-quality managers in each asset class, and to identify potential underperformance as early as possible. The total expense ratio of the portfolio is closely monitored to ensure that it is invested in only those managers whose performance justifies the fees. The defensive and diversified nature of the portfolio typically results in underperformance relative to a rising equity market (e.g. 202), but outperformance relative to falling equity markets (e.g. 20). We believe the portfolio is currently well positioned to deliver portfolio growth over the long term, but with downside protection. Figure 2: Total Endowment Portfolio (January 2002 August 202) 60m 40m 20m 00m 80m 60m 40m 20m 42,5 49,7 55,7 64,9 75,4 05,9 05, 97,2 35,6 42,3 5,5 0m Aug '02 Aug '03 Aug '04 Aug '05 Aug '06 Aug '07 Aug '08 Aug '09 Aug '0 Aug ' Aug '2 Note: Data includes donations. 2
Investment Portfolio Overview As of December 202, the 37 million investment portfolio (excluding direct property) was invested broadly across various asset classes. The allocation of the portfolio by asset class and the long term asset allocation targets are shown in Figure 3. As a long-term growth portfolio, the strategic asset allocation targets of the endowment ( right column ) are biased towards Global Equities, with exposure to other asset classes which offer inflation protection. Currently, the portfolio has an overweight allocation to credit. This includes a range of strategies including high yield bonds (both short and market duration), emerging market local currency debt, bank loans and structured credit. In a low growth environment, the committee believes that credit could perform broadly in line with equities but with significantly lower risk. The portfolio also has an overweight allocation to absolute return hedge funds. These are asset managers who exploit trends or relative value opportunities created when markets overreact to various macroeconomic events. We believe these managers are well positioned to take advantage of current market volatility. These overweight allocations are compensated by underweight allocations to European government bonds and inflation sensitive assets. Since early 20, the portfolio s underweight allocation to European sovereign debt has been held exclusively in the bonds of the German, French and Dutch governments with no exposure to those economies most effected by the European debt crisis. This has been accretive to portfolio performance since the inception of the allocation but detracted in the risk on environment of 202. Due partly to the low rate of French inflation, partly to the school s directly held property portfolio, the investment portfolio is underweight inflation sensitive real assets (inflation linked bonds, commodities and property). However, this will be continually re-assessed over the medium term in reaction to changing inflation expectations. Finally, the portfolio maintains a meaningful allocation to the illiquid asset classes of private equity and private equity real estate which the committee expects to outperform liquid securities over the longer term. Other Endowment Assets In addition to the investment portfolio, the total endowment also consists of a portfolio of other assets including SociétéCivileImmobilière(two properties near the campus in Fontainebleau), MBA Community Loan Bonds (an investment in a company called Prodigy which offers funding to INSEAD students) and cash (held both on deposit and in money market funds). Figure 3: Investment Portfolio excluding Direct Property Asset Allocation (December 202) Asset Class Portfolio Assets ( million) % of Current Portfolio Long-Term Strategic Target Allocation Cash 3 2% 2% Fixed Income 7 5% 2% Credit 22 6% 6% Global Equities 55 40% 39% Absolute Return Hedge Funds 24 8% 3% Real Assets 9 6% 2% Private Equity (illiquid) 3 0% 0% Private Equity Real Estate (illiquid) 4 3% 7% TOTAL 37 00% 00% 3
Investment Portfolio Performance From March 2007 to the end of December 202, the investment portfolio has returned 0% (cumulatively). This represents 4% outperformance of the INSEAD Composite Benchmark, a custom benchmark reflecting the long-term strategic asset allocation adopted by the committee, which returned 6% over the same period. For reference, the global equity markets were down -3% over this period which highlights the benefits of the diversified multi-asset class model. The performance by calendar year is summarised in Figure 4. For completeness, the performance of both the investment portfolio and the total endowment portfolio by academic year are summarised in Figure 5. In calendar year 202, the INSEAD portfolio returned 0.6%, outperforming the INSEAD Composite Benchmark, which rose by 9.7%. The portfolio benefited from strong performance from the longonly equity managers (total allocation to long-only global equities was 32% as of December 202; 7.3% return in the year), and hedged equities managers (8% allocation; 0.0% return). The INSEAD portfolio is invested primarily in equity managers (both long-only and hedged) who perform deep, bottom up fundamental analysis and add value through security selection rather than macro calls on markets, which the committee believes to be a more sustainable source of outperformance in the long term. The portfolio also benefited from the overweight allocation to credit (~6% allocation, 4.8% return), with the high yield and local currency emerging market debt managers performing particularly well. The portfolio s allocation to Absolute Return Hedge Funds performed in line with expectations (cash + 500bps), although the allocation to trend following Managed Futures managers detracted, as the strategy struggled to navigate the risk on / risk off market fluctuations caused by extreme changes in sentiment following political announcements. Although the portfolio s allocation to French inflation-linked government bonds performed well relative to the wider European market, the portfolio s underweight allocation to nominal government bonds and the skew towards core economies in Europe detracted, as peripheral country bonds rallied strongly over the year. The private equity portfolio returned.% in 202 lagging the strong return of public equities. This is due to a combination of immature private equity holdings and what we believe to be conservative marking of the underlying positions. We expect this portfolio to be a key driver of outperformance over the long term. Figure 4: INSEAD Investment Portfolio Calendar Year Performance (March 2007 December 202) INSEADInvestment Portfolio Return 2007 2008 2009 200 20 202 Cumulative (Mar 07 Dec2) +3.5% -20.% +.% +8.7% -0.4% +0.6% +0.0% INSEAD Composite Benchmark 2 +3.0% -8.9% +7.% +7.7% +0.5% +9.7% +6.% Global Equities (MSCI World NR LC) +4.% -38.7% +25.7% +0.0% -5.5% +5.7% -3.5% Partners Capital s mandate began in March 2007, therefore the performance of the endowment and the benchmarks exclude January and February. 2 The INSEAD Composite Benchmark is a custom benchmark comprised of asset class indices (e.g. MSCI World NR LC for the equity allocation, or S&P GSCI TR for the commodities allocation) and weighted to reflect the long-term strategic asset allocation adopted by the committee. 4
Figure 5: INSEAD Endowment and Investment Portfolio Performance Academic Year Performance (September 2007 August 202) Sep 2007 Aug 2008 Sep 2008 Aug 2009 Sep 2009 Aug 200 Sep 200 Aug 20 Sep 20 Aug 202 Cumulative (Sep 07 Aug 2) INSEADInvestment Portfolio Return -3.0% -.8% +6.6% +5.4% +8.7% +4.5% INSEADEndowment Return 2 -.9% -.2% +5.7% +4.7% +7.8% +3.9% INSEAD Composite Benchmark 3-2.0% -3.6% +4.0% +8.3% +6.4% +.5% Global Equities (MSCI World NR LC) -3.5% -7.4% +2.3% +8.% +.4% -2.0% Note: The academic year starts on st September and finishes on 3 st August. This is reflected in the table above. For example, the year labelled 2008 reflects performance from st September 2007 to 3 st August 2008. Concluding Remarks 202 demonstrated the power of monetary authorities to support economies and markets with extraordinary policy actions that included the launch of the ECB s OMT programme to lower peripheral Eurozone bond yields and the Fed s QE-infinity bond purchases. Although these actions are believed to have reduced the downside economic tail risks heading into 203, we are still living in a post-crisis world of deleveraging and slower than normal growth. The deleveraging challenge has provoked unprecedented monetary policy responses, driving developed market interest rates to their lowest levels in history. This fosters uncertainty for investors as they struggle to ascertain how best to invest in an unfamiliar and increasingly low return world. In the face of these uncertainties, we continue to hold the portfolio s overall risk at target levels and do not attempt to time the risk-on / risk-off swings in the market. The portfolio remains overweight credit and other income generating assets while focussing on managers who add value through security selection based on fundamental analysis. The portfolio is sheltered from the risk of QE-driven inflation and higher interest rates by being underweight government bonds, with absolute return strategies used to provide the portfolio safety net. I am grateful to the members of the Endowment Management Committee who have devoted their time and insight towards the management of the INSEAD portfolio. I thank all the donors for their kind contributions to the endowment. These contributions have been pivotal to the growth of the endowment assets which in turn is of paramount importance to the future success of INSEAD. Rémy Best(MBA, 993) Chairman of the INSEAD Endowment Management Committee INSEAD Investment Portfolio consists of the Partners Capital managed portfolio. 2 The INSEAD Endowment consists of both the Partners Capital managed portfolio and all other assets including direct property, cash and other assets. 3 The INSEAD Composite Benchmark is a custom benchmark comprised of asset class indices (e.g. MSCI World NR LC for the equity allocation, or S&P GSCI TR for the commodities allocation) and weighted to reflect the long-term strategic asset allocation adopted by the committee. 5