Welcome to the Investment and Capital Management news

In this news report, we aim to keep our stakeholders informed of the recent achievements and work in progress of the Investment and Capital Management (ICM) Team, as we strive towards best practice in endowment management. In addition, this report provides an opportunity to introduce some members of the team in a more role-oriented manner.

Investment Performance

Against the Internal Portfolio Benchmark

Investment performance of the Long Term (Endowment) Funds managed by ICM remains ahead of the investment portfolio benchmark over 1 and 3 year periods ended June 2009.

Some Peer Comparisons

Comparisons of ICM's performance with funds in the external world are not easy to make. For example, the US-based National Association of College and University Business Officers (NACUBO) distribute information about US endowment performance but there is a lag in publication time that makes timely comparison impossible.

The University endowment funds outperformed the NSW Treasury Corporation Hour-Glass Long Term Growth Facility Trust by around 4% in this financial year and around 2% per annum over the last 3 years. This can be seen on the TCorp website, however these comparisons are only indicative, as the two funds have different asset allocations.

What's new - key work priorities and projects

ICM is currently engaged in several projects:

• The new investment report detailing our results for the period ending 2008 is now out and is available on our website.
• The ICM Investment Policy Statement, which describes the general investment principles adopted by the ICM, will be made available shortly. This document should provide stakeholders with a deeper and better understanding of the investment framework deployed in investing the endowment funds and why certain practices and procedures are adopted.
• Detailed portfolio modelling work focussed around the University's 5 per cent spending rule, tolerance for illiquid assets and the question of whether a reserving policy has a useful role to play in respect of the endowment is continuing. Several different spending rule/reserving frameworks are being tested using Monte Carlo simulation techniques.
• A search for a computer system that will enable stakeholders to view their account balances on-line has begun. This project is only in its early stages and will require a significant investment in technology by ICM. When complete, it is expected to greatly enhance communication between ICM and its stakeholders, who will be able to look up their investments as required using a web-based reporting tool.

Market matters/conundrums

What is quantitative easing?

Normally in an economy which is in or close to recession, the central bank uses its monetary policy powers to reduce interest rates (at the short end of the yield curve) in order to stimulate economic activity. These changes in the 'price or cost of money' (i.e. the interest rate) are not normally associated with any deliberate increase in the quantity of money on circulation. However, when rates are effectively at zero (which is currently the case in the U.S.) then reducing them further is not an option.

What the central bank can do in this scenario to stimulate increased use of credit is, in colloquial terms, 'print money'. This effectively changes the quantity of money in circulation which is available for lending and, as such, is referred to as 'quantitative easing'. Whilst there are several means by which a central bank can implement quantitative easing, one simple and direct method is to buy fixed income securities from the trading banks. This gives the trading banks extra cash which they can lend out, thereby creating credit and stimulating economic growth.

Active management versus passive management - which is better?

The debate between active and passive management waxes and wanes in its intensity with the market cycles. Passive management makes sense in fixed income and equity management precisely because of the existence of well-defined external benchmarks that can be effectively replicated. Passive management cannot be achieved in private equity and direct property.

The proponents of passive argue from the direction of low fees and predictability of outcome. Their opponents argue that active management will always reward the patient investor, even with higher fees paid.

The most common employment of passive is an adjunct to active styles, therefore to create a mix of active and passive. Currently ICM's equity and fixed income managers are active, but we continue to monitor the passive approach for suitability.

Why is investment style important?

Following from the above, equity benchmarks still present risk to the investor in the form of style. In the simplest classification possible, some stocks are 'value' and some 'growth' in nature. The definitions of these words are not important but the implications are that value and growth stocks behave differently over the economic cycle. Consequently, there is a risk in performance relative to benchmark as value and growth performance diverge. ICM controls this risk by employing a mixture of styles from its managers.

ICM Staff profile - Manager External Investments

Andrew Batsakis, BCom LLB (Hons) GDipAppFin (Finsia)

Andrew joined the Investment and Capital Management team in mid-2006 and is the "manager of (external fund) managers". He began his career at Westpac Institutional Banking as a Corporate Foreign Exchange dealer and treasury risk consultant. Andrew has previously worked as a lawyer at the Australian Securities and Investment Commission, and has taught law at the University of Queensland. Andrew holds a Bachelor of Commerce and a Bachelor of Laws (Honours) from the University of Melbourne and a Graduate Diploma in Applied Finance and Investment from FINSIA.

In addition to his role as manager of managers, Andrew is the Secretary of the University's Asset/Liability Committee and a member of the Gift Advisory Board.

We asked Andrew to answer two questions.

You are a lawyer by training. How has that assisted you in your everyday work with external investment managers?

My legal skills are a logical complement to my financial market skills. My legal background (as a lawyer at ASIC) has taught me the value of thorough research and how to ask the appropriate questions to solicit the most useful answer.

Furthermore, in the current environment, regulation and financial markets are heavily interwoven. A good example of this is the short-selling ban imposed by ASIC which had a direct impact on the returns of some of our investment managers.

What is your paragon for exceptional communication from an external investment manager?

Excellent question. Ideally it should be: timely, concise and useful. This should be the case whether the manager is communicating changes to their philosophy/key personnel/processes; communicating performance, or providing some commentary on recent economic and financial developments.

We expect excellent communication whether it is in response to a request from us, or an unsolicited communication from the manager (although in the case of unsolicited, usefulness is paramount!). In selecting a manager, ICM pays close attention to the so-called process component of the manager (e.g. clear philosophy, disciplined portfolio construction; proper risk controls). More often than not, exceptional communication is a natural product/extension of the manager's clear investment philosophy and process, and not simply a result of having a good client service department.

Conclusion

The ICM Team remains committed to enhancing the overall wealth and fiscal capacity of the University and, as an investment service provider, we aim to help our investor stakeholders as best we can. If you have any questions for me, or my staff, please contact or phone 9351 2215.


Greg Fernance
Head of Investment and Capital Management
August 2009