Stu Budden Treasury & Investment Seminar Working Capital Investment Strategies June 14, 2008 Panelists: Helen Choy – Manager, Trust Accounting & Treasury, University of Toronto Stu Finlayson – Treasurer, University of Western Ontario Ron Ritter – Associate Director & Treasurer, University of Alberta Moderator: Colin Spinney, Treasurer, Dalhousie University
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Stu Budden Treasury & Investment Seminar Working Capital Investment Strategies June 14, 2008 Panelists: Helen Choy – Manager, Trust Accounting & Treasury,
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Stu Budden Treasury & Investment Seminar
Working Capital Investment Strategies
June 14, 2008
Panelists:
Helen Choy – Manager, Trust Accounting & Treasury, University of Toronto
Stu Finlayson – Treasurer, University of Western Ontario
Ron Ritter – Associate Director & Treasurer, University of Alberta
Moderator:
Colin Spinney, Treasurer, Dalhousie University
Working Capital Investment Strategies
Many Canadian universities experience significant accumulation of cash balances as a result of the irregular cash inflows of tuition revenues, operating grants and research funding. This leaves university treasurers with the challenge of determining the optimal investment strategies - where to invest this cash, in what amounts and for what term. This panel discussion will explore the approaches that three universities (University of Alberta, University of Western Ontario, University of Toronto) have used, and share their experiences, challenges and lessons learned.
AGENDA
1. Objectives & Policies
2. Risks & Constraints
3. Approach
4. Challenges
5. Results
6. Lessons Learned
CAUBO Stu Budden Treasury & Investment Seminar
June 14, 2008
Working Capital Investment StrategiesAt the University of Western Ontario
– Stu Finlayson, Treasurer– [email protected]– http://www.uwo.ca/finance/treasury/endowfund.pdf
– 5% real estate and 5% private equities to be added in 2008 (bonds to be reduced)
– Range for non Canadian currency exposure (10% to 30%)
Approach
• Treasury activity is a profit centre
– Operates like a “bank”– Treated as an ancillary activity– Not part of basic operating budget– Accumulates all investment returns– Allocates short term interest to some funds (limited)– Allocates “profits” to operating budget each year
• “Negotiated” with Planning department– Separate carry forward reserve
• part of unrestricted net assets• reserve may be negative• target reserve level is about 8% of non endowed investments• if reserve is below target level allocations are suspended
Approach
• Deliberate mismatch of investments to liabilities– Some excess funds invested in t bills
• Enough to pay the bills• Complete liquidity• Low volatility• Low long term returns
– Core of excess funds invested in risky portfolio• Long term nature • Low liquidity needs• Added volatility• Potential for value added higher long term returns
3.2%
-50%
0%
50%
100%
150%
200%
250%19
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1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
ANNUAL CUMULATIVE ANNUALIZED SINCE INCEPTION
4 YEAR ANNUALIZED
Spread Can Be Very Negative!Policy Return vs. 30 Day T-Bills (1970 - 2007)
Current Policy Mix
S&P/TSX Composite 20%
S&P 500 5%
S&P 500 Synthetic Hedged 10%
S&P 400 Hedged 5%
MSCI EAFE 10%
MSCI EAFE Hedged 10%
DEX Universe 40%
1970 to 1979 Simulated policy return: S&P/TSX Comp 35%, S&P 500 15%, MSCI EAFE 10%, DEX Long Bond 40%1980 to 1988 Simulated policy return: S&P/TSX Comp 35%, S&P 500 15%, MSCI EAFE 10%, DEX Universe Bond 40%1989 to 2007 Actual UWO Endowment Policy return
Prepared by Russell Investments
Challenges
• Need to ensure that the Board of Governors continues to be aware of the investment risks for non endowed funds
• Periods of high market volatility are not pleasant– Test the ability to maintain an aggressive investment policy– Could lead to criticism from major stakeholders (Faculty, Students, Donors,
Board, Government)
• Predicting cash requirements is difficult– Want to avoid selling long term investments when market is low
• New investments (real estate, private equities) are illiquid– Difficult to manage asset mix
• Planning Department– appreciates the long term value added – finds it difficult to deal with unpredictable returns from year to year
Results
5 Year Annualized results to March 31, 2008• Operating and Endowment Fund 10.3%• DEX 91 day T-Bill index 3.4%• Annualized Value added 6.9%
– With average of $200 million invested over 5 years = $69 million
• Reserve was $58 million at April 30, 2008 • “Target” level is about $20 million• Lowest level ($16.3) million – March 2003
• Annualized value added since 1988 3.9% per year
Lessons Learned
• Investment policy statement– Supported and approved by Board of Governors– Include risks and returns assumptions– Describe strategy re non endowed investments – Support from Senior Administration is critical
• Reputational risk for individual Investment Committee members
• Volatility is challenging– Bear markets can arrive quickly & can be long– Difficult to assess the risk tolerance for an institution
• Regular reporting of results and reserve levels to Board of Governors
• Do not hesitate to get help from others
Objectives and Policies• Prior to 1998 all non-endowed funds were invested
primarily in short-term money market instruments• Cash flow analysis demonstrated that this amount of
liquidity was not required• A premium was being paid for this liquidity• The objective was to maximize return while protecting the
underlying capital• Investment policy revised to allocate maximum of 1/3 to
each of the long-term and mid-term strategies• Policy can be found at: