Wellesley College Annual Report 2015-16

Wellesley’s chief investment officer provides highlights from the College’s 2015–2016 annual report.

Wellesley’s endowment is the keystone of the College’s financial strength, providing approximately 40 percent of operating revenue in Fiscal Year 2016. On June 30, 2016, the end of the fiscal year, the Wellesley College endowment had a market value of $1.785 billion (versus $1.881 billion on June 30, 2015—a decrease of $97 million). The long-term investment-pool portfolio earned a return of -1.5 percent (net of investment management fees) during this last fiscal year.

Fiscal Year 2016 Developments

During FY2016, U.S. stock prices rose modestly, but stocks outside of the United States declined. Specifically, private equity slightly outpaced public market returns; bond returns were strong as interest rates fell to historic lows; real estate returns were excellent; and commodities prices declined sharply, led by energy—a development that hurt returns on natural resource investments.

The -1.5 percent investment return for FY2016 benefited from the allocations to private equity and fixed income where results were positive in absolute terms. Tilts away from domestic and international equity in favor of private equity and cash also added to returns.
 

Total Return by Asset Class Year Ended June 30, 2016

 

Wellesley Return

Market Return

Benchmark/Comparative Index

Public Equity

(6.4)%

(4.3)%

Public Equity Blended Benchmark(1)

Private Equity

4.6%

(0.1)%

Cambridge Associates(2)

Real Assets

(2.7)%

(3.2)%

Real Assets Benchmark(3)

Semi-marketable(4)

(1.9)%

(6.3)%

Cambridge Associates Hedge Fund-of-Funds Index

Fixed Income

10.2%

11.6%

Fixed Income Benchmark(5)

Cash & Equivalents

(0.1)%

0.1%

Citigroup Three-Month T-Bill

Total Portfolio

(1.5)%

(2.3)%

 

1Public Equity Blended Benchmark is a weighted average of MSCI ACWI, MSCI EAFE, MSCI EM and Russell 3000.
2Private Equity results are measured against the Cambridge Associates Private Equity, Growth Equity, Venture Capital, and Distressed indices.
3Real Assets Benchmark is a weighted average of the NCREIF Timber, Cambridge Associates Real Estate, and the Cambridge Associates Natural Resources Index (x-Timber).
4Semi-marketable investments include strategies focused on absolute return.
5Fixed Income Benchmark is a weighted average of the Barclays 5+ Year Treasury Index and the Citigroup World Government Bond Index.

Longer-Term Results

The endowment’s investment returns are strong compared with a variety of common yardsticks.

  • As shown in the table below, long-term results were mixed, when viewed in the context of the 7.5 percent to 8.0 percent return necessary to support College spending and to maintain the endowment’s purchasing power. Only the seven-year result—a period which spans the financial crisis highs—was above both measures.
  • Over the last 10 years, the College’s well-diversified portfolio has roughly matched a hypothetical portfolio of 65 percent stocks and 35 percent bonds with considerably less volatility in returns. Alternative assets—such as venture capital, growth equity, and real estate—have contributed significantly to strong portfolio results.
  • Investment returns have exceeded the Policy Portfolio benchmark. The Policy Portfolio benchmark is a measure of how the College’s target asset allocation would perform if returns in every asset class matched the market. The difference between the portfolio and the benchmark is a measure of the value added by the Investment Office and the College’s investment managers.
  • Another yardstick is performance versus peers. Over the last three, five, and 10 years, Wellesley rank in the top quartile in a universe of institutions with investments pools larger than $1 billion.

Total Annualized Return on Endowment, Year Ended June 30, 2016

 

3 Years

5 Years

7 Years

10 Years

Wellesley Portfolio

7.4%

7.0%

9.2%

6.7%

S&P 500 Index

11.7%

12.1%

14.9%

7.4%

65/35 Stock/Bond Portfolio(5)

9.1%

9.3%

11.4%

7.0%

Policy Portfolio Benchmark

5.8%

5.9%

8.7%

5.7%

1A commonly used measure of portfolio performance is a comparison with a passive portfolio consisting of 65 percent stocks (as measured by the S&P 500 Index) and 35 percent bonds (as measured by the Citigroup Broad Investment Grade Index).

Policy Portfolio and Strategy Going Forward

To provide strong operating support while preserving purchasing power, the endowment is invested across diverse asset classes, strategies, geographies, and managers. The Policy Portfolio, established by the Wellesley College Investment Committee, guides asset allocation. The Investment Committee and Investment Office team regularly review the expectations upon which the Policy Portfolio is based, with the goal of refining target allocations in order to improve the portfolio’s risk/ return characteristics.

The table below compares the Policy Portfolio and the actual asset allocation on June 30, 2016. An underweight to public equities was offset by an overweight in private equity and fixed income and cash. The portfolio has sufficient exposure to liquid investments to maintain the endowment’s financial support of the College’s operations and to provide for the liquidity needs of the portfolio.

Asset Allocation as of June 30, 2016

Asset Class

Policy Portfolio

Asset Allocation

Public Equities

34%

31%

Private Equity

19%

22%

Real Assets

13%

12%

Semi-Marketable

26%

26%

Total Alternative Assets

58%

60%

Fixed Income and Cash

8%

9%

Total Portfolio

100%

100%

 

In executing the investment strategy, the Investment Office team works to add value within asset classes through long-term partnerships with strong-performing, highly ethical investment managers. Across the portfolio, our managers must have an uncompromising focus on integrity, which not only ensures alignment with the College’s values, but protects long-term returns, as these managers put their clients’ interests first. In addition, we look for managers with a sustainable investment “edge.” Typical characteristics of Wellesley managers include: long investment horizons; a bias toward fundamental, bottom-up investing; a focus on value; relatively concentrated portfolios that often show little relationship to benchmarks; and strong organizations.

The Investment Office and the Investment Committee remain focused on long-term growth to ensure that the endowment continues to support the College’s mission. I believe the College will be well served by its strategy of broad diversification across asset classes, geographies, and strategies, and by the excellent investment managers we employ.

Members of the College community who have questions, suggestions, or thoughts about the management of the Wellesley College endowment are invited to contact me at any time.

Debby Kuenstner signature

Deborah F. Kuenstner
Chief Investment Officer