Annual CIO Report

Report of the Chief Investment Officer

November 2022

Wellesley’s endowment is the keystone of the College’s financial strength, providing approximately 40% percent of operating revenue. Following a record 46.5% return in Fiscal 2021, the Long-term Investment Pool had an investment return of -9.6% in Fiscal 2022. Endowment spending and investment performance took the June 30, 2022 value of the pool to $2.837 billion, $389 million lower than the prior year value of $3.226 billion.

Fiscal Year 2022 Developments

Fiscal year 2022 was a challenging year for public market investments. Rising inflation across much of the world prompted monetary tightening. Stock market multiples, which began the fiscal year at high levels, contracted sharply, even as earnings and earnings expectations held up. Public and private real assets benefited from higher inflation and the expectation that inflation would remain elevated. Returns in private equity were mixed, with strong results in natural resources and real estate, moderate returns in buyouts and distressed debt, and low returns in venture capital and growth equity strategies.

¹Public Equity Blended Benchmark is a weighted average of MSCI ACWI, MSCI EAFE, MSCI EM and Russell 3000.

²Long Term Alternatives are measured against the Cambridge Associates Private Equity, Growth Equity, Venture Capital, Distressed, Natural Resources and Real Estate indices.

³Semi-marketable investments include strategies focused on absolute return.

⁴Fixed 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 to a variety of common yardsticks.

• The College’s well-diversified portfolio has exceeded a hypothetical portfolio of 65 percent stocks and 35 percent bonds over the last 1, 5, 10 and 15 years.
• 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. Long-term investment returns have consistently exceeded the Policy Portfolio benchmark.
• Another yardstick is performance versus peers. Despite disappointing FY22 performance, Wellesley continues to rank in the top quartile in a universe of institutions with investments pools larger than $1 billion over the past 3, 5 and 10 years.

⁶A commonly used measure of portfolio performance is a comparison with a passive portfolio. We use a blend of 65 percent stocks (as measured by the MSCI ACWI) and 35 percent bonds (as measured by the Citigroup World Gov’t Bond Index).

Fossil Fuel Exposure

On June 30, 2022, the portfolio’s exposure to fossil fuels was 4.1%, up from 2.9% a year earlier. During FY22, the value of the portfolio’s fossil fuel exposure increased to $115.4 million from $94.5 million the year before as the value of private equity oil and gas interests responded to higher commodities prices. This increase, coupled with weakness elsewhere in the portfolio, resulted in a higher fossil fuel exposure. No new commitments to private equity oil and gas funds have been made since 2017.

In executing the investment strategy, the Investment Office team aims 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 client interests first. In addition, we look for managers with a sustainable investment “edge.” Typical characteristics of Wellesley managers includes; long investment horizons; a bias toward fundamental, bottom-up investing; a focus on valuation; 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 that the College will be well served by its strategy of broad diversification across asset classes, geographies, and strategies, and by the excellent investment managers with whom we partner. Members of the College community with questions, suggestions, or thoughts about the management of the Wellesley College endowment are invited to contact me at any time.

Deborah F. Kuenstner
Chief Investment Officer