Investment and Capital Management (ICM) is charged with managing the University of Sydney’s endowment and trust assets, investment funds and commercial real estate investments. Given the perpetual nature of the University’s donated funds, ICM seeks to generate an optimal risk-adjusted total return through the employment of a structured long-term investment philosophy based around strategic asset allocation targets.
The ICM team seeks to add value by:
- determining and monitoring strategic asset allocation to achieve optimal long-term objectives (risk and return)
- tactical redistribution within specified ranges around long-term benchmark asset allocation targets, enabling the portfolio to capture additional returns from short and medium-term economic conditions
- appointing professional fund managers with strong management and a proven track record which aligns with the portfolio’s needs for long term growth, and
- introducing new asset classes to improve the risk/return profile of the portfolio.
Asset class diversification: alternative assets
In 2006, ICM commenced a strategy to gradually increase funds invested in selected alternative assets. The rationale underlying this diversification strategy is to invest in assets that are expected to meet return targets but which, typically, have a low correlation with traditional debt and equity investments. Successfully achieving this goal will allow the University to reduce overall portfolio risk and enhance the risk/return profile of its Investment Portfolio. Over the past two years, the University has made commitments to infrastructure funds and a global diversified balanced fund.
During the second half of 2008, the University expanded its portfolio mix further by making an initial commitment to private equity. The timing of entry into this asset class (that is, ‘the vintage’) is particularly important and, in the current environment, the opportunity to add value over time looks to be well-aligned.
Further measured diversification into alternative assets is planned over the next one to three years.
Management of the investment portfolio
The ICM team is highly experienced, with several members having spent more than 15 years working in financial markets. All University funds invested in debt securities are managed internally by the team using a passive philosophy and style; once investment grade securities are purchased they are generally held to maturity. Funds invested in growth assets are managed externally by professional sector specialist managers
who use different investment processes and styles.
ICM is supported by an independent adviser, Mercer Investment Consulting. ICM employs Mercer to assist in decisions regarding the selection of external fund managers and performance reporting, as well as refining the Investment Portfolio’s strategic asset allocation. Mercer also provides quarterly reports that enable the University to monitor its managers against a rigorous compliance framework. The appointment of an external custodian service has also helped in this regard.
Management of bequests and endowments
The Gift Advisory Board (GAB) is responsible for governance of bequests and endowments. During 2008 GAB finalised a gift policy, which seeks to improve the efficiency and transparency of the administration and management of the University’s 300 bequests and 800 capital-preserved trusts. ICM is represented on GAB and is working closely with the University’s External Relations Portfolio on a number of projects that support GAB’s objectives.
Over the long term, the capital preservation of bequests and endowments is enhanced by adherence to a spending rule. ICM is currently undertaking a review of the spending policy to augment the diversification of the Investment Portfolio.
In return for managing the Investment Portfolio and providing other services, ICM charges faculties/foundations an administration fee. In respect of the endowment component of the portfolio, the following annual fees apply: Capital Preserved Trust Funds: 0.4 per cent of funds under management (FUM); other endowments: 0.5 per cent of FUM; foundation funds: 0.15 per cent of FUM.
A review of the administration fee conducted during 2008 found that the current level of fees continues to represent a charge that is predominately for cost recovery purposes and is well within industry standards.
The University relies on investment earnings to support budgeted expenditure and promote overall financial sustainability. In recent years, the annual income derived from the portfolio made up approximately 12 per cent of the University’s overall operating revenue.