The global recession caused many economic players to reevaluate their investment strategies and The University of Western Ontario is among those taking a step back to reevaluate with hindsight in mind.
At the Tuesday meeting of Western’s Board of Governors, the Investment Committee provided a report outlining the performance of the operating and endowment investment portfolio and the recent activities of the committee.
Endowed funds are gifts made to the university with the intention of holding them in perpetuity and directing their returns toward the purpose for which the endowments were created. Non-endowed funds are funds the university has to invest from all other sources, including capital funds, ancillaries, trust funds, research and the operating budget.
With the downturn in the global markets, Western’s accumulated investment returns were essentially wiped out, which forced the university to bring ongoing expenditures in line with ongoing revenues. This included the elimination of positions across campus, as the university was relying on non-endowed investment earnings to support ongoing operating expenses, including salaries. Making a change to its policy, the university now uses non-endowed funds to support one-time expenditures only.
After several weighty blows, Western’s investment portfolio has seen improvement.
Having spent two years in the red, the investment performance of the portfolio is back in the black, earning a policy return of 8.6 per cent for the fiscal year ending June 30, and annualized for four years, the policy return is 1.3 per cent. This is good news considering after losing 2.5 per cent of its value in 2008, the portfolio dropped another 10.3 per cent in 2009, leaving it in the negative.
“We’ve certainly recovered the vast majority of our ground since we had the global economic downturn and we lost the funds in our investment portfolio,” says Gitta Kulczycki, vice-president (resources and operations), adding much of the recovery has been since March 2009.
The operating and endowment portfolio, as of June 30, has a book value of $365.706 million and a market value of $398.038 million.
It may be premature to start smiling about surviving the storm, Kulczycki warns. Rather, it is better to heed the cautionary notes in the marketplace and reevaluate the lessons learned from the worldwide market crash.
“If we look at the tailwinds and headwinds of what is going on in the global marketplace, there’s a lot of cautionary notes … about whether we are entering a period of inflation/deflation. Governments around the world are using different approaches to deal with their huge budget deficits. What that might mean for our equity returns or our overall investment returns – it’s very hard to predict that,” she says.
“It’s fair say that in terms of our expectations going forward, generally speaking … our expectations for investment returns are not what they would have been in the early 2000 decade. We’re probably in a number of years where we are going to see far more modest returns in our endowment and non-endowment portfolio, as is everyone else who is out there in the investment marketplace.”
As the investment world has changed, it might be the right time to review Western’s investment policy, says Kulczycki.
“It’s a good time to relook at everything, given that we went through this global downturn. We had a 100-year event; it’s a good time to have a look at what our expectations are moving forward,” she says.
One of the things under consideration is the Investment Committee’s objective to earn a 5 per cent real rate of return over the long term, meaning to earn 5 per cent over the rate of inflation, as measured by the Consumer Price Index. Inflation has averaged 1.7 per cent per year for the past five years and 2 per cent for the past 10 years.
For the four years ending June 30, the annualized real rate of return was 0.1 per cent, consisting of a nominal return of 1.6 per cent less inflation of 1.5 per cent. For the five years ending June 30, the annualized real rate of return for the portfolio was 1.1 per cent, which consists of a nominal (actual) annualized return of 2.8 per cent less 1.7 per cent for inflation. What this means is the five-year annualized return does not meet the Investment Committee’s performance objective of a real rate of return of five per cent.
At one time, setting the real rate of return objective at 5 per cent made sense and Western was able to achieve that expectation, Kulczycki says. But these are different times.
Given the current asset mix, “that’s probably not realistic,” she says.
“We are talking about ‘geez, is a 5 per cent real return, which means 5 per cent, plus inflation, plus those costs you incurred to generate income, is that realistic?’ Based on a discussion we had with the Board (of Governors) as part of the retreat, was the consensus was probably not; it’s probably not realistic,” she says.
The Investment Committee suggests given the current asset mix, this “unrealistic” objective and the policy statement be modified or changes be made to the asset mix.
As well, the committee raised questions about what a realistic spending policy rate is and whether Western’s spending policy is still reasonable. It was also proposed that a detailed review be conducted of the asset policy mix and spending rate every three years.
The Investment Committee will continue to review its statement of investment objectives, policies and governance over the next few months. Any changes would require final approval by the Board of Governors.
Elect a faculty and staff representative to fill a Board of Governors’ seat
Polls open on Tuesday for the election of faculty and administrative staff constituencies on Western’s Board of Governors. Full-time members of faculty and administrative staff are eligible to cast a ballot for their constituent representative to serve a term from Nov. 15-June 30.
The candidates for faculty are Jerzy Floryan, professor and chair, Mechanical and Materials Engineering in the Faculty of Engineering, and Linda Miller, vice-provost (School of Graduate and Postdoctoral Studies).
The candidates for administrative staff representatives are Susan Grindrod, associate vice-president, Housing and Ancillary Serivces, and Ryan Rodrigues, associate director, alumni outreach, Alumni Relations and Development.
Polls close at 11:59 p.m. on Wednesday. Find out more information on the candidates at https://www.uwo.ca/univsec/election/.