Endowment fund assets
The endowment fund market value was $414.1 million as at April 30, 2014, an increase of $42.3 million since our last report to donors. During the fiscal year, total contributions of new endowment capital from donors and reinvested earnings were $5.3 million and total withdrawals for endowed spending were $11.6 million. Total fund growth due to investment returns was $48.3 million. The fund’s book value and market value at fiscal year-end for each of the last 10 years are presented in Figure 1.
The difference between market value and book value is composed of cumulative investment earnings less withdrawals for endowed spending and expenses. The cushioning from cumulative earnings is important for sustaining a consistent payout to the endowment beneficiaries, year after year and including periods of negative market volatility. The book value represents historical donated capital and matching contributions plus capitalized inflation protection and capitalized earnings, which apply to some older endowments. Fees for investment management, custody, and endowment record keeping are charged directly to the fund. The fund’s total expense ratio in 2013 was 67 basis points, or 0.67%, per annum. York does not charge administration expenses to its endowment fund.
York University’s goal for its investment program is to earn sufficient investment income to provide consistent inflation-adjusted funding over the long term to the beneficiaries of its 2,000 endowed accounts without taking on undue risk in the investment holdings, managers and markets.
Determinants of success over the long run derive from the investment strategy, including policy asset mix and investment manager selection. Effects also arise from investment program developments introduced to respond to shifts in the capital markets and changes in endowment fund characteristics.
The fund’s investment strategy is developed and overseen by the investment committee, which concentrates its efforts on selecting strategies and managers that align with the investment objectives of preserving capital through a range of capital market outcomes and sustaining a regular stream of endowment spending over the long term. Investment risk in the portfolios is managed principally through diversification among asset classes, investment managers and holdings. The fund’s investment managers have been selected for their skill with a particular strategy and ability to build portfolios that control for downside risk.
The policy asset mix is formally determined through an asset-liability study and process that focus on developing an allocation with best fit to the investment objectives and spending requirements for the endowments.The asset mix is composed of allocations to various equity and fixed income asset classes, targeting 70% in stocks (Canadian, U.S. Small-Mid Cap, Global and Emerging Markets) and 30% in bonds (Canadian and Global High Yield). The fund’s actual asset class weights, in dollars and percentages, as at fiscal year ended April 30, 2014, are shown in Figure 2.
For the 12 months ending April 30, 2014, the fund produced a one-year rate of return of 14.8%. This was slightly short of the benchmark return of 15% for the one-year period. For a second year in a row, the markets and most of the fund’s portfolio managers had a strong performance year. The fund’s aggregate equity classes contributed a weighted-average return of 23.2% whereas the weighted-average return of fixed income was 2.8%.
York compares its annual performance results to a group of funds with investment allocations that are similar to that of the endowment fund. Over the last five calendar years, the fund’s performance was in the top 25%, or quartile, among its institutional peers. The outperformance is attributed to the contribution from the portfolio managers relative to their benchmark indexes and the greater exposure to high-returning equity (70%) of the fund relative to its peers. The fund and comparative benchmark returns for the one-year periods ending April 30 for the last 10 years are shown in Figure 3. In seven of the 10 years, the fund return exceeded the return of its performance benchmark.
In addition to overseeing and monitoring the investment portfolios, the investment committee carries out investment-related activities. During the last year, these included the completion of an asset-liability study and the adoption of a revised asset mix, the search for, and selection of, a specialist Canadian real estate manager, continued support of the responsible investment program, which included the launch of the York University Advisory Committee on Responsible Investing, and the conversion of the endowment accounting and external record-keeping to a unitized system. Committee activities are described in more detail in the Annual Investment Report to the University Board of Governors that is produced each year and posted on the University’s Board of Governors’ website in the investment section.
ENDOWMENT FINANCIAL REPORT – DEFINITIONS
Capital Account: The value of an individual endowment’s holdings in the investment pool as at the report date.
Book Value: The sum of the individual endowment’s original donation(s) plus any matching funds together with any amounts capitalized and the cumulative capital protection. The book value is the base amount that is multiplied by the distribution rate to determine the annual distribution amount (refer to Distribution from Endowed Fund below).
Capital Account Activity: Transactions and accounting entries recorded during the fiscal year.
Donations: The total endowed contributions from donor(s) stated at original receipted value.
Matching Funds: The total endowed contributions received from a government or university matching program stated at original value.
Capitalization: An allocation to book value from the individual endowment’s cumulative investment earnings representing excess surplus that has built up over time. This is an accounting entry and does not affect the market value. Its effect is to increase the book value which leads to an increase in the distribution amount.
Capital Protection: An allocation to book value from the individual endowment’s cumulative investment earnings to protect the book value and adjust the distribution amount for inflation. This is an accounting entry that does not affect the market value. Its effect is to increase the book value which leads to an increase in the distribution amount.
Cumulative Investment Earnings: Income and capital appreciation, realized and unrealized, accumulated since individual endowment inception, net of investment expenses, distributions to expendable account and allocations for capital protection.
Net Investment Earnings for the most recent year may be calculated as follows: market value, closing balance 2013 MINUS market value, closing balance 2012 PLUS distribution from endowment fund.
Expendable Account: This is the individual endowment’s operating balance, which reflects amounts withdrawn from the capital account PLUS funds from other sources LESS expenditures for endowed purposes.
Expenditures for Endowed Purpose: A withdrawal from the expendable account for spending (eg: a scholarship award). The annual commitment made in accordance with the donor’s designated purpose may vary from the reported amounts if a withdrawal occurs after the end of the fiscal period.
Cash Balance: The expendable account’s unspent balance as at the report date.
Expendable Donations: Any contributions by the donor that are not endowed and therefore credited to the expendable account generally intended for near-term spending for the purpose of the endowment.
Funding from Internal Sources: Any amount transferred to the expendable account by the University to further support the endowment’s purpose.
Distribution from Endowment Fund: A withdrawal from the capital account transferred to the expendable account for spending toward the endowment’s purpose. The distribution for endowment spending is allocated annually.
The Distribution Rate is set by administration and approved annually by the board. The rate reflects a balance between the objectives of supporting the endowment’s purpose in the current period and preserving its capital over the longer term to sustain a steady level and stream of annual support. In 2014-15, all endowed accounts with market value to book value ratio of greater than 1.05 were paid out at the rate of 5%.
The Distribution Amount is calculated by multiplying the distribution rate by the beginning of year book value, for each individual endowed account, then is allocated to the expendable account at the beginning of the following fiscal year.
Total Market Value and Expendable Account: The individual endowment’s holdings in the investment pool, at market value, plus the balance in the expendable account as at the report date.
Future distributions shall be calculated based on a revised endowment spending formula that has been introduced in 2014-15. The conversion on May 1, 2014 of the endowment fund accounting from a dollarized to a unitized system will be reflected in reporting to donors for the year ending April 30, 2015.