Foundations, Endowments, and Investments

1. Foundations, Endowments, and Investments Presented by Barry N. Berlin, CFA Managing Director

2. Topics Fiduciary Duty and Investments Defining the Relationship – the IPS Diversification, Asset Allocation, and Forecasting Selecting Advisors and Managers Evaluating Investments Investing in Today’s Environment

3. Fiduciary Duty and Investments Fiduciary Duty is defined by GA Code, Section 44-15 – the Uniform Prudent Management of Institutional Funds Act.

4. Defining the Relationship – The Investment Policy Statement • Describes purpose of institution, and fund; relates investment success/failure to the institution’s fortunes. • Proposes time horizon for investments, and any limitations or adjustments that differ from a perpetual framework. Review horizon, and time horizon, would be quite different. • Sets reasonable goals with respect to returns, risks, and distributions. Defines benchmarks. • Illustrates constraints relating to liquidity, concentrated holdings, income vs. total return, specific asset classes, social investing, etc. • Stipulates asset mix guidelines, and appropriate ranges for each major category. • Sets meeting/review timetable, and specific items to be reviewed. • Incorporates Policy Statement in Board minutes. For examples, simply search the internet for ‘Investment Policy Statement’ and many versions will appear.

5. Diversified or Confused by Forecasts?

6. Diversification vs. Forecast-Driven Approaches • Is the future “knowable”? Consider these “big drivers” of economic/market change over the last 30 years… • The Internet was unknown 20 years ago; • The collapse of the Soviet Union surprised most people, even the Soviets; • Terrorism’s impact on US budget and economy (wars, homeland security, etc.); • The housing bubble wasn’t understood until near the end; • The drop in Gov’t bond yields from 15% to under 1%; • China’s dominance in manufacturing; • The rise of hedge funds, derivatives, and short-term trading as market players.

7. What are the odds of consistently forecasting market turns correctly?

8. Diversification Multiple high quality investments, with less than perfect correlation Each asset has ability to meet/exceed benchmark within it’s category Gradually adjust category weightings when out of balance, when goals change, or when profound market imbalances suggest changes Multiple managers, to increase odds of success

9. The Case for Multi-Asset Class Investing:Annual Returns for Various Asset Classes 2Q11 No single asset class exhibits the best performance consistently. However, a diversified approach balances out over the yearly returns. Best Worst Bar Agg is the Barclays Capital U.S. Aggregate Bond Index, which includes U.S. government, corporate, and mortgage-backed securities with maturities up to 30 years. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to developed-market equity performance, excluding the U.S. & Canada. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book rations and higher forecasted growth values. Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 index. Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index. S&P 500 Index, a market-value weighted index, consists of 500 U.S. stocks chosen for market size, liquidity, and industry group representation. Past performance does not guarantee comparable future results. Returns reflect reinvested distributions. Numbers displayed in NAVY represent the variance between the best and worst performance. Source: Lazard, StyleADVISOR, Atlantic Trust. As of 06/30/11.

10. Correlations

11. Access Across Asset Classes Higher Risk / Higher Potential Return • Cash Management • High-Quality Municipal Bonds • High-Quality Taxable Bonds • Hedge Fund-of-Funds • Multi-Strategy • Non-Directional Equity • Non-Directional Credit • Directional Equity • Directional Credit • Large Cap Growth • Large Cap Value • Mid Cap Growth • Mid Cap Value • Small Cap Growth • Small Cap Core • Small Cap Value Private Equity Real Estate Non-U.S. Equity U.S. Equity Directional Hedge Funds • Venture Capital • Leveraged Buyouts • Special Situation Funds • Fund-of-Funds • Private Real Estate Partnerships Non-Directional Hedge Funds Fixed Income • Developed International • Emerging Markets Lower Risk / Lower Potential Return This is a generalization of asset classes. Many of the sub-asset classes would appear in different positions on the risk/reward chart. *As of June 30, 2011.

12. Diversification – Select Categories and Managers Carefully

13. Selecting Advisors – Some Key Questions • Is your investment platform in-house, out-sourced, or a blend? What incentives, if any, exist to predispose recommendations towards in-house, vs. outside, programs? • Fee layering is an ongoing issue in the wealth management arena. Distinguish between fees paid directly by XYZ to your firm, and other fees to be absorbed by XYZ. In what instances will XYZ experience layered fees? • Will your firm receive income of any kind from outside money managers or vendors you use or recommend? These types of fees include but are not limited to 12b-1 fees, rebates and soft dollars. Describe in detail.

14. Fees – NACUBO/CommonFund Study, 2010

15. 4. Do you use a captive broker/dealer to execute client trades? Do any of your outside managers trade through this broker-dealer, generating commissions of any kind for your firm? If the XYZ account trades securities, will trades route through your captive broker/dealer? Will you make money on the bid/ask spread of any stocks, bonds, or other instruments that your firm recommends and/or implements? 5. What is the total fee for the money market fund where our cash reserves will be held? Who earns the fee? 6. When representing investment performance, do your statistics include all accounts of a similar description, including those that have since left your firm? Are your statistics “actual”, or is some of the historical data pro forma, representing a back-test of recommended managers that weren’t in use at the time?

16. 7. Describe the team supporting the XYZ relationship. What are the professional credentials of each participant? Please describe all past and current regulatory, legal, or ethics actions raised against any of these team members. • 8. Do you provide customized reports detailing performance and other important items? How often? Please provide examples. • 9. What practices does your firm engage to ensure consistency among clients? • 10. Describe your regulatory framework, and audit practices. Which CPA firm audits your books? • Where will XYZ’s investment be held in custody? Can assets be verified independently?

17. Evaluating Investments

18. XYZ Hedge Fund 3Q11

19. 10 20 5 10 0 XYZ Hedge Fund 0 -5 HFRI Equity Hedge (Total) Index XYZ Hedge Fund S&P 500 Return Return HFRI Equity Hedge (Total) Index S&P 500 5th to 25th Percentile -10 25th Percentile to Median -10 Median to 75th Percentile 75th to 95th Percentile -15 -20 -20 -25 -30 1 quarter 1 year 2 years 3 years 4 years 5 years 1 quarter 1 year 2 years 3 years 4 years 5 years XYZ Hedge Fund 3Q11 Manager vs. Benchmark as of September 2011 Manager vs. Equity Hedge Fund Universe September 2011

20. XYZ Hedge Fund 3Q11

21. Disclosure Definitions: • Alpha – Alpha is the incremental return on a manager when the market is stationary or the extra expected return due to non-market factors. The risk-adjusted measurement takes into account both the performance of the market as a whole and the volatility of the manager. A positive alpha indicates that a selected portfolio has produced returns above the expected level at that level of risk, and vice versa for negative alpha. • Beta – A measurement indicating the volatility of a manager relative to a chosen market. A beta of 1 means a manager has about the same volatility as the market. A beta higher than 1 means the manager is more volatile than the market, while a beta lower than 1 means less volatile. • Best Return – Within a selected date range (e.g., 5 years), the manager’s best rate of return. • Downside Market Capture – A measure of the manager’s performance in down markets relative to the market itself. A value of 90% suggests the manager’s loss is only nine tenths of the market’s loss. • R-Squared – A statistical measure that represents the percentage of a portfolio’s or security’s movements that are explained by the movements in a benchmark index. • Sharpe Ratio – A measure of the risk-adjusted return of a portfolio, the Sharpe Ratio is equal to the excess return over the risk-free rate divided by the standard deviation of the portfolio. The ratio can be used to compare the performance of managers. If two managers had the same level of risk but different levels of excess return, the manager with the higher Sharpe ratio would be preferable because the manager achieved a higher return with the same level of risk as the other manager. • Standard Deviation – Standard deviation is a statistical measure of a portfolio’s total risk and indicates the variability of the portfolio’s returns over a period of time. A higher standard deviation implies a riskier portfolio whose returns varied widely. • Tracking Error – Tracking error is a statistical measure of how closely a portfolio tracks the performance of the index to which it is benchmarked and is generally defined by the annualized standard deviation of active returns. • Upside Market Capture – A measure of the manager’s performance in up markets relative to the market itself. A value of 110% suggests the manager performs ten percent better than the market when the market is up. • Worst Return – Within a selected date range (e.g., 5 years), the manager’s worst rate of return.