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Investment Management SeminarFinance 4820

Chris BittmanChief Investment Officer

University of Colorado FoundationApril 14, 2009

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Overview

1. Endowment structure, asset classes and performance

2. A look back at the markets in 2007-2008

3. Current conditions and Outlook

4. Investment Due Diligence and Monitoring

5. Where are the Opportunities?

Source of data: BNY Mellon.

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Investment Overview

Endowment is broadly diversified by geography, asset class and style.

Investment Policy Committee sets Policy Index (benchmark) and general policies – asset class ranges/targets, restricted investments and time horizon.

Daily oversight and management by investment staff.

Policy Index:

• 40% - US Equities

• 40% - Non-US Equities

• 20% - Fixed Income

We have outperformed our benchmark and the broad markets for the trailing 1, 2, 3, 4, 5, 7 and 10 year periods with less risk than either.

Have also outperformed 97% of our peers for the trailing 5 years.

Source of data: BNY Mellon.

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Endowment Asset Allocation as of 2-28-09

Range Target 2-28-09

Global Equity 20% to 70% 40% 34.0%Domestic 17.2%

International 16.8%

Alternatives 25% to 85% 50% 53.0%

Global Private Capital 10% to 30% 20% 25.5%

Hedge Funds 10% to 35% 20% 19.5%

Real Assets 5% to 20% 10% 8.0%

Fixed Inc. & Cash 5% to 20% 10% 13.0%

Total 100%

Source of data: BNY Mellon.

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Endowment Performance as of December 31, 2008

Latest Latest Since 10-04 2008 2 Years 3 Years staff inception

Benchmarks:

Russell 3000 -37.31% -18.81% -8.63% -2.66%

MSCI EAFE -43.38% -20.66% -7.35% .96%

Barclays Capital Agg. Bond 5.24% 6.10% 5.51% 4.68%.

Endowment -24.31% -6.41% 0.80% 5.05%

Policy Index -31.84% -14.59% -5.89% -.90%

Notes: Policy Index is 40% Russell 3000, 40% MSCI EAFE, 20% Barclays Capital Agg. Bond Index. From the fund’s inception to 6-30-08, the Policy Index was 50% Russell 3000, 20% MSCI EAFE, 30% LB Agg. Bond Index. Source of data: BNY Mellon

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Endowment Outperformance in Both Up and Down Markets

Performance 9-30-04 to 9-30-07Annualized

17.65%

12.61% 13.14%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

LTIP Policy Index S&P 500

Upside Market Capture = 140% Downside Market Capture = 68%

Performance 9-30-07 to 2-28-09Annualized

-38.84%

-22.18%

-32.62%

-45.00%

-40.00%

-35.00%

-30.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

LTIP Policy Index S&P 500

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Strong Performance Since Joint Effort Between Staff and Committee

Annualized Performance (net) 9-30-04 to 2-28-09

3.03%

-4.50%

-7.12%-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

LTIP Policy Index S&P 500

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…

Latest 3 Years Latest 5 Years

Total Fund (ending 12-31-08) 0.80% 5.30%

CU Foundation Policy Index -5.89% -0.23%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

Total Fund CU Foundation Policy Index

Rank20

Rank3

Outperformed 97% of Peers over last 5 years

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Endowment has outperformed with less risk than Policy Index or S&P 500

Five Years Ending December 31, 2008

Standard Deviations:LTIP 10.54% Policy Index 11.42%Domestic Equity 14.65% Russell 3000 14.03%International Equity 18.11% MSCI EAFE Net 17.60%Hedged Equity 9.21% BC Aggregate 3.75%Private Capital 14.34% S&P 500 13.54%Real Assets 12.27% 3 Mo T Bills 0.78%Total Bonds/ Cash 4.35%

Sharpe Ratios:LTIP 0.21 Policy Index -0.29Domestic Equity -0.31 Russell 3000 -0.36International Equity 0.01 MSCI EAFE Net -0.08Hedged Equity 0.11 BC Aggregate 0.41Private Capital 1.20 S&P 500 -0.39Real Assets 1.33 3 Mo T Bills 0.00Total Bonds 0.32

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

0.00 5.00 10.00 15.00 20.00

Standard Deviation

An

nu

ali

zed

Re

turn

International Equity

MSCI EAFE

Real Assets

Private Capital

Hedge Funds

LTIP

Total Bonds/ Cash

Domestic Equity

Policy Index

Russell 3000S&P 500

BC Aggregate

91 Day T-Bills

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Long term performance is compelling

Cumulative performance since joint effort with staff and Investment Policy Committee began on 9-30-04:

• LTIP up 14.1%

• Policy Index down (18.4%)

• S&P 500 down (27.8%)

In other words . . . a $100 investment in the LTIP made on 9-30-04 would have grown to $114 by 2-28-09.

A similar $100 investment made in the S&P 500 on the same day would have shrunk to $72.

Source of data: BNY Mellon.

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Bedtime stories around the country . . .

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“The economy is fundamentally strong, diverse and resilient . . . and will continue to grow.”

Treasury Secretary Paulson on February 14, 2008

“I do very much believe that the U.S. economy will return to a strong growth path with price stability”

FRB Chair Bernanke on February 19, 2008

“I don’t think we’re headed to recession.” President Bush on February 29, 2008

“I’m putting the odds at 98% . . .” Chris Bittman on March 1, 2008

Can you talk the economy off of a cliff?

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2007-08 Actions to Protect the Endowment

Positioned Portfolio defensively in summer of 2007 to protect capital:

• Trimmed equities from 53% to 46%. • Cut emerging markets exposure from 13% to 6%. • Increasing fixed income and cash from 8% to 13%. Added position in TIPS and strategies benefiting from bond market volatility. • Tilted our hedge fund exposure to managers with bigger short positions and less leverage.

Additional moves in 2008:

• Suspended our Securities Lending program in 3-08 prior to market downturn.

• Exited Commonfund Money Market Fund in summer ’08 before it shut down.

• First limited partner added in 11 years to premier venture capital firm.

• No violations of investment policy or audit comments.

• Continued to strengthen due diligence and monitoring efforts. Added to staff.

• Completed/Tested a Business Continuity Plan in case of a major disruption.

Source of data: BNY Mellon.

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The major difference . . . a better policy response . . .

Will this be another Great Depression?

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What happens when an object of infinite inertia (the government) collides with an immovable object (the economy)?

The Government vs. The Economy

Pick a winner

• Deleveraging

• Deflating housing

• Deteriorating corporate profits

• Debt write-downs

• Manufacturing contraction

• Inventory builds

• Rising unemployment

• Negative consumer sentiment

• Unprecedented fiscal stimulus

• Unprecedented monetary stimulus

• Replacing consumer balance sheet with Government balance sheet

A tug of war between two massive forces . . .

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The credit markets need to heal and banks need to begin lending…Confidence.

Housing needs to stabilize… 10-15%+ more downside in real estate market.

Employment needs to stabilize . . . 7.2% to 10%+ . . . begin deceleration soon.

What it will take for things to get better?

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Don’t invest for where we are today . . . Invest for where we are going tomorrow . . . “Skate to where the puck is going to be . . .”

Economic Cycles

We are here Structure portfolio for here

Take Maalox here

Investing 101 . . . Works in hockey too . . .

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• Consumer will continue to be hurt.

• Nationalization of parts of global financial system means economic crisis is not nearly over.

• The economy will not recover until home prices stop dropping.

• Massive recapitalizations will continue in the financial sector.

• Fed is out of conventional bullets.

• Market leaders the last 5 years (especially those depending on cheap

capital) won’t repeat.

• Dollar no longer the world’s reference currency.

• There are opportunities in this mess . . . Some are just well-hidden . . .

Outlook

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• More important than ever to do your homework on new manager diligence and monitoring of existing investments.

• Due diligence is not a one time event.

• Can’t rely exclusively on third parties.

• Warning Signs . . .

• Quantitative and Qualitative assessments.

Due Diligence Issues

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“Oh Yeah? Well, my dad looted a bigger hedge fund than your dad.”

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Warning Signs in Manager Due Diligence

Volatility beyond expected range.

Significant staff turnover.

Too good to be true performance.

GP unwilling to show performance attribution – generated by longs/shorts.

Unknown auditor.

Little of manager’s personal assets in strategy.

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Quantitative Issues:

Fund volatility vs peer group, Distribution of returns, Drawdown analysis.

Breadth/repetition – Profit on many trades vs. a few large ones, Structural changes in market that impact future performance/volatility.

Strategy – vs. others, Investment decision making process, Sample trade examination, Typical and longest/shortest holding periods, Strategy specific risks.

Risk controls – Risk mgt process, Exposures, Hedging policies (interest rates, currency), Disaster recovery plan, Key-person incapacity.

Leverage – Approach/philosophy, Caps and average use, Highest/lowest amounts, Sources and number of providers.

Taxes

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Qualitative Issues:

Structure – founder still there?, new principals, legal structure of firm and affiliates.

Fund Terms – lockups, redemption policy, high water mark, hurdle rates, fees, minimum investments.

Comp – salary vs. bonus, distribution of carry.

Principals/Managers – full background checks, education verification, past trading history at other firms, are they responsive?, what % of time is spent running the portfolio vs. running the business?

On site visits – infrastructure, key personnel interviews, physical condition of key players, etc.

Fund reporting – how are trades tracked, verify info with prime broker and custodian.

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Qualitative Issues (continued):

Administration -3rd party admin?, how are NAV’s calculated, fees, expenses

Auditor – verify engagement and auditor experience, get audited financials, confirm data previously provided by fund like number of accounts, assets, performance, review changes to auditor.

Attorneys – verify engagement, get representation of no current investigations or litigation.

Investor profiles – number/type of LP’s., percent owned by largest LP’s, value of GP’s interest.

Softer issues – trustworthy, humility (willing to cut losses), healthy dose of paranoia, take losses personally.

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Current Portfolio Positioning

• Higher than target weight in cash and fixed income.

• Below target weight on global public equities.

• Favor US over Non-US on public equities. US biased toward high

quality, large cap, growth-oriented companies.

• Hedge Funds and Private Capital overweight target.

• Opportunities in ’09-10:

• Use of leverage

• Beaten up commodities and real estate

• Bank loans, Distressed credit and TIPS

• Healthcare and Technology

• Infrastructure/Water

• With a long-term time horizon . . . Middle East North Africa.

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The World According to (some) Americans

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Africa in Perspective

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Best long term strategy? Taking advantage of other people’s panic . . .

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Contact info:

Chris Bittman - Chief Investment Officer

University of Colorado Foundation

1800 Grant St., Suite 725

Denver, CO 80203

303-813-7910 (o)

303-484-5790 (fax)

chris.bittman@cufund.org

www.cufund.org

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Chris Bittman Biography

Christopher L. Bittman, Chief Investment OfficerUniversity of Colorado FoundationE-mail: chris.bittman@cufund.org

Christopher L. Bittman is the Chief Investment Officer of the University of Colorado Foundation. Established in 1967, the University of Colorado Foundation is a privately governed nonprofit corporation whose mission is to support the University of Colorado. The Foundation manages investment assets in excess of $850 million.

Prior to being named the first CIO of the Foundation in 2004, he was the President and CEO of Jurika & Voyles – a California investment firm – where he was responsible for the management of over $5 billion for a broad variety of Fortune 500 corporations, public funds, foundations, endowments and individuals.

He began his career on Wall Street as the Western Regional Manager for Merrill Lynch’s Business Financial Services Group - the youngest Regional Manager in the group’s history.

Under his leadership the Foundation was named “Large Foundation of the Year” in 2007 by Institutional Investor’s Foundation & Endowment Money Management magazine based on superior investment performance, innovation and notable asset allocation moves.

Bittman graduated from the University of Colorado in 1985 and has served the institution as a volunteer for over 20 years as President of its Alumni Association as well as Trustee and Director of its Foundation and Chair of the Foundation’s Investment Committee. He sits as a guest lecturer on investment management at the University’s Leeds School of Business as well as serves on the investment committees of Colorado Public Television and the Colorado Health Foundation.