TAB C FY2020 Q2 Investment Reports - Leadership · TAB C April 3, 2020 Board of Trustees Meetings...

TAB C

April 3, 2020 Board of Trustees Meetings

Finance & Administration Committee

FY2020 Q2 Investment Reports BACKGROUND The Oregon State University (university) investment reports for the second quarter (Q2) of fiscal year (FY) 2020 (i.e., October 1 – December 31, 2019) are presented in the following four sections:

• FY2020 Q2 Public University Fund Investment Report – This section includes a report on the investments of the Public University Fund (PUF) for the second quarter of FY2020. The PUF is an investment pool that is administered by the university on behalf of all Oregon public university participants, pursuant to legislation adopted by the 2014 Legislature. The PUF holds assets of the following participating Oregon public universities: Eastern Oregon University, Oregon Institute of Technology, Oregon State University, Portland State University, Southern Oregon University, and Western Oregon University.

• FY2020 Q2 Oregon State University Investment Report – This section includes a report on the investments of the operating and endowment assets of the university. This report reflects the university’s operating assets that are invested in the PUF, the university’s endowment and quasi-endowment investments managed by the Oregon State University Foundation, the land held as separately invested endowments, and the land grant endowment that is invested in the PUF.

• FY2020 Q2 Oregon State University Report on Unspent General Revenue Bond Proceeds – This section provides a summary of unspent revenue bond proceeds as of December 31, 2019.

• FY2020 Q2 Market Background – This section provides a general discussion of the investment markets and related performance information during the second quarter of FY2020.

TAB C



FY2020 Q2 PUBLIC UNIVERSITY FUND INVESTMENT REPORT (Prepared by the Public University Fund Administrator)

Performance

The PUF gained 0.5% for the quarter and 1.5% for the fiscal year-to-date through December 31, 2019. The PUF’s three-year and five-year average returns were 2.8% and 2.3%, respectively.

The Oregon Short-Term Fund (OSTF) returned 0.6% for the quarter and 1.3% for the fiscal year-to-date, outperforming its benchmark by 10 and 30 basis points, respectively. The Core Bond Fund returned 0.4% for the quarter and 1.6% fiscal year-to-date, underperforming its benchmark by 10 and 30 basis points, respectively. The investment yield on the PUF portfolio was 0.6% for the quarter.

In January, Oregon State Treasury fixed income portfolio manager, Tom Lofton, conducted a quarterly performance review with university staff. The rally in the fixed income market slowed during the quarter, represented by the muted 0.2% gain in the Bloomberg Barclays Aggregate Bond Index, as the yield curved steepened during the period. Following the strong rally in corporate credit during calendar year 2019 (+14.5%) and stretched valuations, Mr. Lofton and team continue to underweight corporate credit compared to the benchmark, instead favoring structured product such as agency mortgage backed securities.

Mr. Lofton announced he would be leaving the Oregon State Treasury in late January 2020, to be replaced by the investment team’s recent hire Will Hampson. It was also announced that the lead portfolio manager for the OSTF, Garrett Cudahey, departed in November. Perrin Lim, former lead manager for the OSTF, will assume this responsibility.

Public University Fund Performance

Quarter Ended

12-31-19

Current Fiscal YTD

Prior Fiscal YTD

3-Year Avg.

5-Year Avg. Market Value Asset

Allocation Policy

Oregon Short–Term Fund 0.6% 1.3% 1.2% 2.1% 1.5% $247,045,659 44.4%

$100 million target ¹

Benchmark - 91 day T-Bill

0.5% 1.0% 1.1% 1.7% 1.1%

PUF Core Bond Fund 0.4% 1.6% 1.8% N/A N/A 309,138,690 55.6%

Blended Benchmark ² 0.5% 1.9% 2.0% 3.2% 2.8%

PUF Total Return 0.5% 1.5% 1.7% 2.8% 2.3% $556,184,349 100.0%

PUF Investment Yield 0.6% 1.5% 1.3% 2.4% 2.0%

¹ The PUF policy guidelines define investment allocation targets based upon total participant dollars committed. Core balances in excess of liquidity requirements for the participants are available for investment in the Core Bond Fund. Maximum core investment allocations are determined based upon anticipated average cash balances for all participants during the fiscal year. ² The Blended Benchmark comprises the Bloomberg Barclay’s Aggregate 3-5 Years Index (75%) and the Bloomberg Barclay’s Aggregate 5-7 Years Index (25%).

TAB C



A description of each investment pool’s portfolio characteristics and market exposures is included in Appendix A of this report. Investment Income and Participant Ownership During the quarter, investment earnings distributed to the participants totaled $4,017,862.

Earnings Distribution ¹

Market Value as of 12/31/19

% Ownership

Oregon State University ² $ 1,798,399 $ 235,638,042 42.4% Portland State University 1,471,115 222,760,188 40.1%

Western Oregon University 254,715 32,290,822 5.8%

Oregon Institute of Technology 180,403 24,752,830 4.4%

Eastern Oregon University 157,729 23,226,406 4.2%

Southern Oregon University 155,501 17,516,061 3.1%

Grand Total $ 4,017,862 $ 556,184,349 100.0%

¹The earnings available for distribution to participants were earned during the months of September 2019 through November 2019 and distributed to participants in December 2019. Earnings are distributed to participants based upon average cash and investment balances on deposit during the same period, which differs from the total market value at the end of the quarter. ²As of December 31, 2019, Oregon State University’s total PUF market value consisted of operating assets, valued at $235,308,063, and the land grant endowment, valued at $329,979.

TAB C



FY2020 Q2 OREGON STATE UNIVERSITY INVESTMENT REPORT

The schedule of Oregon State University’s investments is shown in the following investment summary.

Public University Fund Performance Oregon State University’s operating assets and the land grant endowment are invested in the Public University Fund (PUF). The report on the investment performance of the PUF, provided in the separate section above, shows the PUF gained 0.5% for the second fiscal quarter and 1.5% for the fiscal year-to-date.

OSU Endowment Asset Performance The OSU Endowment Assets, including those managed by the OSU Foundation, increased by 5.4% during the quarter. The three-year average total return was 10.6%. The total market value of the OSU endowment assets as of December 31, 2019, was $56,836,085. The OSU Foundation, pursuant to an investment management contract, is managing the majority of the university’s endowment assets. The OSU Foundation’s Endowment Pool increased by 6.2% during the quarter, underperforming its benchmark by 100 basis points. The three-year average return was 10.5%, underperforming its benchmark by 40 basis points.

TAB C



TAB C



FY2020 Q2 OREGON STATE UNIVERSITY REPORT ON UNSPENT GENERAL REVENUE BOND PROCEEDS The schedule of Oregon State University’s unspent revenue bond proceeds as of December 31, 2019, is shown in the summary below.

Unspent Revenue Bond Proceeds

Issuance Year 2015 1 2016 2 2017 3 2019 4 Total

Unspent Revenue Bond Proceeds

$637,148 $2,421,628 $54,810,508 $116,552,946 $174,422,230

Allocated 5 $637,148 $2,421,628 $54,810,508 $86,231,252 $144,100,536 Unallocated 6 $ - $ - $ - $30,321,694 $ 30,321,694

1 Space Improvement Projects are forecasted to be fully expended in FY2020. 2 Primarily taxable funds allocated to IT Systems Infrastructure project (Link Oregon). 3 Proceeds use approved June 2017. 4 Balance represents unspent 2019 revenue bond proceeds as of December 31, 2019, less adjustments for operating account reimbursements due as of the end of the period ($3,811,407) 5 Allocated proceeds are proceeds committed to specific projects that have Stage Gate 2 approval by the Board. 6 Unallocated proceeds have not yet been committed to specific capital projects approved by the Board.

FY2020 Q2 MARKET BACKGROUND (Prepared by Callan Associates, consultants to the Oregon Investment Council) Macroeconomic Environment From our calendar year-end 2018 Letter: “As widely expected … the Federal Open Market Committee (FOMC) voted unanimously to increase its federal funds rate target by 25 bps, bringing it to 2.25%–2.50%. … the year-end read of fed funds futures prices indicated a nearly 90% probability of no Federal Reserve (Fed) hikes in calendar year 2019. … the FOMC also reduced its projections for calendar year 2019 rate hikes from three to two.” Those projections proved to be dramatically inaccurate. Indeed, the FOMC cut rates three times in calendar year 2019, bringing the target rate to 1.50%–1.75%. At calendar year-end 2019, fed funds futures prices indicated a less than 50% probability of any Fed action in calendar year 2020, and the most recent “dot plot,” which illustrates projections of FOMC members, implied no rate cuts in calendar year 2020 and only one in calendar year 2021. Fed cuts fueled risk appetite and all major asset classes posted above-average returns—many of them in double-digit territory. While negative returns in calendar year 2018 are part of this picture, this degree of broad-based outperformance is unusual, if not unprecedented. The Fed’s “pivot” was the most obvious contributor to stellar performance given that the economic picture was largely unchanged. Unemployment lingered at historically low levels, gross domestic product (GDP) growth hovered around 2%, consumers continued to spend, and inflation remained benign. The manufacturing sector continued to be a relatively lone point of weakness.

TAB C



The U.S. economy closed the calendar year with the unemployment rate at a 50-year low of 3.5%. The final reading for third calendar quarter GDP showed a 2.1% gain, with personal consumption expenditures up 3.1%. November’s headline Consumer Price Index print was 2.1% (year-over-year) while the core measure was 2.3%. The Fed’s preferred inflation gauge, the Core Personal Consumption Expenditure Deflator, rose 1.7% over the trailing year. Manufacturing remained weak. The December Manufacturing Institute of Supply Management (released on Jan. 2) was 47.2, below 50 for the fifth consecutive month. Readings below 50 signal contraction. Equity markets were propelled to record highs and even fixed income investors were rewarded with nearly double-digit returns, an amazing feat given the sector’s paltry yields. December capped a 129-month bull market for the S&P 500 Index, the longest ever and a cumulative return of nearly 500% since March 9, 2009. Going into calendar year-end, perceived progress in U.S./China trade negotiations, some degree of closure around British Exit (Brexit), and expectations for the Fed to remain on hold for the foreseeable future overshadowed various areas of concern including unrest in Hong Kong, tensions in the Middle East and North Korea, the ongoing impeachment proceedings in the U.S., and ballooning federal debt. Further, Boeing’s temporary cessation of 737 Max production is expected to trim 0.5% off first calendar quarter GDP growth. Outside of the U.S., rate cuts were prevalent across developed markets in calendar year 2019 but economic news was largely unchanged throughout the calendar year. GDP growth across developed markets remained weak but largely positive. The most recent annual growth rate for the euro area was 1.2% and for Japan, 1.7%. As in the U.S., manufacturing continued to be a weak spot given a fall-off in global demand as well as the imposition of trade tariffs. The global manufacturing Purchasing Managers Index was 50.3 in November, but that was due partly to modest expansions in emerging market countries Brazil, China, and India. Global inflation also remained benign at 2.0% in October, with the figure for developed markets being a more meager 1.5%, according to data from JP Morgan. Equity Markets The S&P 500 Index rose 9.1% in the fourth calendar quarter, bringing its calendar year-to-date result to a whopping 31.5%, the best calendar year return since 2013 and capping a decade of strong performance. Small cap stocks outperformed large caps in the fourth calendar quarter, but trailed for the calendar year (Russell 2000: +9.9%; +25.5% vs. Russell 1000: 9.0%; +31.4%). Growth stocks outperformed for both periods (Russell 1000 Growth: +10.6%; +36.4%; Russell 1000 Value: +7.4%; +26.5). From a sector perspective, Real Estate (-0.5%) was the only sector to post a negative return in the fourth calendar quarter, though Utilities (+0.8%) was only modestly positive. Technology and Health Care (both +14.4%) were the twin “winners”. For the calendar year, all sectors posted double-digit returns—Energy (+11.8%) and Technology (+50.3%) were the bookends. The Tech sector is up a cumulative 840% since the market low in March 9, 2009. Notably, the stock market rally in calendar year 2019 was fueled largely by expansions in share price multiples in contrast to the rest of the decade, when returns were driven mostly by earnings growth. As a result, some term the market “overvalued” by a number of metrics relative to long-term averages.

TAB C



Non-U.S. developed markets trailed the U.S. but were still up sharply in the fourth calendar quarter and full calendar year 2019 (Morgan Stanley Capital Indices (MSCI) All Countries World Index (ACWI) ex-USA: +8.9%; +21.5%). Virtually all countries posted positive returns for both periods, though results were varied. Emerging markets outperformed developed markets in the fourth calendar quarter but trailed for the full calendar year (MSCI Emerging Markets Index: +11.8% +18.4%). Chile (-8.8%; -16.9%) was the only country to deliver a negative return for both periods due to a sharp decline in the Chilean peso amid civil unrest. Russia (+16.8%; +50.9%) was the top performer for the calendar year as its central bank aggressively cut rates. Returns for the Brazil, Russia, India and China countries were mixed. Brazil (+14.2%; + 26.3%) and China (+14.7%; +23.5%) also posted strong results while returns from India (+5.3%; +7.6%) were more modest.

Fixed Income Markets Fixed income markets posted strong returns in calendar year 2019 fueled both by falling interest rates and strong investor demand, especially for higher-yielding sectors. The 10-year U.S. Treasury closed the calendar year at 1.92%, up from 1.68% at the end of the third calendar quarter and down sharply from 2.69% at the close of calendar year 2018. The Bloomberg Barclays U.S. Aggregate Bond Index rose 8.7%, the best calendar year return since 2002, with the lowest-quality tier of the Index up 16.4%. Fourth calendar quarter gains were more muted at 0.2% as Treasury yields rose modestly. Corporate bonds were the best-performing sector in the fourth calendar quarter and 2019 (Bloomberg Barclays Corporate Index: +1.2%; +14.5%) with long corporates gaining nearly 24% in calendar year 2019. High yield corporates also posted sharp gains; the Bloomberg Barclays Corporate High Yield Index rose 2.6% in the fourth calendar quarter and 14.3% in calendar year 2019. Leveraged loans suffered outflows throughout the calendar year, but still posted a solid return (Credit Suisse Leveraged Loan: +1.7%; +9.0%). The Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index sharply outperformed the Treasury Index in the fourth calendar quarter as inflation expectations

TAB C



rose, more than offsetting underperformance earlier in the calendar year. The 10-year breakeven spread ended the calendar year at 1.77%, up from 1.53% as of September 30, 2019, and 1.71% as of December 31, 2018. Worries over an inverted yield curve were a distant memory—the spread between the 2-year and 10-year Treasury was 34 bps at calendar year-end. Municipal bonds (Bloomberg Barclays Municipal Bond: +0.7% and +7.5%) outperformed U.S. Treasuries in the fourth calendar quarter and calendar year 2019 as the sector attracted record inflows.

Overseas, rates followed a similar path with most higher in the fourth calendar quarter but lower for the calendar year. The amount of negatively yielding debt declined from a high of $17 trillion in August 2019 to less than $12 trillion as of calendar year-end. The U.S. dollar gave up some gains in the fourth calendar quarter, especially versus the euro (-3%), the Australian dollar (-4%), and the British pound (-8%). It posted a modest gain versus the Japanese yen (+0.6%). The Global Aggregate ex-U.S. Index rose 0.7% in the fourth calendar quarter on an unhedged basis but fell 1.1% on a hedged basis. For the full calendar year, the hedged version outperformed unhedged (7.6% vs 5.1%). Emerging market debt benefited from both rate cuts and a risk-on environment. Local currency emerging market debt, as measured by the JP Morgan Global Bond Emerging Markets Diversified Index, gained 5.2% in the fourth calendar quarter and 13.5% for the calendar year. Russia (+10.0%; +34.0%) was a top performer on the back of rate cuts and a stronger ruble. The U.S. dollar-denominated JP Morgan Global Bond Emerging Markets Diversified Index was up 1.8% in the fourth calendar quarter and 15.0% for the calendar year with mixed results across its 60+ constituents. Real Assets Real asset returns were mostly strong in the fourth calendar quarter. The Bloomberg Commodity Index gained 4.4% and the S&P Goldman Sachs Commodity Index (GSCI) Index was up 8.3%; the deviation between the two indices was largely attributable to the price of oil (up 9% and a much larger allocation within the S&P GSCI Index). Master Limited Partnerships (MLP), however, declined (Alerian MLP Index: -4.1%). Spot gold prices were up 3.4%. The Dow Jones-Brookfield Infrastructure Index rose 4.0%. Real Estate Investment Trusts (REITs) (Financial Times Stock Exchange: National Association of REITs Equity Index) posted a modest loss (-0.8%). Treasury Inflation Protected Securities (TIPS) also fared well as real rates fell; the Bloomberg Barclays TIPS Index rose 0.8%. For the full calendar year, all returns were positive with Infrastructure (+28.7%) and REITs (+26.0%) leading the pack. MLPs (+6.6%) posted the lowest full-year return of the real asset category.

TAB C



Closing Thoughts While calendar year 2018 was an unusual year where virtually all asset classes posted negative returns, calendar year 2019 was equally rare with all major asset classes delivering above-average returns. Our head of capital markets, Jay Kloepfer, fondly labels calendar year 2019 a “two standard deviation event” and certainly a year that few expected in spite of the disappointing results in calendar year 2018. The calendar year serves as a good reminder of the importance of adhering to a disciplined process that includes a well-defined long-term asset allocation policy. RECOMMENDATION Staff recommend the Finance & Administration Committee accept the FY2020 Q2 Public University Fund Investment Report and the FY2020 Q2 Oregon State University Investment Report.

TAB C - Appendix A



Oregon Short Term Fund December 31, 2019

TAB C - Appendix A



Core Bond Fund December 31, 2019

TAB C FY2020 Q2 Investment Reports - Leadership · TAB C April 3, 2020 Board of Trustees Meetings...

Documents

Transcript of TAB C FY2020 Q2 Investment Reports - Leadership · TAB C April 3, 2020 Board of Trustees Meetings...