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Report on Endowment Performance 2010-11

The McGill endowment is comprised of (i) bequests and donations received by the University, for the most part with specific designations, and to be held in perpetuity (ii) those assets designated by the Board of Governors to be endowed and (iii) those assets of certain McGill units and affiliated entities which have been allocated to the McGill Investment Pool (“MIP”) as an investment vehicle.  The endowment is managed by the McGill Office of Investments under the direction of the Investment Committee.

The overall objective of the endowment is to obtain a total return (yield plus capital appreciation) necessary to provide a dependable and optimal source of income for endowment beneficiaries, to cover the annual operating costs of the endowment and to preserve (in real dollar terms) the capital of the endowment within the social and ethical norms of the University.

The endowment fund is managed as the MIP which was formed in 1970.  The use of a unitized pool allows for the investment of a critical mass of assets thus providing for broad diversification and economies of scale that have over the years resulted in positive performance, reduced volatility and low investment management fees.

At April 30, 2011, the end of the University’s fiscal period, the McGill Investment Pool (“MIP”), with a market value of $962.3 million, consisted of investments for the McGill endowments and accounts managed on behalf of McGill units and affiliated entities.

MIP Market and Unit Value

 The MIP market and unit value changes over the years ended May 31, 2007 to May 31, 2010 and period ended April 30, 2011 are shown below:

MIP Market Value and Unit Value Change (May 31, 2007-2010 & April 30, 2011)

MIP Growth

 

Table 1:    Change in market value for the period ended April 30, 2011


Income Distribution and Management Fee 

For the period ended April 30, 2011, $38.9 million in income was distributed to the University’s endowment beneficiaries.  Income is distributed monthly and adjusted quarterly for capital additions and withdrawals.

The 2010-11 the distribution rate per unit was based on 4.25% of the average market value of the endowment of the previous three years calculated at May 31.  This practice is used to minimize the impact of market fluctuations on the endowment fund and is consistent with practices adopted at other leading North American universities.  It is based on the distribution of an appropriate and prudent level of income to all unit holders. This method will apply in the 2011-12 fiscal year.

While the decision was made to maintain the distribution rate for the fiscal year 2010-11 at the same level as 2009-10 ($14.60 per unit), the Quebec government announced in February 2010 that all universities in the province would be required to change their fiscal year end from May 31 to April 30, commencing April 30, 2011.  As a result, income distribution in the 2010-11 fiscal period was $13.38 per unit, based on 11 months to April 30, 2011.

For 2010-11, the management fee was .90% of the average market value of the previous three years and amounted to $7.1 million. The management fee covers the endowment fund’s administrative costs, investment management fees and custodial fees as well as a contribution to the University’s indirect costs. The management fee will be calculated in the same manner for the 2011-12 fiscal year, in that it will be based on the average market value for the three years ended May 31, 2010.

Governance and Investment Management

The Investment Committee, a committee of the Board of Governors (“Board”), oversees the investment of the MIP assets.  The Office of Investments is responsible for implementing the Investment Committee’s decisions.

The Investment Committee is comprised of 11 members who, as of May 31, 2011, are Ian Soutar (Montreal), Chair; Heather Munroe-Blum (Montreal), Principal and Vice-Chancellor, ex-officio; Marc Weinstein (Montreal), Vice-Principal (Development and Alumni Relations), ex officio; Robert Rabinovitch (Montreal), Joel Raby (Montreal), Brenda Norris (Montreal), Jeremy Reitman (Montreal), Gerald Sheff (Toronto), Arnold Steinberg (Montreal), Danny Ritter (Montreal) and Stuart Cobbett (Montreal), Chair of the Board, ex-officio.  Anthony Campbell serves as Special Advisor. Members are appointed on the basis of their expertise and interest in investment, business and economics.

Pursuant to its Terms of Reference, the Committee is responsible for overseeing the management of the University’s investments in accordance with the Statement of Investment Policy.   Included in the Committee’s functions are (i) providing advice to the Board in establishing policies related to investments and making recommendations thereon to the Board for approval, (ii) reviewing annually the appropriateness of the Statement of Investment Policy and making recommendations on proposed modifications to the Board (iii) recommending to the Board policies on the annual distribution rate for the income from the University’s endowment (iv) reviewing and approving the appointment and termination of investment managers and service providers, investment manager mandates and the performance of each fund manager and (v) monitoring compliance with the Statement of Investment Policy.

The Committee met six times during the fiscal year ended April 30, 2011 either in person or by conference call.  Overall attendance averaged 68%.

The Investment Committee's annual review of the Statement of Investment Policy resulted in a proposal that no further changes be made during the year 2011.  The Committee’s Statement of Investment Beliefs, a document that provides guidance to the Committee in formulating investment decisions, was reviewed and revisions were made during the year.

Recommendations to maintain the income distribution rate at 4.25% for the 2011-12 fiscal year and that such rate be applied to the three-year rolling average market value determined by including the three fiscal years ending May 31, 2010, 2009 and 2008 were approved by the Board.

Decisions related to manager changes for the period ended April 30, 2011 are noted below:

During the year, a new commitment was made to JOG Limited Partnership No. V, a Canadian early stage oil and gas fund.

Also during the year, Hexavest Inc. was engaged for a non-North American equity value mandate and the Canadian equity/Canadian income trust mandates previously granted to Phillips Hager & North, Acuity Investment Management and MFC Global Investment Management were terminated and their respective holdings, as well as Canadian iShares holdings in RIAL-Holding, were apportioned between an existing manager, Jarislowsky Fraser, and a new manager, Pyramis Global Advisors, a Fidelity Investment Canada ULC  manager for Canadian equity mandates.

 As at June 30, 2011, approximately 92% of the University’s endowment investments were managed by external investment managers.  These managers and their respective mandates were:

  • Jarislowsky Fraser (Canadian and U.S. equity)
  • Pyramis Global Advisors, a Fidelity Investments Company (Canadian equity)
  • State Street Global Advisors (U.S. mid-cap index equity)
  • LSV Asset Management (U.S. small/mid-cap equity)
  • William Blair & Company (non-North American equity for both developed and emerging markets)
  • Hexavest Inc. (Non-North American equity)
  • Capital International and Comgest (emerging markets equity)
  • TD Asset Management (Canadian bond index and a passive currency hedging program)
  • Phillips, Hager & North (fixed income)
  • Hedge Funds (two funds of funds, primarily invested in long/short equity; a U.S. long/short equity fund and two event driven funds)
  • Private equity (six private equity funds of funds, investing on a combined basis in North American and European buyout, venture capital and global secondary funds, a Canadian fund investing in securities of distressed and under-valued Canadian companies and two Canadian venture capital limited partnerships)
  • Commodities (two North American natural resources funds of funds, two Canadian oil and gas funds)
  • Real estate (four limited partnerships investing in Canadian real estate and one U.S. open-ended real estate fund)

In addition to the above, two investment management mandates granted to Desautels Capital Management Inc. in  2010 for global equity and for global fixed income continue to be under management by students in McGill University’s Desautels Faculty of Management.

The Office of Investments manages approximately 8% of the MIP internally.  It holds securities in an account pending liquidation or allocation to an external investment manager, in addition to managing cash and cash equivalents.

Asset Distribution

The asset allocation of the MIP portfolio by asset class at June 30, 2011 and at June 30, 2010 is shown below:

MIP Asset Distribution by Asset Class as at June 30 (2011 - $957.7M; 2010 - $834.0M)

 

MIP Asset Allocation by Currency as at June 30

 

The currency allocation for total investments at June 30 is shown in the above chart. The 1.8 percentage point increase in Canadian exposure and the corresponding decrease in U.S. and non-North American exposure reflect market movements during the year as well as rebalancing activities.

Performance Measurement – 2010-2011

Performance measurement of the MIP is carried out quarterly on a calendar year basis by an independent performance measurement service.  Investment rates of return are stated on a total return basis which is capital appreciation, both realized and unrealized, plus income received and accrued.  The following table indicates the performance of the total MIP and all external managers (excluding RIAL-Holding, staff mortgages and the currency hedging program) over a range of time periods ended June 30, 2011 as well as the median return of the BNY Mellon Canadian Master Trust Universe (comprised of 82 pension funds), the BNY Mellon Endowments and Foundations Universe (comprised of 20 participants), the absolute return objective, a composite of the returns of  four comparable Canadian university endowment funds and the MIP’s composite benchmark:

 

Prepared by:  Office of Investments