Independent Education gratefully acknowledges our sponsor Is the ‘Yale Endowment Model’ Obsolete? A Discussion on Lessons Learned from the Financial Meltdown of 2008

2 Agenda 1.What is the Endowment Model? How does it add value? 2.How has it changed over time? 3.How does U. Maryland Endowment invest? 4.What’s new since the crisis of 2008? 5.Thematic investing?

The Endowment Model worked… 3 Source: Cambridge Associates LLC. Note: Yale data is for years ending June 30 th and from NACUBO.

…and worked very well for Yale! 4 Source: Cambridge Associates LLC. Note: Yale data is for years ending June 30 th and from NACUBO.

5 How does the “Endowment Model” add value? 1.Asset Allocation 2.Risk management 3.Manager Selection 4.Thematic investing

Traditional vs. Endowment Models 6 Source: Cambridge Associates LLC. As of 2010

7 What are “Alternative” Investments? Absolute Return Long/short equity Arbitrage Macro-trading Distressed Credit Private Equity Leveraged buyouts Venture capital Growth capital Mezzanine financing Turnarounds Real Assets Real estate Oil & gas properties Energy infrastructure - pipelines & storage Timber & Farmland Mining Commodities

8 The Yale Endowment 28% Real Assets 33% Private Equity 19% Absolute Return 9% Int’l. Equity 4% Bonds 7% US Equity Source: The Yale Endowment Report As of June 30, 2010

Endowment Asset Allocation History 9 The Current “Over $1 billion” Endowment Universe – Historical Mean Asset Allocation Source: Cambridge Associates LLC.

USMF Policy Allocation History 10 USMF Investment Committee embarked on a new strategy in Implementation took several years.

Current Endowment Asset Allocation 11 Yale As of June 30, 2010 U. Maryland As of Dec. 31, 2010 Source: Cambridge Associates LLC. Note: Real Assets includes real estate, commodities, oil & gas, timber, and other private partnerships. Over $1 billion Universe As of Dec. 31, 2010 Liquid & Quasi-liquid75% Private25% Liquid & Quasi-liquid66% Private34% Liquid & Quasi-liquid42% Private58% Liquidity:

USMF Allocation by Security Type 12 Note: Represents a look-through to all securities held by endowment managers.

USMF Allocation by Security Type 13 Note: Represents a look-through to all securities held by endowment managers.

USMF Allocation by Security Type 14 Note: Represents a look-through to all securities held by endowment managers.

15 How does the “Endowment Model” add value? 1.Asset Allocation 2.Risk management 3.Manager Selection 4.Thematic investing

16 Risk Management Enhancements post-2008:  Risk Management Software  Streamline risk exposure data aggregation  System provides enhanced stress testing, VaR analysis, risk factor attribution  Formal Liquidity Policy  Tightened limit on outstanding capital commitments (liabilities must be < 20% of endow.)  Placed ceiling on illiquid investments at 50% of endowment  Valuations-based Rebalancing

“Non-Normal” Markets 17 USMF Max Loss: -25.0% Note: Above stress test estimates the current portfolio’s response to the changes in capital markets during the specified events.

18 “Normal markets” – VaR analysis Need to reduce risk Note: VaR represents the likely one-month loss that might occur every 1 in 20 months, i.e. 95% of all months the portfolio’s returns are likely to be better than the stated VaR amount. This does not capture the “tail events”, and it assumes a normal distribution of returns. VaRCurrentAvg. USMF-2.6%-5.5% S&P-5.1%-10.2%

19 How does the “Endowment Model” add value? 1.Asset Allocation 2.Risk management 3.Manager Selection 4.Thematic investing

Value Add via Manager Selection 20 Source: The Yale Endowment Report 2010.

How did Yale do it? Right place, right managers 21 Source: Cambridge Associates LLC. Note: Yale data is for years ending June 30 th and from NACUBO. Yale’s Venture Capital results in high returns, outperformance

22 How does the “Endowment Model” add value? 1.Asset Allocation 2.Risk management 3.Manager Selection 4.Thematic investing

What is asset allocation? 23 Debates about 80/20 vs. 60/40 are probably less important… diversification across different asset classes matters far more.

Not just US stocks/US bonds… 24 Source: Bloomberg

25 Thematic Investing Possible themes for the next several years:  End of the bull market in US govt. bonds  New bilateral relationships in the developing world  Super-cycle wave for commodities  Urbanization and a rising consumer class  High quality multi-national companies ; US technology ; EU luxury brands  Asian Union?

Emerging Economies Drive Global Growth 26 Source: The Conference Board, Inc.

Growing Bilateral Relationships in Developing World 27 Source: IMF DOT Database, UN COMTRADE US$millions

28 Urbanization Nearly 1 billion people might urbanize in the next ten years Source: World Urbanization Prospects

29 E.g., in China, the number of cities with large middle-affluent populations will expand dramatically in the next decade. Source: The Boston Consulting Group, Inc “The Keys to the Kingdom – Unlocking China’s Consumer Power” Rising Consumer Class

Urbanization 30 Shanghai 1990 Shanghai 2010

31 Asian Demand for Resources

Urbanization in Africa 32

Improved Macro Fundamentals in Africa 33 Source: IMF

Real vs. Financial Assets 34 Source: Bloomberg

Contact Information 35 University System of Maryland Foundation, Inc. Michael Barry – Chief Investment Officer