In organisational terms there isn’t a stone unturned at University of Toronto Asset Management (UTAM). The organisation has a new board, new staff, new risk and reporting systems and has restructured its portfolios, including a new policy portfolio.
Where previously the assets were managed in a traditional method, with public market assets and alternatives allocated across a benchmark portfolio, now a low-cost passive reference portfolio is the starting point for investments. The portfolio is assessed in risk-driver terms including equities, interest rates, cash, inflation and currency.
The settings
This passive, low-cost easily implementable reference portfolio was set at Canadian equities 16 per cent, US equities 18 per cent, international developed market equities 16 per cent, emerging markets equities 10 per cent, credit 20 per cent and rates 20 per cent.
Of course the actual portfolio in 2012 was quite different to the reference portfolio, with UTAM “believing” in active management.
The actual allocations at the end of 2012 were Canadian equity 15.9 per cent, US equity 17.9 per cent, international developed market equity 16.4 per cent, emerging markets equity 10.2 per cent, credit 19.8 per cent, rates 10.9 per cent and absolute return 8.9 per cent.
“We have changed the place quite considerably in the past four years,” Bill Moriarty, the chief executive and president of UTAM, says.
“We have gone to a simple reference portfolio concept. It’s easy, implementable and passive. What drove the allocations was the risk tolerance and budget of the organisation. We also acknowledged that risk, in terms of volatility and other risks, is not static, so the risk budget should be reference portfolio plus an element of active management,” he says. “We looked at it as beta risk and active risk, then created a portfolio around that.”
Once the reference portfolio was approved, he says the team “looked inside each area and then found the best way to gaining exposure to the risk over time”.
“It gave us the basic beta portfolio, then we look at whether we can build a better beta portfolio with strategies and then we think of the best managers,” he says.
University of Toronto Asset Management manages three pools of money on behalf of the university. The endowment and pension portfolios have a target return of 4 per cent plus CPI, the target of the Expendable Fund Investment Pool, which is the university’s working capital pool, is the 365-day Canadian treasury bill plus 50 basis points.
Positioning risk
Over the past 12 months UTAM has also implemented a position-based risk system, which went live in December 2012.
“I have more grey hairs than I did a year ago,” Moriarty says. “This is easier to implement for traditional long-only strategies but is more complicated with hedge funds and privates.”
University of Toronto Asset Management has also been working with Morgan Creek Capital, which is an investment adviser, built specifically to advise clients on the endowment model.
It has used State Street’s web-based truView market risk-management tool, which feeds into other international fund services applications, and is specifically aimed at the needs of hedge funds and hedge funds of funds.
“The hedge fund strategy is an evolving area where we are working with the university,” he says.
“On the private side, we pulled apart the commingled funds to understand the investments, proxied them with public investments and everything was put into portfolios. It means we can now look at our allocations across, say, regional or industry concentrations.”
“This has taken a lot of time to implement. We’ve found it very useful, and it’s told us some things that weren’t obvious, like some of our currency risks weren’t quite as obvious from the top down as when you look at granular level.”
The foreign currency hedging policy has also been changed, and is now set between 5 and 25 per cent of each portfolio’s total value.
One of the results of the new risk allocation model is that the portfolio is very underweight interest rate risk.
“Our rates exposure is now half of the policy portfolio and we have no exposure to high yield,” he says.
Performance plus
Moriarty is proud of the team’s performance, which he says has been steadily improving relative to the benchmark over the years.
Tens of millions of dollars in costs have been taken out of the portfolio as it comes up with strategies to create a better beta portfolio. Despite that, UTAM still has a large number of service providers, with more than 50 managers under the growth/equity critiera, 22 in income/credit, two in rates and 11 in the other category.
One of the enabling factors for all of the change at UTAM has been a new governance structure.
A large board has been reduced to five directors, which deals only with operational risk, strategic vision and budgets. The university has an investment advisory committee, with investments delegated to and implemented by UTAM.
“This structure focuses the board on the critical elements of managing the portfolios, which is setting the long-term risk and return targets,” he says. “Before the board was much larger and there was perhaps some lack of understanding or explicit statement of responsibility.”
