FY17 Report from the Chief Investment Officer

Amherst’s endowment saw a strong rebound in performance for FY17, returning 15.5 percent for the period. The return, coupled with gift receipts, helped to push the endowment to an all-time high value of $2.248 billion as of June 30, 2017 (compared to $2.032 billion on June 30, 2016—an increase of $216 million). Gifts of $6 million and another $2 million in transfers to the endowment from terminated life-income funds also contributed to the College’s endowment for the year. The significant return comes at an opportune time for the College, as the endowment’s support of the Operating Budget continues to climb, totaling 51 percent for FY17. Further, campus construction projects, particularly the new Science Center, are marching towards completion.


The Folger Shakespeare Memorial Library’s Endowment Fund increased from $303.2 million to $334.0 million during the fiscal year. Funds managed by the trustees under life-income agreements totaled $81.8 million as of June 30, 2017, showing a net increase of $4.4 million from the prior year.

A summary of the growth in the Amherst endowment over the past decade is shown below.

Amherst College endowment value

FISCAL YEAR 2017 MARKETS AND RETURNS

Equity markets soared during the fiscal year, despite the backdrop of a very contentious U.S. presidential election, increased political tensions with North Korea and the ongoing process of the United Kingdom formally exiting the European Union. Fueled by expected pro-growth policies under then President-elect Trump, investors moved quickly into higher risk assets, eschewing the relative safety of government bonds. Market volatility dropped to multi-decade lows, and U.S. equity markets reached record highs seemingly on a daily basis. Monetary policies remain accommodating, even as the Federal Reserve has begun to raise interest rates and has announced plans to trim its balance sheet. While U.S. markets were strong (S&P 500 Index rose 17.9 percent for FY17), worldwide equity returns were even higher, as the MSCI EAFE Index gained 20.3 percent, and the MSCI Emerging Markets Index climbed 23.7 percent for the year. The return for Emerging Markets comes after a significant period of relative underperformance versus developed indices, and was its highest fiscal year return since 2011. China was a significant contributor to the MSCI EM return, as the MSCI China Index climbed 32.2 percent over the year.

After a strong FY16, with double-digit returns for both the Citigroup World Government Bond Index and U.S. 10-year Treasuries, investors showed a dramatic increase in risk appetite and, coupled with the expectation of continued rate hikes, demand for government bonds fell during FY17. For the year, U.S. 10-year Treasuries fell 5.6 percent, while the Citigroup World Government Bond Index dropped 4.1 percent. Commodity markets also struggled during FY17, as evidenced by the 9.0 percent decline in the S&P Goldman Sachs Commodity Index.

The College’s 15.5 percent return for FY17 year outpaced the strategic policy benchmark, which rose 12.4 percent for the period. The College’s return was significantly ahead of the 60 percent S&P 500 Index/40 percent Bloomberg Barclays U.S. Aggregate Bond  Index blended return of 10.4 percent.

The College’s FY17 return ranked in the top decile of the Cambridge Associates performance universe for college and university endowments.

Over the past 20 years, by investing alongside well-aligned investment managers, across a variety of asset classes and markets, the College has cumulatively added roughly $1.3 billion in value to the endowment—relative to a 7.4passive benchmark of 60 percent S&P 500 Index and 40 percent Bloomberg Barclays Aggregate Bond Index and the CA mean. The College’s 10-year return figure of 5.6 percent more fully reflects the pronounced impact of the 2008 global financial crisis on the portfolio.

A summary of the College’s longer-term returns versus various indices is summarized below.

Annualized Returns

POLICY PORTFOLIO AND INVESTMENT STRATEGY

The portfolio continues to be invested across a diverse set of asset classes, strategies, geographies and managers. The strategic policy portfolio, established by the Amherst College Investment Committee, guides overall asset allocation and liquidity. Given the increasing endowment support of the Operating Budget and a more cautious view of market performance on a forward basis, in FY17 the Investment Committee approved a dedicated strategic policy target to cash, to better manage capital flows for the portfolio. Thus the strategic policy portfolio now spans five broad asset categories: Global Equities, Absolute Return, Real Assets, Fixed Income and Cash. The Investment Committee and Office of Investments staff regularly review the expectations upon which the strategic policy portfolio is based, with the goal of constantly improving the portfolio’s risk
and return characteristics.

The strategic policy portfolio targets and policy ranges, along with actual asset allocation levels as of June 30, 2017, are shown in the table below. Asset Allocation
The rise in equity markets, coupled with the underperformance of commodities, has resulted in an underweight relative to targets within the Real Assets portfolio.

SUSTAINABILITY

In February 2015, the Board of Trustees issued a statement defining environmental sustainability as a fundamental College objective. The Investment Office has eagerly accepted and embraced the responsibility to influence its investment managers to incorporate consistent and thoughtful environmental considerations into their investment processes. The College’s investment managers are acutely aware that sustainability is a key diligence criterion for Amherst College and many other mission-based institutions. They are also aware of how important sustainable investing principles are to their continued ability to attract investment dollars. The majority of managers affirmatively indicated that they take these risks into consideration when evaluating prospective investments. In addition, the College continues to proactively evaluate and vote its shareholder proxies in alignment with ESG (Environmental, Social and Governance) principles, advocating for corporate accountability with respect to social, ethical, environmental and governance issues. The Office of Investments has partnered with Ceres, a nonprofit organization that advocates for sustainability leadership. Through membership in Ceres’ Investor Network on Climate Risk, Amherst College is able to advocate for, and participate in, numerous initiatives on environmental sustainability and efforts that will lead to a reduction of greenhouse gas emissions. In addition, the Amherst investment staff and Investment Committee continue to reshape and redirect the College’s investments into a broad array of sustainable natural resources, which includes investments in all energy sectors: renewables (wind, solar, geothermal), storage, energy efficiency technology and energy infrastructure, as well as sustainable timber, minerals and agriculture. The Office of Investments embraces an “active engagement” approach by making our views known to current and prospective investment managers and by aggressively seeking to participate in collective efforts to influence action to address the real and acute problem of climate change.

LOOKING AHEAD

FY17 performance was satisfying both on an absolute and relative basis, particularly following a year in which portfolio diversification was punished, as was the case in FY16. The ability to be a patient investor, along with the ability to invest through market cycles, has allowed Amherst to be an attractive partner to some of the best investment managers in the world. The College’s best-in-class investment partners have been a significant driver of its strong long-term performance.

The Investment Committee, working closely with the Office of Investments staff, continue to strive for capital appreciation with the appropriate level of risk. The College’s reliance on the endowment to support the tremendous initiatives across the campus places Amherst in a unique place among peers. Preserving the ability to support these initiatives remains of utmost importance to both the Investment Committee and staff as we navigate markets in which value is difficult to find.

Mauricia Geissler
Mauricia Geissler
Chief Investment Officer