Anders Hall, CFA

Vice Chancellor for Investments

& Chief Investment Officer

The Vanderbilt Endowment

August 11, 2015

Agenda• Endowment Background• Office of Investments• Asset Allocation• Beta Factors• Capital Market Research• Manager Selection• Ongoing Due Diligence• Termination Decision• Recent Activity

August 11, 2015

ENDOWMENTBACKGROUND

August 11, 2015

Background: Endowment Overview

August 11, 2015

• Vanderbilt’s endowment is not one singular, homogeneous fund

• It is comprised of approximately 2,500 different funds supporting a variety of institutional needs and purposes• Athletics • Chairs • Fellowships/stipends• Graduate support (aid,

stipends) • Lectureships• Plant, equipment, and facility operations

• Prizes and awards• Professional financial

aid• Programs• Research• Student loans• Undergraduate financial

aid • Unrestricted

Background: Endowment Categories

August 11, 2015

Gift Category Size Percentage

Athletics financial aid $58 million 1.3%

Chairs $968 million 22.0%

Fellowships/stipends $27 million 0.6%

Graduate support (aid, stipends) $48 million 1.1%

Lectureships $19 million 0.4%

Loans $3 million 0.1%

Other $17 million 0.4%

Other financial aid $42 million 0.9%

Pending designation $33 million 0.8%

Plant, equipment, and facility operations

$44 million 1.0%

Prizes and awards $13 million 0.3%

Professional financial aid $278 million 6.3%

Programs $236 million 5.4%

Research $71 million 1.6%

Undergraduate financial aid $999 million 22.7%

Unrestricted $1.5 billion 35.0%

Total $4.3 billion 100.0%

Background: Endowment Structure

August 11, 2015

• The endowment is run similar to a mutual fund or common trust, with each internal beneficiary “owning” units (similar to shares of a mutual fund) of the endowment

• At December 2014, the endowment had 43.9 million units valued at $98.32/unit

• Spending from the endowment is based on 4.5% of a trailing three-year unit value• The payout for FY 2015 (based on 12/31/12,

12/31/13, and12/31/14 unit valuations) was $4.09/unit

Background: Largest 25 EndowmentsEndowment Size (as of

6/30/14)

Harvard $35.9 billion

Texas 25.4

Yale 23.9

Stanford 21.4

Princeton 21.0

MIT 12.4

Texas A&M 11.1

Northwestern 9.8

Michigan 9.7

Penn 9.6

Columbia 9.2

Notre Dame 8.0

Chicago 7.5

California 7.4

Duke 7.0

Emory 6.7

Washington U. 6.6

Virginia 5.9

Cornell 5.9

USC 5.6

Rice 5.5

Dartmouth 4.5

Vanderbilt 4.1

Ohio State 3.5

Pitt 3.5

August 11, 2015

Background: Endowment Growth

August 11, 2015

$0

$500,000,000

$1,000,000,000

$1,500,000,000

$2,000,000,000

$2,500,000,000

$3,000,000,000

$3,500,000,000

$4,000,000,000

$4,500,000,000

$5,000,000,000Total Market Value

Background: Endowment Additions

August 11, 2015

True Corpus (Book Value) Additions (in millions)

9

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

$0

$10

$20

$30

$40

$50

$60

$70

$0$4

$15

$9

$26

$8

$1$3

$6

$3 $4 $4 $4 $5 $5$7

$26

$9$7 $7 $7

$15$1

9$1

9

$32

$24

$4

$14

$12

$56

$21

$32

$28$3

3$34

$16

$46$4

5

$41

$34$3

7

$51

$29

$60

$55

$11M5-yr avg.

$4M5-yr avg.

$4M5-yr avg.

$11M5-yr avg.

$18M5-yr avg.

$22M5-yr avg.

$29M5-yr avg.

$36M5-yr avg.

$47M5-yr avg.

$75M 10-yr total $78M 10-yr total $202M 10-yr total

$414M 10-yr total

$232M 5-yr total$330M 10-yr total

Background: Endowment Additions

August 11, 2015

Sources of Endowment Growth (in millions)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$1,800

$2,200

$2,600

$3,000

$3,400

$3,800

$4,200

Endowment that existed at the end of FY00

True endowment additions (and growth) since FY00

Quasi-endowment additions (and growth) since FY00

$4,046

$2,9

90$8

86$1

70

10%

51%

39%

$1,731 of growth

% ofgrowth

$2,315

August 11, 2015

Background: Endowment Dependency

Prince

ton

Rice

Harva

rdYal

e

Notre

Dame*

Dartm

outh

Brown

MIT

Colum

bia

Stanfo

rd*

Northwes

tern

*

Chicag

o

Was

h U.

Cornel

l

Duke

Georg

etown

Cal T

ech*

UVA

Emory

Upenn

USC

Carneg

ie M

ello

n

Vander

bilt

Johns H

opkins

UCLA*

Berkel

ey*

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%52.5%

38.7%

34.9%33.5%

26.4%

21.8%

17.6%16.5%

13.9%12.7%12.1%11.1%

10.0%7.8%

6.1%5.8%5.4%5.0%5.0%4.4%3.7%4.5%4.0%2.7%

1.6%1.0%FY

20

13

En

dow

men

t d

istr

ibu

tion

÷ O

pera

tin

g

reve

nu

es

* Includes health system

August 11, 2015

Divinity

OwenBlair

A&SLaw

Peabody

Engineering

Nursing

Athletic

s VU

Medicine0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

77%

33%

23%19% 18%

13%10% 10%

4% 4% 4%

(1) Not including the hospitals and clinics, Vanderbilt’s endowment dependency is approximately 8%(2) Endowment dependency is defined as endowment distributions as a percentage of operating revenues, net of financial aid(3) Includes Vanderbilt Medical Group

Perc

en

tag

e o

f re

ven

ues

deri

ved

fro

m

en

dow

men

t

FY 2015 budget (1,2)

(3)

Background: Endowment Dependency

August 11, 2015

Background: Endowment Returns

08-09 0190-9180-8273-75

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

-20%

-10%

0%

10%

20%

30%

40%

18

.4%

12

.1%

0.5

%

-14

.1%

7.2

% 10

.0%

5.1

%

3.3

%

10

.2%

12

.4%

12

.1%

1.7

%

30

.0%

1.6

%

25

.0%

31

.4%

14

.9%

0.8

%

14

.8%

12

.2%

5.0

%

10

.9% 14

.1%

5.5

%

15

.7% 1

9.2

%

20

.6%

17

.0% 19

.8%

31

.9%

-4.7

%

-5.8

%

3.8

%

16

.9%

17

.9%

14

.0%

21

.9%

2.1

%

-16

.3%

8.9

%

13

.6%

1.3

%

9.3

%

13

.3%

Endowment return (%) Recessions

Payout

rate (%)

4.3

%

3.1

%4

.3%

4.9

%5

.2%

5.6

%5

.5%

5.6

%5

.3%

5.4

%

3.7

%

5.5

%5

.4%

5.6

%5

.3%

4.5

%4

.6%

4.9

%5

.1%

5.1

%5

.1%

5.0

%4

.5%

4.6

%4

.3%

3.9

%3

.7%

3.7

%

3.5

%3

.9%

4.6

%6

.1%

5.1

%4

.7%

4.2

%4

.0%

4.0

%4

.8%

5.3

%4

.8%

4.4

%

FY

3.1

%3

.0%

4.1

%

Positive in 40 of Past 44 Fiscal Years

OFFICE OFINVESTMENTS

August 11, 2015

Office of Investments

August 11, 2015

Asset Allocation

Manager Selection

Operations

Office of Investments

August 11, 2015

• Staff of 24• Chief Investment Officer: 1• Investment Team• Public Investment Team: 6• Private Investment Team: 5• Risk Management: 1

• Operations Team: 8• Assistants: 3

ASSETALLOCATION

August 11, 2015

Asset Allocation: Typical US Endowment/Foundation

• Among endowments and foundations:• Largest allocation to public equities• Second largest allocation to hedge

funds

August 11, 2015

Source: Cambridge Associates

Asset Allocation: US Endowment/ Foundation Fund

Flows• Decreased flows to bonds and US equity• Increased to hedge funds and global ex-

US equity

August 11, 2015

Source: Cambridge Associates

Asset Allocation: As of 6/30/2015

August 11, 2015

Asset Class Amount Percentage

Global Equity $1,423 million 32.8%

Hedged Strategies 909 21.0

Commodities 144 3.3

Fixed Income 225 5.2

Private Capital 1,220 28.2

Real Estate 197 4.6

Natural Resources 299 6.9

Cash/Leverage -85 -2.0

Total $4,332 million 100.0%

BETAFACTORS

August 11, 2015

Beta Factors: Rationale

• Most endowments focus solely on traditional asset classes

• Shortcomings of this framework• Diversification complacency• Asset classes versus legal structures

• Beta factors provide additional perspective on a portfolio’s exposures

August 11, 2015

Global Equity

(32.5%)

Hedged Strategies

(22.1%)

Fixed Income(2.4%)

Private Capital(28.7%)

Real Estate(5.9%)

Natural Resources

(8.1%)

Ass

et

Cla

sses

As of February 28, 2013

Beta Factors: Methodology

Equity

Global Equity

(32.5%)

Hedged Strategies

(22.1%)

Fixed Income(2.4%)

Private Capital(28.7%)

Real Estate(5.9%)

Natural Resources

(8.1%)

85%

Eq

uit

y: M

SC

I A

ll C

ou

ntr

y W

orl

d I

nd

ex

(US

D)

Ass

et

Cla

sses

As of February 28, 2013

Beta Factors: Methodology

Equity (27.6%)

Global Equity

(32.5%)

Hedged Strategies

(22.1%)

Fixed Income(2.4%)

Private Capital(28.7%)

Real Estate(5.9%)

Natural Resources

(8.1%)

85%

Eq

uit

y: M

SC

I A

ll C

ou

ntr

y W

orl

d I

nd

ex

(US

D)

Ass

et

Cla

sses

As of February 28, 2013

Beta Factors: Methodology

Equity (54.6%)

Global Equity

(32.5%)

Hedged Strategies

(22.1%)

Fixed Income(2.4%)

Private Capital(28.7%)

Real Estate(5.9%)

Natural Resources

(8.1%) Cre

dit

: B

arc

lays

Corp

ora

te B

on

d a

nd

Hig

h Y

ield

In

dic

es

Com

mod

ity:

S

&P

GS

CI

Tota

l R

etu

rn I

nd

ex

Real E

state

: F

TS

E N

AR

EIT

US

Real

Est

ate

In

dex

Cash

: C

itig

rou

p 3

-mon

th T

reasu

ry B

ill

+ 5

0b

ps

85%

9%

0%

87%

0%

0%

71%

0%

11%

11%

12%

0%

0%

0%

0%

0%

0%

0%

86%

Eq

uit

y: M

SC

I A

ll C

ou

ntr

y W

orl

d I

nd

ex

(US

D)

3%

Inte

rest

Rate

:

Barc

lays

US

Ag

gre

gate

Tre

asu

ry

Ind

ex

Ass

et

Cla

sses

0%

8%

99%

0%

1%

12%

1%

2%

As of February 28, 2013

Beta Factors: Methodology

Equity (54.6%)

Credit(19.9%)

Commodity(9.1%)

Real Estate(8.5%)

Interest Rate

(4.1%)

Cash(3.8%)

Global Equity

(32.5%)

Hedged Strategies

(22.1%)

Fixed Income(2.4%)

Private Capital(28.7%)

Real Estate(5.9%)

Natural Resources

(8.1%) Cre

dit

: B

arc

lays

Corp

ora

te B

on

d a

nd

Hig

h Y

ield

In

dic

es

Com

mod

ity:

S

&P

GS

CI

Tota

l R

etu

rn I

nd

ex

Real E

state

: F

TS

E N

AR

EIT

US

Real

Est

ate

In

dex

Cash

: C

itig

rou

p 3

-mon

th T

reasu

ry B

ill

+ 5

0b

ps

85%

9%

0%

87%

0%

0%

71%

0%

11%

11%

12%

0%

0%

0%

0%

0%

0%

0%

86%

Eq

uit

y: M

SC

I A

ll C

ou

ntr

y W

orl

d I

nd

ex

(US

D)

3%

Inte

rest

Rate

:

Barc

lays

US

Ag

gre

gate

Tre

asu

ry

Ind

ex

Ass

et

Cla

sses

0%

8%

99%

0%

0%

1%

12%

1%

2%

3%

0% 5% 64% 30% 0% 1%

As of February 28, 2013

Beta Factors: Methodology

  Strategic Targets

Strategic Ranges

Equity 55.0% 25% to 75%Commodity 10.0% -5% to 30%Credit 20.0% -5% to 30%Real Estate 10.0% -5% to 30%Interest Rates 12.5% -5% to 30%

Cash-7.5% -10% to

10%Total 100.0%  Non-US Dollar 25.0% 0% to 50%

Beta Factors: Targets/Ranges

August 11, 2015

  Strategic Targets

Strategic Ranges

6/30/15 Exposures

Equity 55.0% 25% to 75% 69.3%Commodity 10.0% -5% to 30% 4.6%Credit 20.0% -5% to 30% 4.8%Real Estate 10.0% -5% to 30% 5.8%Interest Rates 12.5% -5% to 30% 3.5%

Cash-7.5% -10% to

10%11.9%

Total 100.0%   100.0%Non-US Dollar 25.0% 0% to 50% 31.4%

Beta Factors: Targets/Ranges

August 11, 2015

CAPITALMARKET RESEARCH

August 11, 2015

Research: Markets

• Understanding the market microstructure, especially cross-sectional volatility, can help identify markets with the highest return dispersion

August 11, 2015

Research: Tools

August 11, 2015

MANAGERSELECTION

August 11, 2015

Selection: Core Beliefs

• Healthy level of skepticism• Alpha is scarce

• Not easy to deliver superior risk-adjusted returns

• Beta (hidden/unhidden) can be a large part of managers’ portfolios

• Large inflows into an asset class or a manager decrease the ability to deliver alpha

• True skill is rare• Manager selection is key to success

August 11, 2015

Selection: Flowchart

August 11, 2015

Structureinvestments toprotect VU &align interests.

Use futures overlayto access marketswith limited alphaopportunities &/or

express tacticalviews.

Identifymarkets withthe highest

alphaopportunities.

Find activemanagers inattractivemarkets.

Understand &analyze risks in

attractive markets.Disciplined macrorisk framework.

• Can control process• Can’t control outcome

Good Process

Bad Process

Good Outcom

e

Deserved

Success

Dumb Luck

Bad Outcom

e

Bad Break

Poetic Justice

August 11, 2015

Selection: Process versus Outcome

Selection: Process versus Outcome

• Principle-based framework (not rules-based)

• Focus on process keeps us from buying high and selling low

• No substitute for good judgment

August 11, 2015

“Ninety percent of what passes for brilliance, or incompetence, in investing is the ebb and flow of investment styles. Since opportunities by style regress [to the mean], past performance tends to be negatively correlated with future performance.”

- Jeremy Grantham

Selection: Philosophy

• Focus within fertile opportunity sets with wide outcomes

August 11, 2015

“Active management strategies demand un-institutional behavior from institutions, creating a paradox that few can unravel.

Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom.”

– David F. Swensen, Pioneering Portfolio Management

Selection: Philosophy

• Avoid adverse selection issues• Superior opportunities will rarely find

us, we must seek them out

• Active sourcing process for small, unique, and unscalable opportunities

• Leverage staff pre-existing relationships to create opportunity in areas with limited capacity

August 11, 2015

Selection: Philosophy

• Balance small opportunistic managers withmid-to-large opportunities

• Calibrate assets under management with opportunity

• Calibrate manager lifecycle with investment structure, fees, and alignment of interests

August 11, 2015

Selection: Concentration

• Our focus is the concentrated investors, who have typically outperformed other types of active managers over the long run

• Concentration allows managers to focus on their best ideas rather than diluting returns withlow-conviction ideas just because they belong to benchmarks

August 11, 2015

Selection: Concentration

August 11, 2015

Selection: Other Characteristics

• Discernible investment edge and investment opportunity

• Ability to preserve capital• Robust risk management

process/policies• Preference for superior security

selection or market timing, not both

August 11, 2015

Selection: Other Characteristics

• Preference for low-to-moderate leverage• Appropriate assets under management

for strategy• Avoid black-box or difficult-to-

understand strategies• Attractive long-term, net of fees

performance• Lesser-known, “emerging” managers

August 11, 2015

ONGOINGDUE DILIGENCE

August 11, 2015

Ongoing Due Diligence: Monitoring

August 11, 2015

• On-site visits• Meetings in Vanderbilt offices• Ad-hoc and scheduled phone calls• Weekly, monthly, quarterly reports• Annual meetings• Log meeting and call notes in Backstop• Internal debates on positions• Portfolio monitoring

• Performance, attribution (alpha/beta/market timing), exposure (strategy, geography, gross/net), liquidity, holdings-based (when available)

TERMINATIONDECISION

August 11, 2015

Termination: Rationale

• Consistent underperformance • Managers are not terminated just for

underperformance• Based on strategy and markets at a point

in time• Key and/or high personnel turnover• Better investment opportunities• Material strategy drift• Substantial and fast asset growth beyond

what might be expected• Unexpected events

August 11, 2015

August 11, 2015

Termination: Rationale

RECENTACTIVITY

August 11, 2015

Recent Activity: Since September 2013

• Added 24 new Global Equity managers totaling $998 million of market value

• Launched Hedged Strategies separately-managed account platform (11 managers, $513 million of net asset value)

• Introduced Commodities as a new asset class

• Reduced Fixed Income allocation• Deep dives on private investments

portfolio• Private Capital• Real Estate• Natural Resources

August 11, 2015

• Completed office remodeling

• Hired 15 new employees

• Made 61 new investments in total• Public investments: 37 investments

totaling$1.6 billion

• Private investments: 24 commitments totaling $218 million

August 11, 2015

Recent Activity: Since September 2013

Anders Hall, CFA

Vice Chancellor for Investments

& Chief Investment Officer

Questions?

August 11, 2015