Investment Briefing June 7, 2018 Colonial Consulting LLC. Jim Russo, Partner
Colonial Consulting Firm Overview Founded in 1980 140 full service clients; $35.4 billion under advisement Overview Over 90% of client base consists of not-for-profit organizations 59 full-time staff members 100% internally owned and headquartered in New York City Organizational Structure Employee Owned No Outside Investors 13 Equity Partners Client Service Operations Consulting Performance Reporting Technology Finance & Office & Research & Portfolio Transitions & Data Management Management 22 Professionals 21 Professionals 11 Professionals 5 Professionals Page 1
Why Colonial? FOCUS PERFORMANCE CONFLICT FREE ● Long history of serving U.S. not- ● Assume accountability for ● We place client interests for-profits recommendations and results above our own ● Employee owned with only one ● Unbiased advice – no internal ● Goal is to achieve exceptional line of business strategies or financial investment outcomes across arrangements with managers market cycles Page 2
The Community Foundation’s Approach Establish a strategic asset allocation t hat is expected to achieve the Foundation’s long term risk/return o bjectives (preserve Foundation’s purchasing power in perpetuity) No attempt made to market time or change strategy based on near term outlook – does not preclude opportunistic allocations whose outcome is not driven by timing Diversify portfolio by asset class and strategy. Increases the likelihood of achieving return objectives under different scenarios Capitalize on the Foundation’s scale to invest opportunistically and access top managers across a diversified asset mix that follow Catholic principles as outlined in the USCCB guidelines Provide donors with investment pool options that meet giving horizon and investment objectives Page 3
First Quarter 2018 Market Environment Market Index Q1 2018 Return Non-US Emerging Equity – MSCI EM +1.4% US Small Cap Equity – Russell 2000 -0.1% US Large Cap Equity – S&P 500 -0.8% Non-US Developed Equity – MSCI EAFE -1.5% Non-US Fixed – Citigroup Non-US WGBI Unhedged +2.5% CSFB Leveraged Loan Index +1.6% US Below Investment Grade Fixed – Merrill HY -0.9% US Investment Grade Fixed – Barclays Aggregate -1.5% Hedge Funds – HFRI Fund of Funds +0.6% Bloomberg Commodity Index -0.4% Market Environment Emerging markets performed well US Dollar fell Credit spreads remained tight Bonds and interest rate sensitive stocks fell Growth equity continues to dominate Volatility increased Page 4
Investment Performance Investment Returns through 3/31/18 (%) Q1 1 Year 3 Years Catholic CF Long-Term Growth Fund -0.4 11.5 6.0 Catholic CF Balanced Fund -0.6 9.9 5.2 FAOG Community Foundation Median* -0.8 10.4 5.8 CPI +5% 2.1 7.8 7.2 Morningstar Moderate Allocation Index -1.3 7.7 4.9 Returns are as of March 31, 2018 and are net of investment management fees. *Community Foundations with $25-$50MM in assets What Didn’t Work? What Worked in Q1 2018? Active managers in equity and fixed Hedge fund managers Low core bond exposure Value tilt Non-US equity exposure Commodities exposure Page 5
Asset Allocation Strategy Long-Term (%) Balanced (%) Asset Class Total Public Equity 63.5 50.7 US Large/Mid Cap 21.5 17.2 US Small Cap 9.7 7.2 Non-U.S. Developed Markets 24.1 19.5 Emerging Markets 8.2 6.8 Total Alternatives 19.5 15.2 Hedge Funds 15.4 11.8 Real Assets 4.1 3.4 Total Fixed Income and Cash 17.1 34.1 Aggregate Bonds 4.5 15.4 TIPS 4.1 5.8 Global Bonds 4.2 5.0 High Yield 3.9 4.9 Cash & Equivalents 0.4 3.0 Portfolios are built to provide high single digit returns that can keep up with a 5% spending ratio + inflation to maintain the purchasing power of the corpus in perpetuity Page 6
Manager Due Diligence • • Aligned Ownership Structure Long Term Oriented Business • Plan Long-term Oriented Client • Base Including Insider Capital Low Personnel Turnover • • Succession Plan Appropriate Asset Base Alignment Stability Consistency • Strategy Throughout the Cycle • Investment Edge Generates Superior Risk-Adjusted Return • Focus on Core Competency Always looking for opportunities to upgrade Page 7
Manager Roster Long-Term Growth Fund Balanced Fund Large/Mid Cap Equity Large/Mid Cap Equity Comerica S&P 500 Catholic Comerica S&P 500 Catholic HS Managemennt US Small Cap US Small Cap Vanguard Vulcan Non-US Developed Markets Equity Non-US Developed Markets Equity Aberdeen EAFE Ethical Aberdeen EAFE Ethical DFA International Social DFA International Social Emerging Markets Equity Emerging Markets Equity DFA EM Social DFA EM Social Aggregate Fixed Aggregate Fixed Baird Baird TIPS TIPS Vanguard Vanguard Global Fixed Global Fixed Colchester Colchester High Yield High Yield KDP KDP Hedge Funds Hedge Funds Owl Creek SRI Owl Creek SRI J. Hancock Seaport (Wellington) Bogle SRI Liquid Real Assets Lone Juniper Van Eck Liquid Real Assets Van Eck Page 8
Managers Adhere to USCCB Investment Guidelines Socially Responsible Investment Guidelines from the United States Conference of Catholic Bishops are widely understood and many managers offer fund vehicles that adhere or are willing to customize separate accounts Colonial has decades of experience building USCCB compliant portfolios for Catholic clients and we have sourced a robust universe of opportunities Page 9
New US Corporate Tax Rate Is More Competitive Page 10
Lower Taxes Contributing to Earnings Recovery in US Source: Strategas Research Page 11
Earnings Recovery is Global Page 12
Interest Rates Are Rising Page 13
Despite Rate Increase, Stocks Still Attractive Relative to Bonds Source: Strategas Research Page 14
Regional Valuations Favor Non-US Markets 50.0 S&P 500 Shiller P/E 45.0 Shiller P/E ratios are quite high in the 40.0 Mean ex 1998-00 35.0 One Standard Deviation US 30.0 25.0 20.0 15.0 10.0 5.0 0.0 1880 1895 1910 1925 1940 1955 1970 1985 2000 2015 MSCI EAFE Shiller P/E 45.0 Multiples appear to be more reasonable 40.0 35.0 in developed markets outside the US 30.0 25.0 20.0 15.0 Mean ex 1998-00 10.0 One Standard Deviation 5.0 0.0 1982 1985 1987 1990 1992 1995 1997 1999 2002 2004 2007 2009 2011 2014 2016 40.0 MSCI EM Shiller P/E Emerging markets are also relatively 35.0 inexpensive compared to history 30.0 25.0 20.0 15.0 10.0 Source: Schiller PE data. Shiller PE is a measure of market price Mean 5.0 that uses normalized earnings (higher level is more expensive) One Standard Deviation Mean is the average for the period and standard deviation is a 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2012 2013 2014 2015 2016 2017 measure of dispersion (68% of the returns are between one standard deviation above and below the mean) Page 15
Volatility Spike in Q1 But Still Not Excessive CBOE SPX Volatiltiy Index CBOE SPX Volatility Index 80 70 60 ~6.5 Years Annualized S&P 50 Return = 4.9% ~4 Years 40 ~6 Years Annualized Annualized S&P ~6 Years S&P Return = Return = 14.8% 30 Annualized S&P 15.0% Return = 16.1% 20 ~6.5 Years 10 Annualized S&P Return = -0.5% 0 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Source: Strategas Research Page 16
Global Economy Continues to Improve Page 17
Productivity Lag Could Be Worrisome Page 18
Looking Ahead Focus Keep Long-Term Time Horizon in Mind Maintain Consistent Risk Exposure Capitalize on Market Volatility - New Leadership Will Create Risk and Opportunities Consistently Utilize Rebalancing Strategies Page 19
Benefits with The Catholic Community Foundation of Santa Clara Diversified and thoughtful asset allocation Manager access: institutional quality strategies Multiple pools to align with donor priorities Stewardship of assets Experienced staff handling all compliance, audit and reporting needs Conflict-free advisor experienced in Foundation & Endowment space Experienced, high-quality Investment Committee which reports to the Board Follow Catholic Values USCCB Guidelines in manager selection Page 20
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