Investments

asset allocation: Asset allocation describes the proportions of an investment pool that should be invested in various asset classes. The Investments Office employs quantitative and qualitative tools to determine an optimal asset allocation that will meet the endowment goals of supporting annual spending and preserving the purchasing power of the endowment.

asset class: An asset class is a group of investment instruments that exhibit similar characteristics, such as expected returns, risks, and correlations. Smith currently invests across seven asset classes:

• The global public equity asset class is expected to provide exposure to global listed stocks. Smith’s investment approach to global equities emphasizes active management designed to uncover attractive opportunities and identify market inefficiencies to generate excess returns relative to passive indexes.
• Absolute return strategies provide significant diversification to the endowment. The asset class is expected to provide solid returns with lower volatility, largely independent of broad market moves. Absolute return strategies may include long/short equities, credit, distressed securities, merger and risk arbitrage, and other opportunistic strategies. Managers in this asset class may invest across the capital structure, globally, and in both public and private markets.  
• Private equity managers seek to take advantage of the inefficiencies in the private markets and provide hands-on ownership to create value. The asset class will include leveraged buyout (LBO) managers, and may include growth equity managers as well. LBO managers typically take majority ownership stakes in profitable and mature private companies, funding a portion of the acquisition with debt and working closely with companies to create fundamentally more valuable entities through hands-on initiatives. Growth equity managers will generally negotiate structured minority ownership stakes in high-growth, maturing companies that are breaking even or profitable, funding the companies’ continued expansion with little or no leverage.
• Venture capital managers focus on seed, early, and expansion-stage investments in high-growth, dynamic, and disruptive sectors and companies. The purpose of this asset class is to provide exposure to novel technologies, business models, and markets.  
• Real assets strategies may include real estate, energy and natural resources (excluding fossil fuel-specific strategies), and infrastructure. Real assets investments are intended to generate returns and provide protection against unanticipated inflation, playing an important diversifying role in the portfolio.    
• The fixed income asset class includes high-quality debt instruments such as U.S. Treasuries and should provide a liquid, reliable, and transparent source of capital for cash needs.
• The cash allocation is necessary for liquidity management and will primarily include cash and cash equivalents that are short-term, high credit quality, and highly liquid. 

diversification: A diversified portfolio provides exposure across many asset classes possessing different expected return, risk, and correlation characteristics. Because asset classes should behave differently in a given market environment, diversification can reduce the overall volatility of a portfolio without sacrificing returns. 

equity orientation: Equity represents an ownership stake of a company. The value of that equity is equal to the total value of the company’s assets less the total value of its liabilities. Equity investments generally provide higher expected returns than other asset classes such as fixed income, causing the endowment to favor equity oriented strategies.

exchange traded fund: An exchange traded fund (ETF) is a basket of securities that trades on an exchange and can be bought or sold like a stock. ETFs are often designed to track a specific index, such as the S&P 500, and they offer lower expense ratios than buying the individual stocks in an index.

fiduciary responsibility: Under the Massachusetts Uniform Prudent Management of Institutional Funds Act (UPMIFA), boards of nonprofit organizations must manage endowment funds “in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”

index fund: Index funds are investment vehicles designed to passively track broad market benchmarks such as the S&P 500. They offer lower expense ratios than buying the individual stocks in an index.

pooled investment vehicles and commingled funds: Pooled investment vehicles and commingled funds combine capital from many different investors into a single vehicle that is generally managed by a third-party fund manager. The fund manager makes investment decisions on behalf of the pooled vehicle; external investors are not involved in investment decision-making or the day-to-day operations of the fund. Investors generally participate in the gains or losses of the pooled vehicle in proportion to their interest in the fund, after taking fees into account. Fund managers may employ structures with lock-ups that dictate investors’ ability to redeem capital.

purchasing power: Purchasing power represents the “buying power” of a unit of currency and is eroded by inflation. To maintain the purchasing power of an endowment, that endowment must generate returns in excess of spending and inflation.  

smoothing rule: Smith’s endowment spending in a given year is equal to 80% of the previous year’s spending plus 20% of the targeted long-term spending rate applied to the endowment market value, the sum of which is adjusted for inflation. By incorporating the prior year’s spending, the rule eliminates large fluctuations, enabling the college to plan for its operating budget needs. By adjusting spending toward the long-term target spending level, the rule ensures that spending will be sensitive to fluctuating endowment market values, providing stability in long-term purchasing power.

Standard and Poor’s (S&P) 500: The S&P 500 is an index that tracks the stock market performance of the roughly 500 largest public companies in the United States.

U.S. Treasuries: U.S. Treasury securities are debt instruments issued and backed by the United States Department of the Treasury.