November 8, 2018

MEMORANDUM

TO: The Finance Committee:

James B. Murray Jr., Chair

Robert M. Blue, Vice Chair

Mark T. Bowles

Thomas A. DePasquale

Robert D. Hardie

Maurice A. Jones

Jeffrey C. Walker

Frank M. Conner III, Ex Officio

and

The Remaining Members of the Board:

L.D. Britt, M.D. Tammy S. Murphy

Whittington W. Clement C. Evans Poston Jr.

Elizabeth M. Cranwell James V. Reyes

Barbara J. Fried Margaret F. Riley, Faculty Member

John A. Griffin Brendan T. Nigro, Student Member

Babur B. Lateef, M.D.

FROM: Susan G. Harris

SUBJECT: Minutes of the Meeting of the Finance Committee on November 8, 2018

The Finance Committee of the Board of Visitors of the University of Virginia met, in Open Session, at 1:00 p.m. on Thursday, November 8, 2018, in the Board Room of the Rotunda. James B. Murray Jr., chair, presided.

Present: Frank M. Conner III, Robert M. Blue, Thomas A. DePasquale, and Robert D. Hardie. Maurice A. Jones monitored by phone.

Absent: Mark T. Bowles and Jeffrey C. Walker

Whittington W. Clement, Barbara J. Fried, Babur B. Lateef, M.D., C. Evans Poston Jr., and Brendan T. Nigro also attended.

Present as well were Jennifer Wagner Davis, Patrick D. Hogan, Thomas C. Katsouleas, Richard P. Shannon, M.D., Melody S. Bianchetto, J. Matthew Dorchuck, Susan G. Harris, Timothy J. Heaphy, W. Thomas Leback, Megan K. Lowe, Debra D. Rinker, and Anda L. Webb. Simeon Ewing monitored by phone.

David B. MacFarlane and John G. Macfarlane III from the University of Virginia Investment Management Company (UVIMCO) Board of Directors were also present.

Robert W. Durden, Kristina M. Alimard, and James S. Matteo were the presenters.

Mr. Murray opened the meeting. After welcoming Ms. Davis, Mr. David MacFarlane, and Mr. John Macfarlane, he said Mr. Durden, UVIMCO CEO, would report on the endowment performance for FY 2018 and review UVIMCO’s investment objectives and strategy. Mr. Durden was accompanied by Ms. Alimard, UVIMCO Chief Operating Officer, and Mr. Dorchuck, UVIMCO Senior Investment Associate.

University of Virginia Investment Management Company (UVIMCO) 2017-2018 Annual Report

Mr. Durden’s report included a review of UVIMCO’s investment objectives, philosophy, policy portfolio, manager selection criteria, organization, risk management, the long term pool asset allocation as of September 30, 2018, and the portfolio performance as of June 30, 2018.

Mr. David MacFarlane, chair of UVIMCO’s Board of Directors, reviewed the portfolio and said it must be balanced between short-term and long-term risks and must be aligned with objectives and risk tolerance.

Mr. Durden said UVIMCO’s primary investment objective is to maximize long-term inflation-adjusted returns commensurate with the University’s risk tolerance. This involves evaluating the pool’s performance relative to the policy portfolio, preserving the purchasing power of long-term investment assets, and providing returns that compare favorably with peer institutions. UVIMCO believes long-term returns are best produced by employing a consistent investment philosophy and process over time. Core tenets include a focus on the long term; a belief in active management; employment of a global, flexible investment mandate; and management of risks with the understanding that risks have to be taken to generate returns. He observed that the University has a lower risk tolerance than some peers.

Ms. Alimard reviewed the risk management framework, which consists of market risk, manager risk, and liquidity risk. UVIMCO does not seek to avoid risk, but to achieve a return on investment that is appropriate for the level of risk taken. The ability to take on market risk is constrained by liquidity risk, which is the risk of not being able to transfer funds to the University or a foundation for a spending distribution, not being able to honor capital calls, and not being able to revamp the portfolio in response to market events. Manager risk includes managers underperforming expectations, and issues such as insider trading and fraud.

Mr. Durden reviewed the long-term pool asset allocation as of September 30, 2018. The portfolio target is 60% equities, 30% bonds, and 10% real assets. The actual equity component was 66% with 28.6% in public equities, 20% in long/short equities, and 18% in private equities. Real assets totaled 11% and were split between real estate at 4.5% and resources at 6.4%. The percentage of real assets has been steady for the last two decades. Fixed income totaled 22% and was split between 1) marketable alternatives and credits and 2) fixed income and cash. UVIMCO expects only modest changes in the overall asset allocation. The percentage of long/short equities has been coming down for a number of years. In 2008, for example, it comprised 35% of the portfolio. Its percentage may continue to decline. The percentage of private equity, on the other hand, may increase. In the past, it has been above 20%.

The return of the long-term pool for FY 2018 was 11.4%. All sectors of the pool outperformed their respective policy benchmarks. UVIMCO is pleased with the 7.1% return for marketable alternatives versus it flat benchmark and with the performance over the five year period, which saw a 9.6% return versus the 7.7% policy benchmark.

To introduce the closed session, Mr. Murray said Mr. Hogan, who is the president’s representative on the UVIMCO board, called him after the last UVIMCO board meeting to say that the board had decided to reconsider its asset allocation and that this could have a long term impact on the University. Even though the Board of Visitors delegates exclusive control over the portfolio to UVIMCO, it was important for the Board to understand UVIMCO’s strategy.

Closed Session

At 1:25 p.m., the committee went into closed session upon the following motion made by Mr. Blue, duly seconded, and approved.

“I move that the Finance Committee go into closed session to discuss portfolio risk for investment of the long term pool where competition is involved and if made public, the financial interests of the University would be adversely affected. The closed session is authorized by § 2.2-3711.A.6 of the Code of Virginia. “

At 2:55 p.m., the committee concluded closed session by the following motion made by Mr. Murray and duly seconded, and approved by roll call vote.

Voting in the affirmative:

James B. Murray Jr. Thomas A. DePasquale

Robert M. Blue Robert D. Hardie

Frank M. Conner III

Motion:

“I move that we vote on and record our certification that, to the best of each committee member’s knowledge, only public business matters lawfully exempted from open meeting requirements and which were identified in the motion authorizing the closed session, were heard, discussed or considered in closed session.”

Mr. Conner concluded the meeting with an explanation of the differential tuition proposal for the College of Arts & Sciences that was included in the recent tuition and fees notice. This proposal is consistent with what was done last year for the undergraduate professional schools. Concern has been expressed that the decision would be made at the December meeting in conjunction with the 2019-2020 tuition and fees proposal. This can be done, but the two proposals are not linked. It may take time for the Board to reach a decision and so that may not occur until the Board’s March meeting.

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On motion, the chair adjourned the meeting at 3:04 p.m.

SGH:wtl

These minutes have been posted to the University of Virginia’s Board of Visitors website: http://bov.virginia.edu/committees/205