For the year ending March 31, 2015, we are reporting a gain of 8.94% on the Jewish Community Foundation (“JCF”) of Montreal’s pooled fund. This is in contrast to last year’s 11.81% return and leaves the fund with a 2-year return of 9.55%. Over a 3-year period the return is 9.75%.
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In fiscal year 2015, the primary drivers of the portfolio’s outperformance were the private equity and venture capital investments, and hedge funds. The key external factor was the devaluation of the Canadian dollar. Due to the JCF’s currency hedging policy only a portion of the currency gains were realized by the pool. Due to interest rate reductions fixed income was the surprise performer of the year. The portfolio outperformed its policy benchmark by 1.04% for the year.
This performance is directly related to the investment policies and strategies of the committee – primarily to use a fund of fund investment approach, to diversify the pool into an array of asset classes and to hedge investment strategies to mitigate risk against significant losses. This will be further explained below.
During the last fiscal year the markets responded positively but not dramatically ending the strong bear run. Equity markets performed adequately during the period with the S&P rising %, the MSCI 5.42% and the S&P/TSX composite 6.93%.
Asset Allocation Performances
Over the long term, equity holdings are generally expected to generate returns superior to those of less risky assets such as bonds and cash. Within the JCF’s equity allocation are both marketable (traded on public exchanges and highly liquid) and non-marketable (private partnerships, not publicly traded and less liquid) holdings. Included among the marketable holdings are U.S., Canadian and foreign equities. Among the non-marketable holdings are positions in private equity and distressed debt.
This category makes up 40% of the fund and includes traditional market equities (Canadian, U.S. and foreign), private equity, and distressed debt.
Our Canadian equity allocation’s (4.67%) index fund, State Street Composite, reported a 6.9% gain this year against the benchmark 6.93% (S&P/TSX Composite).
Our U.S., International, and Emerging Markets Funds, managed by Commonfund and State Street are managed using a combination of passive indexed and active strategies. These investments reported a 6.34 % gain against a benchmark of 5.92% (25.9% allocation).
Our Private Equity and distressed debt fund of funds (“fofs”) reported a 11.91% aggregate return. These “illiquids” continue to contribute positively to the total performance of the pool.
Real asset investments provide attractive return prospects, portfolio diversification, and a hedge against unanticipated
inflation. This category of investment is typically less liquid than publicly traded securities. JCF includes real estate and natural resources in its allocation to real assets.
12.4% of our assets are placed in this asset class and lost 7.93% due to the commodity collapse.
Hedge funds provide portfolio diversification, seeking to
generate high long-term real returns by exploiting market inefficiencies. Unlike traditional marketable securities, hedge funds have historically provided returns largely independent of overall market moves.
25.3% of our portfolio is placed in hedge fund FOFs (managed by Commonfund and HSBC), which gained 7.23% against a benchmark of 5.37%. Our hedge fund managers in fiscal year 2015 actually outperformed the public equity markets. These
hedged investments performed above their benchmark and added value on a risk-adjusted basis.
Fixed income assets generate stable flows of income, providing greater certainty of nominal cash flow than other asset classes. They have the lowest historical and expected returns of the asset classes included in the JCF’s portfolio.
16.1% of the pool is placed in fixed income. Over 80% of this allocation is run by State Street in a Canadian Fixed Income Index Fund, with the balance basically invested in Israeli Bonds which the pool has traditionally held. The net return on fixed income was 10.01%., which was completely unanticipated and a result of interest rate reductions.
Currency and Currency Hedging
The returns described above are described in the currency of the fund. As about 70% of the pool is invested in $US, currency fluctuations have an impact on the final returns described in
$CDN. The fund uses a dynamic hedging formula with the aim of significantly reducing the foreign currency risk.
This past year the Canadian dollar depreciated 12% against the US greenback, as the exchange rate moved from 0.904 to .78. The Investment Committee partially hedges currency fluctuations. In an environment where the Canadian dollar depreciates, hedging currency moves partially reverses the upward valuation effect of assets denominated in USD. JCF’s currency
hedging policy partially hedged the portfolio over the year, which resulted in a performance benefit caused by the unhedged portion of our holdings in an appreciated USD environment.
The market has performed adequately and the results bear this out. The Investment Committee will maintain its policies of diversification and hedging.