TORONTO - The University of Toronto plans to enter private equity and hedge fund investments, as well as to increase international investing by its endowment, pension and operating funds.
The University of Toronto Asset Management Corp., launched in May to oversee the university's C$4.5 billion (U.S.$3 billion), took its first independent steps recently when it hired its first two managers: Galileo Equity Management, Toronto, to run a North American small-cap equity portfolio, and Dalton, Greiner, Hartman, Maher & Co., New York, to run a North American small-cap value equity portfolio. The amount each received was not released.
"I see a big increase in our international exposure and the buildup of a private equity program," said Donald Lindsey, president and chief executive officer. Officials plan to invest 10% of the endowment's assets and 5% of the pension fund's assets in private equity.
"We're interested in exploring alternative investments and specialist managers who can give us added alpha," said Robert White, chief financial officer of the university, who played a large role in getting the new venture started.
Mr. Lindsey is developing an asset allocation strategy to diversify the assets, which previously were overseen by the university's treasury office.
The C$2.5 billion pension fund has 15% of its equity assets and the C$1.5 billion endowment has 20% of its equity assets in U.S. stocks. About 20% of the combined equity assets are invested outside of North America; Mr. Lindsey anticipates that will increase. "I see a much greater emphasis on (investing in) the U.S. (equity) markets and other international markets to mitigate our risks and not be overexposed to Canada," Mr. Lindsey added.
He pointed out that although the Canadian stock market as measured by the Toronto Stock Exchange 300 index has done spectacularly well this year, it is dominated by Nortel Networks, which comprises about 33% of the entire index.
"With the volatility of telecommunications stocks, we don't want to be too heavily concentrated in that index," he said.
Mr. Lindsey said hedge funds could get 5% to 10% of the overall equity allocation, with strategies including long-short equity and market neutral. The allocations will be "market dependent," he said.
The funds' equity investment guidelines, which already have been approved by the boards of the asset management unit and the university, "are very broad and put no limit on hedge fund strategies such as market-neutral investing," Mr. Lindsey said.
"We want to go into established funds with a track record where we can buy a piece of the action," added Mr. White. "We'll build up experience over time and expand it."
Mr. Lindsey comes from the University of Virginia, Charlottesville, where he oversaw fixed-income and alternative investments for $2.2 billion in endowment and operating funds. "This was such a compelling opportunity I felt it was time to make a change," said Mr. Lindsey. "It's a brand new operation. It's exciting; I can put my mark on it."
Mr. Lindsey said he hopes to get all of the asset allocation shifts approved by late fall to enable the firm to start selecting new managers. Current managers overseen by the treasury, whose performance has been very good, will be kept on, he said.
He also plans to increase his in-house investment staff and will hire three new managing directors, one to oversee North American equities, one to oversee other international equities and a third to monitor private equity investments.
"Even though our allocation to private equity will be small, it entails a great deal of time and analysis, and I feel it's important to have someone on board now covering it," said Mr. Lindsey.
The private equity investments "will include a broad array of investments such as early stage venture capital, buyouts, real estate and distressed debt," said Mr. Lindsey.
Passive strategies also will be used, but Mr. Lindsey said he is not sure how much of the funds will be indexed. Currently, 75% of the endowment's assets are indexed, including all of its bond holdings. For the pension fund, 67% of its assets are indexed, including all of its bonds. Mr. Lindsey said the indexed portion of the portfolios will be reduced, but he has not set a specific target as yet. "It depends on what's available in the active sector," he said.
Mr. Lindsey added it's important to the university to "have a professional staff focusing solely on investments." However, he said, "our objective will not be to make frequent changes" in policy or managers. He thinks that most investment staffs get about two or three "great investment ideas" a year and from those the funds will make "incremental changes."
Eventually, some of the fixed-income assets might be managed in-house, according to Mr. Lindsey. "There can be value added from having some assets in-house when you get close to the decision-making process," he said. However, bringing any money in-house is "a long way down the road," said Mr. Lindsey.
Unlike in the United States, Toronto is the first university in Canada to set up an asset management corporation. Mr. White visited such colleges as Harvard, Yale and Duke, to get ideas for what strategy the University of Toronto would follow.
