University of Texas Investment Management Co. officials project a lower return and higher downside risk in fiscal 2013 for its endowment assets, according to the 2013 strategy review presented to the board on Wednesday.
UTIMCO's return assumption for the fiscal year ending Aug. 31, 2013, is 4.86% with downside risk of 9.45%, compared to the 2012 return assumption of 5.85% with downside risk of 8.9%.
UTIMCO, based in Austin, manages the endowment and operating funds of the University of Texas System, Austin, and Texas A&M University System, College Station. As of May 31, the endowment funds totaled $19.2 billion and operating funds totaled $7.7 billion.
The projections represent the consensus of UTIMCO's investment team “based on what we see in the capital markets,” said Bruce Zimmerman, UTIMCO CEO and chief investment officer, in an interview.
UTIMCO's annual spending rate is 4.75% of assets.
The report noted that return and risk assumptions from external sources are higher. Consultant Cambridge Associates, for example, predicts an assumed 5.72% return with 8.96% downside risk, and money manager Commonfund assumes a 5.21% return with 9.24% downside risk.
Only three asset classes — emerging markets public equity, private equity and real estate — will produce returns of more than 6% for the year, UTIMCO's investment team predicted. “Our base case is that the developed world is in for a long workout, which presents a headwind. There are opportunities for growth, but we don't have a tailwind behind us,“ Mr. Zimmerman said.
Growth prospects for emerging markets, on the other hand, look better. Developing economies are “in a long march” though likely at a slower pace than in recent years, said Mr. Zimmerman.
Based on their lowered return assumption, UTIMCO staffers recommended and the board approved slight changes to asset class targets and ranges.
For example, the 2013 policy target for natural resources is two percentage points higher than for 2012; real estate is one percentage point higher; emerging market equity is a half-point higher; and developed country equity is 3.5 percentage points lower.
The recommended investment policy asset allocation ranges and targets for fiscal 2013 were: developed country equity, a range of 35% to 60% and a target of 45%; emerging market equity, a range of 10% to 25% and a target of 20%; natural resources, 5% to 25%, with a target of 13.5%; investment grade fixed income, 5% to 20%, with a target of 9.5%; real estate, zero to 12.5%, with a target of 6.5%; and credit-related fixed income, zero to 30%, with a target of 5.5%.