Oxford University’s investment office reported that the £3.4 billion Oxford Endowment Fund “was flat” in 2018, which it described as “a volatile and challenging year” for financial assets.
“It would be remiss not to mention that 2018 itself saw periods of negative equity returns and elevated volatility,” OU Endowment Management (OUEM), which oversees the fund, said in its investment report. “The fund’s equity exposure is significant and not immune to such volatility.”
Despite the difficult year, OUEM said the portfolio returned 8.3% annualized over the past three and five years, and 9.0% annualized over the past 10 years, well ahead of its investment objective to grow capital by an average of 5% per year in real terms.
The fund is heavily focused on risk assets such as public and private equity, credit, and property. It also has significant exposure to innovation across a range of sectors such as technology, consumer products, and pharmaceutical research in both public and private equity.
OUEM said the fund remains predominantly invested in both public and private equity, and that there were no significant changes to the asset allocation during the year, except for allowing some increases in cash holdings as valuations in public and private equity markets continued to rise. It also said its public equity managers have returned 10.6% annualized over 10 years.
Public equity annualized net returns for the endowment over the past three, five, and 10 years are 10.0%, 9.1%, and 10.6%, respectively, while its private equity annualized net returns over the same time periods are 14.5%, 17.6%, and 13.9%, respectively.
“Private equity continues to make a significant impact,” said OUEM. “2018 saw a record year for distributions, led by our growth equity specialists. Nearly a third of distributions came from the venture portfolio, including a mix of IPOs and trade sales.”
Meanwhile credit investments have returned 9.8%, 9.5%, and 10.0%, respectively over the past three, five, and 10 years, while property investments have earned returns of 5.7%, 8.0%, and 8.6% over the same time periods.
“Credit has been a strong contributor to the fund,” said OUEM. “We have evolved our credit exposure over time and will continue to do so as opportunities arise,” adding that while it had significant stressed credit investments in the US during the financial crisis, today it owns investments in complex special situation strategies that target a range of geographies including Europe and Asia.
“All of these have a range of return drivers different to those of our equity investments,” said the firm.
OUEM also said it is “quite possible” that over the next few years that a passive investing approach “will be considerably challenged,” adding that it believes that active management over the long term is the most effective form of stewardship for the endowment.
“Given the possibility of greater equity market volatility,” said OUEM, “active management will be even more valuable to ensure we have exposure to well managed businesses operating under potentially challenging market conditions.”
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