Colorado Academy

Colorado Academy Board of Trustees: Endowment Advisory Committee update for May 4, 2016

Updated: May 4, 2016

This presentation can be accessed anywhere at URL: "bit.ly/EAC-002"

Endowment Advisory Committee: Chris Bittman, Laurence Chang*, John Ege*, John Fenley*, Mike Fries, Paul McPheeters*, Bryan Ritz and Minyoung Sohn with Mike Davis and Heather Miller as Ex Officio members

Our Relationship with Watershed Consulting is led by Paul Schreder, CFA, Managing Director. Watershed has been our consultant for over 5 years. Paul's Biography can be accessed here: http://www.watershedinvest.com/paul-schreder-cfa.html

In 2015, CA Endowment lost 1.0%, slightly better than the Policy Index, which lost 1.1%.

Since June 30, 2015, changes to the Endowment Investment Posture have been to become more defensive in Equities by reducing the Overweight Equity position from 70% to 60% ("Neutral").

Fixed Income is currently 25.3% of the Portfolio. Endowment remains Highly Liquid with over Half (13.2%) of the Investments held in Cash, with the remaining allocation divided 5 parts Floating-Rate Corporate Loan securities and 1 part Fixed-Rate securities.

Alternatives currently make up 15.7% of the Portfolio and is comprised of 10% Hedge Funds, 4% MLPs and 1% Gold

EAC Portfolio Votes

August 21, 2015: Committee voted to sell 5% of Leveraged Loan Exposure and designated these funds for an opportunistic energy trade later in the year

October 15, 2015: Committee voted to Increase MLP Exposure by 1%

November 11, 2015: Committee voted to Increase MLP Exposure by another 1%

February 9, 2016: Committee voted to sell 1.2% TLT (20-year Treasury Bond ETF) and hold the proceeds in cash

March 16, 2016 [Interim Meeting]: Committee voted to reduce Equity Positions by 5%, moving closer to the "Neutral" 60% target allocation to Equity, and we moved the proceeds to cash

Endowment has achieved its results with slightly less risk as measured by Annualized Standard Deviation than the Policy Index, as well as the Median of our Peer Group, the InvestorForce All Endowment below $50 million.

Investment Policy Statement provides Flexibility for Portfolio Construction with wide Rebalancing Ranges for Fixed Income (0% to 30%) and Alternatives (0% to 30%) while stating a target allocation of 60% Equities, 20% Fixed Income and 20% Alternatives.

Note: "CPI" is the Consumer Price Index and is measured by the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor.

Core CPI (which excludes Food and Energy) is currently Up 2.2% (measured as of March 2016)

Source: Bureau of Labor Statistics, News Release dated April 14, 2016

News Release [Bureau of Labor Statistics] Consumer Price Index

Target Rate of Return = CPI [2.2%] plus 5% = 7.2% which seems a bit daunting in the current Economic and Market Environment

CA Endowment | Asset Class Allocation

As of March 31, 2016

Endowment Value = $23,945,696

Q1 2016 Performance = +0.9% versus Policy Index gain of +0.3%

The biggest area of concern is the magnitude of the draw down in Q3 2015. While the Endowment outperformed the Policy Index by 10 basis points, the absolute loss exceeded 6%, and captured 98% of the downside movement in the Index.

As of March 31, 2016

Equities

IPS Rebalancing Range [50% to 70%] Target Allocation [60%]

As of March 31, 2016: The Endowment was weighted 59% Equities [$14,110,772] with a Focus on U.S. Equities. In Q1, CA Equity returned 1.2% and Outperformed the Policy Benchmark (MSCI ACWI IMI USD Index) return of 0.3%.

Benchmark: "MSCI ACWI IMI" is the Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) Investable Market Index (IMI) is used as benchmark for global stock market diversification (MSCI says it covers 99% of the global equity investment opportunity set). Top 10 constituents: Apple (1.48%) Microsoft (1.02%) Exxon Mobil (0.85%) General Electric (0.73%) Johnson & Johnson (0.73%) Facebook (0.63%) AT&T (0.59%) Nestle, Switzerland (0.58%) Amazon.com (0.58%) Wells Fargo (0.57%) = in total, 7.77% of the Total Index by weight.

The Equity Portfolio is weighted to U.S. Equities through the S&P 500 and Russell 3000 Indices. The 14% weighting to Vanguard Dividend Growth Fund adds more emphasis to high quality U.S. Companies with a growing dividend focus. International Equity exposure is owned through a combination of passive and active investment strategies. Finally, the Endowment does hold approximately 8% of total AUM (and 13% of the Equity Portfolio) in Asia-Pacific and Emerging Markets.

U.S. Equities

🕷 SPDR S&P 500 ETF

Link 🔗 State Street Global Advisors | SPY

[20.6% weighting] The S&P 500 is the largest component of our Equity portfolio, and it is also the largest exposure in the Portfolio.

Q1 2016: SPY gained 1.3%

😬

Endowment holds its S&P 500 exposure through the "Spyder" 🕷 (Ticker: SPY), managed by State Street Global Advisors.

Vanguard Dividend Growth Fund

Link 🔗 Vanguard Group | Dividend Growth Fund

[14.4% weighting] The Vanguard Dividend Growth Fund, rated 5-stars by Morningstar, is the 2nd largest component of our Equity portfolio, and it is also the 2nd largest exposure in the Portfolio. Sub-advised by Wellington Capital Mgmt, this strategy is comprised of high-quality dividend-focused stocks. Combined with the 20% weight in the S&P 500, over 1/3rd of the CA Equity is held in the Largest U.S. Stocks.

Q1 2016: Vanguard Dividend Growth gained 2.8%, exceeding the S&P 500 return of 1.3%

Vanguard Dividend Growth Fund [Ticker: VDIGX]. This is a 5-Star Large Blend Fund, sub-advised by Wellington, ranks in the Top 2% for all Large Blend funds over the past 10 years. The Fund is a consistent top Decile performer. As of December 31, 2015, the Top 10 holdings were: Microsoft (3.1%) UPS (2.9%) TJX (2.8%) Honeywell (2.8%) Colgate-Palmolive (2.7%) ACE Ltd. (2.7%) Cardinal Health (2.6%) UnitedHealth Group (2.6%) McDonalds (2.6%) and Johnson & Johnson (2.5%).

Barclays iShares Russell 3000 ETF

Link 🔗 iShares | Russell 3000 ETF

[5.5% weighting] The Russell 3000 is a market-cap weighted index of 3,000 U.S.-listed public companies. The Russell 3000 is the Foundation for all Russell sub-indexes, including the Russell 1000 (which tracks large companies) and the Russell 2000 (which tracks small companies). The combined weightings in the S&P 500, Vanguard Dividend Growth and the Russell 3000 Index brings the total U.S. Exposure to 40% which is 2/3rd of our Equities.

Q1 2016: Russell 3000 returned 0.9% which trailed the S&P 500 return of 1.3%

Barclays iShares Russell 3000 ETF [Ticker: IWV]. The Russell 3000 Index is owned by Russell Investments Group and is designed to represent the entire U.S. stock market. The Russell 3000 is also the master index on which all other Russell indexes are derived. The Endowment holds exposure to this Index through the Barclays iShares ETF, which trades under the ticker "IWV". In terms of Risk, the three-year standard deviation was 11.5% and the Beta to the S&P 500 was 1.01. Total fees and expenses are 0.20%.

🌎🌍🌏

International Equities

Vanguard FTSE Developed Markets ETF

Link 🔗 Vanguard Group | FTSE Developed Markets ETF

[6.4% weighting] Citing Morningstar, 40% of the world's investable market cap is outside of the United States. This ETF is 97% ex-U.S. And is very low fee.

This Index generates a 3.22% dividend yield from 1,413 constituents with an average market cap of USD $9.2 billion. The Top 10 companies are: Nestle (1.81%) Roche Holdings (1.34%) Novartis (1.20%) Toyota Motors (1.12%) HSBC Holdings (0.94%) Samsung Electronics (0.92%) British American Tobacco (0.84%) Royal Dutch Shell (0.79%) Novo-Nordisk (0.78%) and Anheuser-Busch InBev (0.77%).

Q1 2016: VEA had a negative return of 1.8%, but the result was better than the 2.8% loss from its benchmark, FTSE Developed Markets ex. North America

"VEA" is the ETF version of Vanguard's FTSE Developed Markets strategy, which is also available in Fund form. As of the March 31, 2016 Fact Sheet, this strategy holds over 3,700 stocks with a Median market cap of $25 billion and an average price-to-earnings ratio of 18.5x. This strategy has $56 billion in total assets. By Geography: 22.6% Japan, 18.65% United Kingdom, 8.81% France, 8.52% Germany, 8.40% Switzerland, 6.84% Austria, 4.34% Korea , 3.48% Hong Kong and 2.95% Netherlands and others.

Lazard International Strategic Equity

Link 🔗 Lazard | International Strategic Equity Fund

[4.4% weighting] Rated 5-stars by Morningstar, earned by high returns through the cycle with only average category risk. The Fund is a go-anywhere, multi-cap strategy (no benchmark) that uses a Fundamental Research, Bottoms-Up relative value investing approach.

Q1 2016: LISIX lost only 0.3% compared to the benchmark MSCI loss of 3.0%

Ticker: LISIX. Lazard International Strategic Equity Portfolio. The Fund has 63 holdings with a weighted average market cap of $40 billion, and it turns over only 34%. In terms of Risk, the 3-year standard deviation on this Fund has been 12.5%. By Geography: The Fund is invested 34% in Continental Europe, 26% United Kingdom, 17% Japan, 8% Emerging Markets and 4% Korea. There is $7.5 billion invested in this strategy.

🏆 Awesome ~200 bps outperformance in every time period

Asia-Pacific and Emerging Markets

Matthews Pacific Tiger Fund

Link 🔗 Matthews Asia and Fund Information

[5.4% weighting] Rated 5-stars by Morningstar, earned by high returns through the cycle with only average category risk. One issue to watch here is Investment team turnover.

Q1 2016: Strategy returned 0.3% after a very strong rebound in March

[Ticker: MAPTX] Matthews Pacific Tiger Fund. Assets = $6.6 billion. Top 10 Holdings: NAVER, Korea (3.4%) Dongbu Insurance, Korea (3.3%) Baidu, China / Hong Kong (3.1%) Central Pattana Public, Thailand (2.8%) DKSH Holding, Switzerland (2.9%) Kotak Mahindra Bank, India (2.8%) Vietnam Dairy Products, Vietnam (2.6%) Sinopharm Group, China / Hong Kong (2.5%), Orion Corp, Korea (2.4%) Tata Power, India (2.4%). Top 10 = 28.0%

🏆 The outperformance gets better with time, starting with 300 basis points over 1- and 3-years and 500 basis points since inception

Causeway Emerging Markets Fund

Link 🔗 Causeway Capital | Emerging Markets Fund

[4.1% weighting] Causeway is a Fundamental Research shop, but we are invested in their Quantitive Emerging Markets strategy.

Q1 2016: CEMIX returned 4.1% but trailed the MSCI Emerging Markets index, which gained 5.7%.

Ticker: CEMIX | Causeway Emerging Markets Fund is an actively managed Quantitive strategy. The literature says: "We believe the best way to exploit the investment opportunities in emerging markets equities is through a combination of value and growth, and bottom-up and top-down factors. Our quantitative stock selection process is focused on attractively valued companies with superior earnings prospects and positive market sentiment; these companies should produce consistent returns across investment cycles. We use the same approach to select sectors and countries, comparing valuation against earnings growth and market sentiment. At the country level, we also consider the health of the macro-economy. Our quantitative process seeks to combine these factors while attempting to avoid undue sources of risk, which for this strategy we define as tracking error."

FIXED INCOME

IPS Rebalancing Range [0% to 30%] Target Allocation [20%]

As of March 31, 2016: The Endowment was weighted 25% in Fixed Income with a Heavy Emphasis on Cash (zero coupon, zero duration asset) and Floating-Rate strategies. In Q1, CA Fixed Income returned 1.6%, which trailed the Barclays Aggregate return of 3.0%.

Cash

As of March 31, The Endowment held 13.2% of assets in cash, which returned 0% and underperformed the Barclays Agg return of 3.0%. The opportunity cost of this cash position was 40 bps in Q1 (relative to Agg) or 17 bps (relative to the S&P 500).

Floating Rate Strategies

[Benchmark] Credit Suisse Leveraged Loans Total Return Index gained 1.3% in Q1, which closed the price-related losses in Q4 2015. However, the Q1 return trailed that of the Barclays Agg.

Math needs to sharpened here, but even accounting for the tough 2015, Floating-Rate Income Strategies do generate the "4%" to stabilize portfolio returns. Since 2011, CS-LLT returned 20.2% over a period of 21 quarters, so approximately 1% per quarter.

BlackRock Floating Rate Income Trust

Link 🔗 [BGT] BlackRock Floating Rate Income Trust

Q1 2016: BGT gained 3.6%

Ticker: [BGT] BlackRock Floating Rate Income Trust

BlackRock / GSO Floating Rate Term Fund (Closed-End Fund)

Link 🔗 [BSL] Blackstone GSO Senior Floating Rate Term Fund

Q1 2016: BSL gained 4.1%

Ticker: [BSL] Blackstone GSO Senior Floating Rate Term Fund

BlackRock Floating Rate Income Stategies Fund (Closed-End Fund)

Link 🔗 BlackRock Floating Rate Income Strategies Fund

Q1 2016: FRA returned 2.3%

Ticker: [FRA] BlackRock Floating Rate Income Strategies Fund

Western Asset Corporate Loan Fund (Closed-End Fund)

Link 🔗 [TLI] Western Asset | Corporate Loan Fund

Q1 2016: TLI returned 1.1%

Ticker: [TLI] Legg Mason / Western Asset Corporate Loan Fund

RidgeWorth Seix Floating Rate High Income Fund

Link 🔗 Ridgeworth | Seix Floating Rate High Income Fund

Q1 2016: Fund returned 2.1%

Tickers: [SFRAX, SAMBX, SFRCX, SFRZX] RidgeWorth Seix Floating Rate High Income Fund

Duration Strategies

[1.1% weighting] Investment Grade Corporate Bonds via LQD (iShares) returned 4.8% in the quarter

Link 🔗 iShares [LQD] Investment Grade Corporate Bond ETF

Ticker: LQD. Barclays iShares iBoxx $ Investment Grade Corporate Bond ETF

[1.2% weighting] Global Bonds via Templeton Global Bond Fund returned 0.1% in Q1 2016 and severely lagged the Benchmark return of 7%.

Link 🔗 Franklin | Templeton Global Bond Fund

Ticker: [TPINX] Templeton Global Bond Fund

Alternatives

IPS Rebalancing Range [0% to 30%] Target Allocation [20%]

As of March 31, 2016: The Endowment was weighted 15.7% in Alternatives with Legacy Positions in BlackRock Strategic Partners (8.9%) and Silver Creek strategies (combined 1.5% in two funds). In 2H 2015, Committee voted to place New Risk Positions in MLPs [4.0%] and Gold [1.4%].

Hedge Funds

Note: The HFRI Fund of Funds Composite Index lost 2.8% in Q1. This Hedge Fund Index also lost 0.2% in 2015. Ending March 31st 2016, the 3-year return for HRFI Fund of Funds Composite Index is 1.9%.The 5-year return is 1.3%. The 10-year return is 1.5%.

Q-BLK [BlackRock] Strategic Partners Fund (8.9% position in the Endowment) lost 1.4% in Q1, which was better than the 2.8% loss in Hedge Funds Index. This Fund also lost -0.2% in 2015, a year in which SPY gained 1.3%.

Silver Creek Low Volatility Strategy (1.3% position) lost 2.3% in Q1 - on top of a 2.3% loss in 2015.

Silver Creek Long/Short (0.2% position) lost 2.6% in Q1 - on top of a -2.5% loss in 2015.

MLPs

Note: In 2H 2015, under the guidance and expertise of Paul McPheeters and Bryan Ritz, Committee voted to take new Risk by establishing positions in the beaten-down MLP sector.

Q1 2016: The JP Morgan vehicle lost 4.5% in the quarter. The UBS vehicle lost 6.0%.

March 2016: Both MLP exposures advanced better than 8%

JP Morgan Alerian MLP ETN is a 1.2% position

[Ticker: MLPI] UBS ETRACS Alerian MLP Infrastructure is an Exchange-Traded Note (ETN) issued by UBS AG. The ETN is a 2.8% position bought in Q4 2015

Gold

Link 🔗 Sprott | Physical Gold Trust

Appreciate

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