Page 43 - July JSF report

INVESTMENT COMMITTEE MEETING MINUTES (DRAFT) (6)
the two Managing Directors and founders of Adage Bob Atchinson and Phill Gross (both still on the job and showing no signs of slowing down) were the gentlemen that ran the Harvard University pension fund and foundation for more than fifteen years prior to 2001 during which they generated very high absolute and relative investment returns for Harvard. However, their compensation greatly exceeded that of the President of Harvard, which apparently did not sit well with certain board members, which led to a parting of ways in 2001. Adage started with $3 billion in assets in 2001 a portion of which came from Harvard. AUM has grown to about $32 billion currently. Harvard is no longer a client. Growth has occurred organically. Adage has been closed to new investors for a number of years. Adage’s sole objective is above average risk adjusted returns not size. There still is only one fund and the investing business model remains the same. For sure a classic American success story.
Adage ticks all the boxes from an investors’ standpoint – low risk (versus active US core equity managers) and well above average consistent returns. Low risk because Adage is sector neutral. It carries a market weight in each industry sector. Adage generates Alpha by picking the winners and losers within a sector. Alpha will short stocks to enhance returns. It employs 29 portfolio managers/analysts with 22 years average industry-specific experience. Their compensation is performance driven. The compensation of a top performing analyst can exceed that of the two founding Managing Directors in a given year. Adage is employee owned. Adage does not attempt to time the market. It is always 100% invested in the US equity market (foreign equity exposure is less than 5%).
Adage fees are low and fair – a management fee of 0.50% and an incentive fee of 20% of relative outperformance versus the S&P 500 benchmark.
The Committee asked about Adage’s view on ESG issues. Adage indicated they are invested in all S&P sectors on a market weighted basis including oil and gas and other sectors some individuals consider not in the public interest. Adage indicated they consider ESG issues when picking winners and losers within a sector. Some investors have suggested Adage cease investing in certain sectors or offer a secondary fund that does not invest in these sectors. Adage has rejected these suggestions (unlike Gaoling in China). A few investors have redeemed their Adage investment because of the ESG issue however so far it is not a major concern to Adage.
There was a discussion with regard to whether JSF should consider putting a limit on exposure to any one manager. Many would consider 10% high and 20% too high. There appeared to be a Committee consensus that the current Adage exposure is not a major risk assuming their quasi index investing model and risk mitigation tools remain in place. Rather the major risk appears to be the US equity market itself which has experienced huge outperformance in recent years driven by the IT sector – i.e. see Table 1 – over the last 10 years annual return from S&P 500 12.2% versus 2.6% for the MSCI ACWI ex-US index.
Prime and the Committee acknowledge this risk but feels JSF’s diversified portfolio provides adequate downside protection. The target weighting for publicly traded equities is 50% broken down as follows:
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