Challenges and Opportunities Facing Endowments and Foundations The

Challenges and Opportunities Facing Endowments and Foundations The Pardoning of Sisyphus February 2013 Gordon B. Fowler, Jr. Chief Investment Officer 215. 419. 6640 gordon. fowler@glenmede. com Economic and Market Outlook represents a review of issues or topics of possible interest to Glenmede’s clients and friends, and not as personalized investment advice. It contains Glenmede’s opinions, which may change after the date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. No outcome, including performance, is guaranteed due to various risks and uncertainties. This document is not a recommendation of any particular investment. Actual investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Clients are encouraged to discuss anything they see here of interest with their Glenmede representative.

Key Economic and Market Viewpoints • The world’s largest developed economies continue to experience modest and volatile growth as they work off excess debt accumulated over previous decades. • Politicians in many nations are addressing these fundamental problems, albeit at the expense of near-term economic performance. • The global economy is finding some offsetting support from emerging markets, the health of the corporate sector, and modest improvements in housing and employment. • Long-term return prospects remain compelling for many risk assets, but investors should be selective, giving proper weight to shorter-term concerns. • Turning the corner of negative debt dynamics will likely be negative for defensive assets that have become extremely expensive over the past few years.

Asset Allocation Recommendations* February 2013 Individual Investor Endowment/Foundation * The ability to implement this recommendation depends upon investable assets. The appropriateness of this recommendation to any one portfolio depends upon tax and liquidity objectives as well as other considerations. This is for general educational purposes only

Deleveraging efforts have held back growth Economic growth has been moderate since 2000

Questions before the house 1. Do the developed world’s long term financial problems present an insurmountable hurdle to good economic and market growth? 2. Is there a way to protect principal in a low to no yield bond market? 3. Can we generate enough return to meet rising needs?

Sisyphus’ punishment for trying to outsmart the gods In Greek mythology, Sisyphus was a wily and arrogant king of Corinth who angered the gods, Zeus in particular, and was punished to an eternity of rolling a boulder up a hill. He originally angered the gods by repeatedly breaking the code of hospitality, murdering guests and travelers, and was sent to be tortured in the underworld. He then successfully escaped the underworld several times through deceit and trickery, exhibiting a belief that he was more clever than the gods. In seemingly just return, Zeus displayed his own cleverness by personally selecting Sisyphus’ punishment and committing him to the unending and useless task of attempting to roll a boulder up a hill and perpetually failing. Sisyphus by Titian, 1548 -1549

Sisyphus’ Boulder

Monetary and fiscal efforts seek a pardon of Sisyphus Depressive/ Deflationary Stimulative/ Inflationary Printing Public Flogging (Deflationary Deleveraging) Examples: US Great Depression (1930 -1932) Japan (1990 – Present) Austerity/ Defaults US Pre-QE (Jun 2008 – Feb 2009) Spain (2008 – Present) Examples: Pardon Austerity/ Defaults Printing US Reflation (1933 - 1937) United Kingdom (1947 - 1969) (Tolerable economic and market outcomes) US Post-QE (Mar 2009 - Present) UK Post-QE (Mar 2009 - Present) Private Flogging (Inflationary Deleveraging) Austerity/ Defaults Examples: Printing Weimar Republic (1918 -1923) Latin America (1980 s) Source: Bridgewater Associates

The U. S. has moved its boulder another few feet The American Taxpayer Relief Act delayed some of the pain

The Taxpayer Relief Act does bring down the deficit… New policy now has the deficit narrowing to historical levels around 2015 2012

The Taxpayer Relief Act does bring down the deficit… New policy now has the deficit narrowing to historical levels around 2015 2012

The Taxpayer Relief Act does bring down the deficit… New policy now has the deficit narrowing to historical levels around 2015 2012

The Taxpayer Relief Act does bring down the deficit… New policy now has the deficit narrowing to historical levels around 2015 2012 Average

…and stabilizes the national debt Under the new policy, debt-to-GDP declines to around 73% before increasing again 2012

…and stabilizes the national debt Under the new policy, debt-to-GDP declines to around 73% before increasing again 2012

…and stabilizes the national debt Under the new policy, debt-to-GDP declines to around 73% before increasing again 2012

Projections always come with caveats Potential flaws in Congressional Budget Office projections Growth 2018 – 2023: 2. 7% • Assumes a return to trend GDP over 5 years • Does not account for negative impact Growth 2013 – 2017: 3. 3% of unexpected economic shocks • Longer-term debt levels start rising again due to entitlement spending

Protracted recovery in employment If current trends hold, unemployment will reach 6. 5% in October 2014 6. 5% Unemployment

A Housing recovery could stabilize collateral values Many housing statistics are showing signs of positive momentum

European Central Bank action has stabilized the situation ECB action has provided a backstop in financial markets

Key long-term imbalances are being addressed Labor costs are converging…slowly

Europe has put more fiscal effort into rolling its boulder …and more fiscal adjustments are still needed

Emerging markets never had a boulder to roll Emerging markets generally have lower debts and deficits

Secular trends like the growth of the consumer remain EM consumption to grow four times faster than developed to 2020

Business confidence surveys show a divergence Large business sentiment steady, but small businesses are having difficulties Strong Weak

The gods are crafty and could yet throw up more obstacles Inflation expectations are tame for now…

Excess reserves have not yet led to loan growth Federal Reserve assets have mushroomed… …but money supply and loans have not Annualized Growth Rate Fed Assets: 22% Annualized Growth Rate Money Supply: 6% Loans & Leases: 3%

Perhaps the gods have enthralled the politicians Market volatility may have fallen, but policy uncertainty remains high

Europe has demonstrated that austerity reduces growth Austerity has been, to the surprise of no one, contractionary

Spain: the show (refinancing) isn’t over yet Spain has to pay for its maturing debt as well as fund its deficit 2013 Refinancing Needs Budget Deficit Maturing Debt Total € Billions % of GDP 54 5. 7% 151 16. 0% 205 21. 7%

Core fixed income has seen huge asset flows… Fear has driven money into fixed income products for years

…and accordingly offer paltry yields with little appeal Even longer-dated Treasuries have yields below the rate of inflation

Current bond yields suggest poor long-term returns Starting yields have a strong relationship with subsequent performance Current Yield: 2%

Equity prices look more favorable Current multiples suggest good if not great performance

Subdued return projections may entail taking some risk Projected 10 -year returns by asset class Source: Glenmede. Future results cannot be guaranteed, and all investments are subject to loss. Inflation is assumed to be 2. 3%. As of 1/21/13.

Real returns may require taking some risk Projected 10 -year real returns by asset class Source: Glenmede. Future results cannot be guaranteed, and all investments are subject to loss. Inflation is assumed to be 2. 3%. As of 1/21/13.

Expected returns and risks for strategy alternatives Portfolio Classic Portfolio (60% Equities / 40% High Quality Fixed Income & Cash) Expected Return Risk Nominal Real Risk 4. 8% 2. 6% 11. 3% Source: Glenmed. e. S&P 500 is used as a proxy for equities, The Barclays US Aggregate Index is used for high quality fixed income. Expected return is annualized projected over 10 years. Expectations of return and risk are made in good faith, but actual results may vary depending on market conditions. This represents a purely hypothetical portfolio for the purpose of illustration. Hypothetical, expected returns do not include management fees or transaction costs which would lower returns.

Investment allocations for a yield challenged market • • Underweight traditional fixed income and cash Invest in higher return potential fixed income • • • Allocate money to risk-managed equity strategies with similar or better expected return than the market but with 20% to 30% less risk • • • High quality companies with dividend growth Secured options/covered calls Overweight emerging and developed markets equity Invest in cheap(-er) inflation protection Identify lower correlation special strategies • • • Global Fixed Income Bank Loans & High Yield Debt Private Secondary Opportunities Catastrophic Reinsurance Not all strategies may be available to or suitable for, all investors.

Expected returns and risks for strategy alternatives Asset Class Source: Glenmede Strategy Portfolio Suggested Weights % w/ partnerships % w/o partnerships Fixed Income Cash Traditional High Quality High Yield / Bank Loans Global Fixed Income 18% 2% 10% 2% 4% 21% 2% 11% 2% 6% Equity US Large Cap US Small Cap Risk-Managed International Developed Emerging 42% 16% 4% 9% 13% 9% 4% 57% 27% 4% 12% 14% 10% 4% Alternatives Commodities Private Equity Real Estate Absolute Return 40% 4% 12% 3% 21% 22% 4% 3% 15%

Expected returns and risks for strategy alternatives Portfolio Expected Return Risk Nominal Real Risk Classic Portfolio (60% Equities / 40% High Quality Fixed Income & Cash) 4. 8% 2. 6% 11. 3% Strategy Portfolio 6. 9% 4. 7% 11. 0% Strategy Portfolio (No P. E. or H. F. Partnerships) 6. 5% 4. 2% 10. 7% Source: Glenmede Expected return is annualized projected over 10 years. Expectations of return and risk are made in good faith, but actual results may vary depending on market conditions. This represents a purely hypothetical portfolio for the purpose of illustration. Hypothetical, expected returns do not include management fees or transaction costs which would lower returns.

Substitute some credit risk for equity risk by using high yield debt Expected returns are competitive High Yield BB S&P 500 Yield 5. 9% 2. 1% Earnings Growth -- 5. 3% Loss Rate -0. 8% -- Valuation Change -0. 3% -0. 4% Expected 10 year Return 4. 8% 7. 0% High yield exhibits protection in downturns Source: Glenmede High yield bonds may be more volatile, risky, and less liquid than other securities of similar duration. Future results cannot be guaranteed and all investments are subject to loss.

Bank loans minimize duration risk with attractive yield Yields comparable to high yield, with less interest rate risk

Emerging market bonds offer more substantial yields… …even at shorter durations International bonds may be more volatile, risky, and less liquid than other securities of similar duration. International bond investment involves additional risks including but not limited to currency, political instability, and accounting differences.

Seeking to control risk while still aiming for attractive returns High quality has provided greater stability and absolute return over time w 10, 8% w 10, 4% w-7, 2% w. Upside w-10, 9% w. Downside

Secured options provide an opportunity to both participate in and protect from market performance* Selling options against an equity portfolio provides protection *Secured option strategies include covered calls and cash-secured puts. Protection cannot be guaranteed. Volatility can cause results to differ from expectations.

Secured Option (Covered Call) Strategies offer attractive risk/return characteristics

Emerging markets are becoming more developed Lots of room to grow as their GDP per capita converges to developed world levels

Real assets can provide a hedge against inflation A broad basket of commodities looks less expensive than gold alone

Special strategies can improve a portfolio’s risk and reward • Private Asset Secondaries • Catastrophic Reinsurance • Risk Parity • Exotic Beta

Investment Strategy Themes • Position portfolios to benefit from moderate economic growth • • • Maintain the middle: Investors should maintain a long-term focus on the middle of the investment risk spectrum, where the most attractive risk-reward opportunities lie. • Favor high quality and/or dividend growth within equities • Take credit risk: high yield bonds, bank loans, and emerging market bonds • Utilize alternative risk control: secured options and absolute return strategies Position to benefit from long-term growth opportunities • • Favor a constructive but not aggressive asset mix given ongoing risk of policy errors Emerging market consumer growth Maintain some protection against unexpected future inflation and currency devaluation • Global fixed income and broad/active commodity basket