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TRANSCRIPT
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5855 Wadsworth Bypass, Unit A • Arvada, CO 80003720.898.5900 • CommunityFirstFoundation.org
Welcome to yourAnnual Investment Meeting
Wednesday, February 158:00 – 10:00 a.m.
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Agenda
8:00 Registration and Breakfast
8:30 WelcomeLynne D. ValenciaBoard of Directors, Vice Chair
8:35 RemarksDavid L. BombergerBoard of DirectorsFinance and InvestmentCommittee, Chair
8:40 PresentationInnovest Portfolio Solutions
Wendy DominguezPresident and Principal
Scott MiddletonPrincipal and Director
9:25 Q&ALynne D. Valencia
9:35 2016 Year in ReviewDrawingsLynda RicketsonDirector of Development
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Investment Structure
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4643 S Ulster Street | Suite 1040 | Denver, CO 80237 303.694.1900 | innovestinc.com
Community First FoundationAnnual Investment Meeting
February 15, 2017
Wendy Dominguez, MBA, Principal, PresidentScott Middleton, CFA, CIMA®, Principal, Director
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AGENDA
1. Our Investment Process
2. Performance History and Investment Results
3. Capital Markets Outlook
4. What’s Next for Community First’s Portfolios?
5. Advantages of Our Partnership
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1. INNOVEST’S INVESTMENT PROCESS
ANALYZE
STRATEGIZE
FORMALIZEIMPLEMENT
MONITOR
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2. COMMUNITY FIRST ASSET ALLOCATION CHANGES OVER TIME1. Introduced additional diversification in fixed income
• High yield (2008)
• Floating rate corporate loans (2009)
• Defensive (short-term) fixed income (2011)
2. Introduced products to hedge interest rate risk
• Opportunistic fixed income (2011)
3. The Finance and Investment Committee reviewed the updated projected risk/reward profiles of the Short-Term Portfolio and the Long-Term Portfolio. (2016)
• The risk/reward and asset allocation of the Short-Term Portfolio was left unchanged.
• The risk/reward and asset allocation of the Long-Term Portfolio was left unchanged.
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PERIODIC TABLE OF INVESTMENT RETURNS
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
HighCommodities
16.23%
Fixed Income
5.24%
Int'l Stocks
31.78 %
REITs
28.60 %
REITs
9.24 %
REITs
17.59 %
Small Cap
Stocks
38.82 %
REITs
31.78 %
REITs
4.23 %
Small Cap
Stocks
21.31%
Small Cap
Stocks
7.07%
REITs
26.39%High
Int'l Stocks
11.17%
Hedge Funds
-21.37%
REITs
28.60 %
Small Cap
Stocks
26.85 %
Fixed Income
7.84 %
Int'l Stocks
17.32 %
Large Cap
Stocks
32.38 %
Large Cap
Stocks
13.69 %
Large Cap
Stocks
1.38 %
Large Cap
Stocks
11.96%
Large Cap
Stocks
6.95%
Commodities
20.31%
Hedge Funds
10.25%
Diversified
Portfolio
-24.24%
Small Cap
Stocks
27.17 %
Commodities
16.83 %
Large Cap
Stocks
2.11 %
Small Cap
Stocks
16.35 %
Int'l Stocks
22.78%
Diversified
Portfolio
6.18%
Fixed Income
0.55 %
Commodities
11.74%
REITs
4.80%
Small Cap
Stocks
20.17%
Fixed Income
6.97%
Small Cap
Stocks
-33.79%
Large Cap
Stocks
26.46 %
Large Cap
Stocks
15.06 %
Diversified
Portfolio
-0.06%
Large Cap
Stocks
16.00 %
Diversified
Portfolio
14.40%
Fixed Income
5.97 %
Hedge Funds
-0.27%
REITs
7.24%
Diversified
Portfolio
4.37%
Int'l Stocks
19.49%
Diversified
Portfolio
6.04%
Commodities
-35.65%
Diversified
Portfolio
19.61%
Diversified
Portfolio
12.64%
Small Cap
Stocks
-4.18 %
Diversified
Portfolio
10.28%
Hedge Funds
8.96%
Small Cap
Stocks
4.89 %
Int'l Stocks
-0.81%
Diversified
Portfolio
6.91%
Fixed Income
4.34%
Large Cap
Stocks
16.17%
Large Cap
Stocks
5.49%
Large Cap
Stocks
-37.00%
Commodities
18.91 %
Int'l Stocks
7.75 %
Hedge Funds
-5.72 %
Hedge Funds
4.79%
REITs
1.86 %
Hedge Funds
3.37%
Diversified
Portfolio
-1.01%
Fixed Income
2.65%
Hedge Funds
1.30%
Diversified
Portfolio
10.35%
Small Cap
Stocks
-1.57%
REITs
-39.20%
Hedge Funds
11.47 %
Fixed Income
6.54 %
Int'l Stocks
-12.14 %
Fixed Income
4.21 %
Fixed Income
-2.02 %
Int'l Stocks
-4.90%
Small Cap
Stocks
-4.41%
Int'l Stocks
1.00%
Int'l Stocks
0.75%
Hedge Funds
6.75%
LowREITs
-17.55%
Int'l Stocks
-43.38%
Fixed Income
5.93 %
Hedge Funds
5.70 %
Commodities
-13.32 %
Commodities
-1.06 %
Commodities
-9.53 %
Commodities
-17.01 %
Commodities
-24.66%
Hedge Funds
0.42%
Commodities
-5.58%
Fixed Income
3.39%Low
Indices Used: Large Cap Stocks (S&P 500), Small Cap Stock (Russell 2000) Int'l Stocks (MSCI EAFE), Fixed Income (Barclays Aggregate), REITs (DJ-Wilshire REIT)
Hedge Funds (HFRI Fund of Funds Composite), Commodities (Bloomberg Commodity)
Diversified Portfolio: 25% S&P 500, 10% Russell 2000, 10% MSCI EAFE, 25% BC Aggregate Bond, 5% Bloomberg Commodity, 5% DJ-Wilshire REIT, 20% HFRI Fund of Funds Composite
Periodic Table of Returns 2007 - 2016
Avg Annual
Returns
'07-'16
Avg Annual
Risk
'07-'16
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ASSET ALLOCATION –SHORT-TERM PORTFOLIO
Large Cap Domestic Equity 11% Mid/Small Cap Domestic Equity 5%International Equity 6% Emerging Markets Equity 3%Core Fixed Income 38% Defensive Fixed Income 20%Floating Rate 11% High Yield 3%Cash 3%
Market Value as of 12/31/2016: $9,663,018
Expected Average Annual Return: 2.0% over CPI (4.25%)
Risk Tolerance: Potential downside risk of -7.9% in a one-year period based on a statistical confidence level of 95%.
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ASSET ALLOCATION LONG-TERM PORTFOLIO
Large Cap Domestic Equity 25% Mid/Small Cap Domestic Equity 10%International Equity 16% Emerging Markets Equity 6%Domestic Fixed Income 27% Floating Rate 10%High Yield 3% Cash 3%
Market Value as of 12/31/2016: $49,952,837
Expected Average Annual Return: 5.0% over CPI (7.25%)
Risk Tolerance: Potential downside risk of -18.2% in a one-year period based on a statistical confidence level of 95%.
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PERFORMANCE HISTORY FOR THE SHORT-TERM PORTFOLIO
Table of Returns as of December 31, 2016
Community First Foundation Performance Short-Term PortfolioPerformance as of December 31, 2016*
2016 Last 3 Years Last 5 Years Last 7 YearsSince Inception1/1/2010
Community First Foundation 5.95% 2.56% 4.91% 5.01% 5.01%
CPI + 2% 4.12% 3.21% 3.39% 3.64% 3.64%
Custom Index 5.45% 3.20% 4.55% 5.00% 5.00%
*Returns are net of investment fees. All returns are average annual returns.
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PERFORMANCE HISTORY FOR THE LONG-TERM PORTFOLIO
Table of Returns as of December 31, 2016
Community First Foundation Performance Long-Term PortfolioPerformance as of December 31, 2016*
2016 Last 3 Years
Last 5Years
Last 7 Years
Last 10 Years
Since 1/2010
Since 9/1998
Community First Foundation
7.63% 3.00% 8.12% 7.23% 4.95% 7.23% 5.28%
CPI + 5% 7.18% 6.24% 6.43% 6.69% 6.90% 6.69% 7.26%
Custom Index 7.76% 4.16% 8.40% 7.76% 5.09% 7.76% 5.25%
*Returns are net of investment fees. All returns are average annual returns.
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COMMUNITY FIRST FOUNDATION RISK AND RETURN VS. PEER GROUP
“The Long Term Portfolio outperformed peer group with less risk.”
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INVESTMENT RESULTS AS OF 12/31/2016
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PERFORMANCE ATTRIBUTION : KEY THEMES
Equity Managers Underperformed• Domestic Equity
• Healthcare stock allocation and security selection was the biggest detractor for domestic equity managers in the portfolio relative to their respective indices.
• Most of the underperformance occurred in the 4th quarter as markets experienced a rapid sector rotation after the election. Health care stocks struggled relative to other sectors like financials.
• International Equity• Country allocation was the largest detractor for international
equity managers relative to their indices. • Under allocation to Japan and an overweight to the U.K. hurt
performance.
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PERFORMANCE ATTRIBUTION : KEY THEMES
Fixed Income Managers Outperformed• Opportunistic (Unconstrained) Fixed Income
• The decision to allocate to Opportunistic (Unconstrained) Fixed Income funds was the main driver of outperformance.
• These funds are in the portfolio to protect against rising interest rates.
• The 10-year treasury rose from an all-time low of 1.36% in July to 2.45% by December 31.
• Floating Rate Corporate Loans• Floating rate funds added to performance posting double digit
returns.
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EQUITY MANAGERS
Equity Returns in 2016 were mixed• Domestic markets posted strong gains - International markets
were mixed• Large Caps (S&P 500 Index): +12.0% for the calendar year• Small Caps (Russell 2000 Index): +21.3%• International Developed (MSCI EAFE Index): +1.0%• Emerging Markets (MSCI EM Index): +11.6%
U.S. Equity Managers• No changes in manager line-up• Value mangers outperformed Growth managers• Midcap managers outperformed both the large and small cap managers
Non-U.S. Equity Managers• No changes in manager line-up• Managers primarily focused in the developed markets with exposure to
emerging markets outperformed• Dedicated Emerging Market managers posted the strongest returns
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FIXED INCOME MANAGERS
Nominal fixed income returns were mixed• Core Fixed Income (Bloomberg Barclays Aggregate): 2.7%• Defensive Fixed Income (Bloomberg Barclays 1-3 Yr Gov/Credit): 1.3%• Floating Rate Corporate Loans (CSFB Leverage Loan): 9.9%• High Yield Fixed Income (Bloomberg Barclays US Corp High Yield):
17.1%
Core Fixed Income and Defensive Fixed Income Managers • Core Fixed Income managers performed in line with the benchmark
• Returns were strong until the fourth quarter when interest rates rose substantially
• Both Defensive Fixed Income managers outperformed the index due to strong security and sector selection
Floating Rate, High Yield, and Opportunistic Managers• Both High Yield and Floating Rate Corporate Loan mangers posted
double digit gains in 2016• Opportunistic Fixed Income managers performed well during the
turbulent year. Both unconstrained fixed funds outperformed the Bloomberg Barclays index as interest rates rose during the latter half of the year
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CONCLUSION: KEY TAKEAWAYS FOR YOUR CONSTITUENTS
• Asset allocation was positive.
• The long term portfolio outperformed similarly sized peers with less risk.
• Over the last five and seven year period, both the short term portfolio and the long term portfolio have beaten their portfolio return objectives.
• Diversification is imperative.
• Equity managers have struggled relative to their benchmark
• Fixed Income managers have performed well relative to their benchmark
• Total performance has been solid
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3. CAPITAL MARKETS OUTLOOK
Economic Environment
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GLOBAL ECONOMICS: SLOW GROWTH
Real GDP Annualized Percentage Change
Source: Vanguard calculations based on data from the International Monetary Fund World Economic Outlook 2016. Reported 12/2016.
Near-Term• Developed markets:
– Political uncertainty, positive spending growth
• Emerging markets: – Currency fluctuations, varying
political stability
Long-Term• Developed markets:
– Aging population, higher labor costs
• Emerging markets: – Growth of the middle class, lower
labor costs
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Near-Term• Low unemployment• Rising wages• Growth in consumer spending• Relatively low threat of
recession
Long-Term• The Fed’s fight against inflation• Sluggish working-age
population growth• Low productivity growth• Taxes and regulations
GLOBAL ECONOMICS: U.S. IS SLUGGISH
Sources: BEA, NBER, and JP Morgan Asset Management. Reported 12/31/2016.
U.S. Economic Expansions Since WWII
Current Expansion
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GLOBAL ECONOMICS: INFLATION LOW, BUT RISING
Rising Global Inflation Expectations
Source: BofA Merrill Lynch Global Fund Manager Survey. Reported 11/17/2016.
Near-Term• Global: subdued inflation
• U.S.: core rates moving higher
Long-Term• Rising wages and
shelter costs
• Oil and other commodity prices
• Fiscal and monetary stimulus
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GLOBAL ECONOMICS: MONETARY POLICY
Near-Term• U.S.: gradual tightening
• Eurozone and Japan: accommodative policies
Long-Term• Rising inflation: monetary
tightening
• Limited monetary tools to fight recessions
*As of 12/31/2016. Sources: Bloomberg and JP Morgan Asset Management.
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GLOBAL ECONOMICS: THE DEBT OVERHANG
G7 Debt as a Percentage of GDP
Source: Vanguard calculations based on data from the IMF World Economic Outlook 2016, and the World Bank Development Indicators database. Reported 12/2016.
Near-Term • Low interest rates on debt
• Relatively low consumer debt payments
• Sustained economic growth
Long-Term • Rising interest rates on debt
• Increased defaults in recessions
• Potential mismanagement of China’s debt growth
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GLOBAL ECONOMICS: EMPLOYMENT & WAGES
Near-Term• U.S.: close to full
employment
• Tougher to fill vacant jobs
• Wage growth: increasing
Long-Term• Developed world:
– Slow growth or decline in working-age populations
• Emerging countries:– Growth of the middle class
– Immigration reforms
The Atlanta Fed's wage metric tracks the incomes of individual workers over time and mitigates the impact of those entering the workforce at lower wages and those exiting at higher wages. Sources: Federal Reserve Bank of Atlanta, Haver Analytics, and DB Global Markets Research. Reported 1/2017.
Wage Growth Picking Up
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GLOBAL ECONOMICS: FISCAL POLICY & POLITICS
Near-Term• Rising global populism
• Tax reform for corporations and individuals
• Fiscal stimulus for infrastructure
• Government deregulation
Long-Term• Potential for rising trade
barriers and tariffs
• High domestic costs for manufacturing
• Possible lack of entitlement reform
• Government indebtedness
As of 2015. Sources: World Bank and JP Morgan Asset Management. Reported 11/2016.
Global Trade as a Percentage of GDP
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EQUITIES – FUNDAMENTALS
DM = Developed MarketsEM = Emerging Markets* Valuations refer to NTMA P/E for U.S. and Developed Markets, and P/B for Emerging Markets. Data as of 12/31/2016. Sources: IBES, FactSet, MSCI, Standard & Poor’s, and J.P. Morgan Asset Management.
< U
nder
valu
ed
Ove
rval
ued
>
Equity Valuations: Headwinds or Tailwinds?
U.S.:Somewhat above long-term averages
Developed Markets:Near long-term averages
Emerging Markets:Below long-term averages
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EQUITIES – FUNDAMENTALS, CONTINUED
Starting valuations: the key to subsequent long-term returns
< Less Expensive More Expensive >
< Less Expensive More Expensive >
Returns are 12-month and 60-month annualized total returns, measured monthly, beginning 12/31/1991. R² represents the percent of total variation in total returns that can be explained by forward P/E ratios. Sources: Reported 12/31/2016. FactSet, Reuters, and JP Morgan Asset Management.
Subs
eque
nt O
ne-Y
ear R
etur
ns
Hopefully an updated version will be available.
Subs
eque
nt F
ive-
Year
Ann
ualiz
ed R
etur
ns
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FIXED INCOME – FUNDAMENTALS
• Future returns: anchored by current yields (2.61% on the BC Aggregate as of 12/31/2016)
• 20-year trailing total return on the BC Agg: 6.33%
• Rising inflation: a threat to returns.
High Quality Bonds: Yields and Subsequent Returns
As of 12/31/2016. Source: Wellington.
Yield on 12/31/2016:2.61%
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FIXED INCOME – FUNDAMENTALS, CONTINUED
Dashed line is the spread, which is the difference between nominal yields for floating rate corporate loans and the yield of a comparable duration U.S. Treasury. Sources: Bloomberg and Eaton Vance.
Floating Rate Corporate Loans: Spreads and Subsequent Returns• Spreads: still attractive
• An economic recession: a significant headwind for returns (defaults increase)
Hopefully an updated version will be available.
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FIXED INCOME – FUNDAMENTALS, CONTINUED
High Yield Bonds: Spreads and Subsequent Returns• Spreads: somewhat attractive
• An economic recession: a significant headwind for returns (defaults increase)
Dashed line is the spread, which is the difference between nominal yields for high yield bonds and the yield of a comparable duration U.S. Treasury. Sources: Bloomberg and Eaton Vance.
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Hopefully an updated version will be available.
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SAMPLE PORTFOLIOS – 7% EXPECTED RETURN
Source: Innovest Portfolio Solutions.
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SUMMARY: INNOVEST’S LONG-TERM OUTLOOK
Higher valuations and ongoing sluggish global growth:Overall, reduced long-term projected returns
Volatility: Have a plan, including portfolio rebalancing
The most effective investment strategy:Remain diversified and focused on the long term
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4. WHAT’S NEXT FOR THE COMMUNITY FIRST FOUNDATION’S PORTFOLIOS?
• Tolerance for risk, long-term return goals, and diversification remain paramount considerations.
• It is prudent and necessary to embrace reduced expectations for returns on most investments.
• The threat of long-term inflation needs to be carefully assessed in the asset allocation process.
• The characteristics, pros and cons of each decision must be carefully examined.
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5. ADVANTAGES OF OUR PARTNERSHIP
COMMUNITY FIRST FOUNDATION FOCUS ON PORTFOLIO MANAGEMENT
• Economies of scale• Fiduciary best practices• Fully diversified as required by UPMIFA• Delegation to independent experts
INNOVEST• Institutional approach
• Forward-looking design with downside risk quantification• Proven approach to manager selection: Recognize managers
that truly add value• Institutional pricing
• Access and availability• Completely independent
• No conflicts of interest• 100% revenue from consulting fees• No proprietary products
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WENDY J. DOMINGUEZ, MBAPRINCIPAL, PRESIDENT
Wendy is the President and co-founder of Innovest Portfolio Solutions LLC. She has more than 24 years of experience in the investment consulting profession. Her clients include some of the largest public and private sector retirement plans in the Rocky Mountain Region, as well as many large Foundations, Endowments and wealthy families. She is a member of Innovest’s Investment Committee, which makes decisions on investment related research and due diligence. Additionally, she leads Innovest’s Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to maximize efficiencies for our retirement plan clients. In 2014, Wendy was named one of the 20 Most Influential Women in Benefit Advising in the nation by Employee Benefit Adviser. Finally, Wendy has been designated as one of the Financial Times' Top 100 Women Financial Advisors.
Wendy is responsible for contract negotiation between many of our clients and their vendors. Through her efforts she has saved clients millions of dollars. Wendy’s views on investment cost control have been published in Pensions & Investments, and the National Association of Government Defined Contribution Administrators (NAGDCA). She was a key contributor to the Innovest White Paper on Employee Directed Defined Contribution Retirement Plans, as well as The Case for Vendor Consolidation. She has also authored a number of articles on fiduciary related matters which have been published in several national publications. Additionally, Wendy has been a speaker at the Center for State and Local Government Excellence, a national conference in Washington, DC, the Colorado Public Pension Conference and the Rocky Mountain Defined Benefit Plan Conference, among others.
Wendy has a BS in Finance and Economics (Magna Cum Laude) and an MBA from the University of Denver. Wendy was appointed by Governor Hickenlooper to serve on the Metropolitan State University Board of Trustees in 2016. She is an Advisory Board member for ACE Scholarships and is a member of the Finance Council of the Archdiocese of Denver. She previously served as the Chairman of the Board of ENDOW (Educating on the Nature and Dignity of Women), an international Catholic women’s organization. Wendy is also a member of The 100 Club of Denver, which provides financial support to the families of fallen police and firefighters. Wendy is married to a Denver Police SWAT officer and is the mother of 13-year-old twins. Wendy volunteers in her children’s classroom and has coached YMCA Little Kicker’s soccer.
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SCOTT MIDDLETON, CFA, CIMA®
PRINCIPAL, DIRECTORScott is a Principal, Senior Consultant and Innovest Director. Scott is the Director of Innovest’s Investment Committee, which oversees the firm’s investment research and due diligence process. He is also a member of the Capital Markets Research Groupwhich assesses the economic and market outlook and oversees clients’ asset allocation studies and portfolio construction. He has more than 27 years of experience in investment management, focusing on customized portfolio management and consulting for institutional and personal clients.
For seven years prior to joining Innovest, Scott was a Vice President and Senior Portfolio Manager at Northern Trust, an investment management and trust company. He assisted clients with developing investment policies and managed customized client portfolios.His clients included multi-generational families, entrepreneurs, charitable trusts and not-for-profit organizations. Previous investment experience included portfolio management with a national bank and trust company, as well as founding his own investment management firm.
Scott holds the CFA (Chartered Financial Analyst) and CIMA® (Certified Investment Management Analyst) designations from the CFA Institute and the Investment Management Consultants Association, respectively. He is a graduate of Oral Roberts University in Tulsa, Oklahoma, with a major in history. Scott is a member of the Investment Management Consultants Association, the CFA Institute and the CFA Society of Colorado. He is also a former grader for the level-three CFA examinations.
Scott currently serves on the Board of Governors for Catholic Pacific College in Langley, British Columbia. His former volunteer activities include the First Friday Forum, Junior Achievement, and as trustee and chairman of the Investment Committee for the Seeds of Hope Charitable Trust, an organization that provides educational opportunities for at-risk children in Colorado. Scott is married and the father of three children.
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Questions?
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Highlights of 2016
2016 Incentive Grant Program• 32 Nonprofit Endowment Partners participated
• 29 incentive grants totaling nearly $190,000
2017 Incentive Grant Program• Grant budget = $305,000
“For a small, but mighty, organization like Adam’s Camp to have a partner like Community First Foundation help us manage our endowment fund will secure our future and make a tremendously positive impact on the families and children we will serve for generations.”
Jay ClarkExecutive Director
Adam’s Camp
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Highlights of 2016
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Highlights of 2016
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Highlights of 2016The Innovators Society – Overview Video
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DrawingsTwo $500 prizesfor your endowment!
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Thank you!