xt74mw289c97 https://exploreuk.uky.edu/dips/xt74mw289c97/data/mets.xml Lexington, Kentucky University of Kentucky 20080909 minutes English University of Kentucky Contact the Special Collections Research Center for information regarding rights and use of this collection. Minutes of the University of Kentucky Board of Trustees Minutes of the University of Kentucky Board of Trustees, 2008-09-09ic. text Minutes of the University of Kentucky Board of Trustees, 2008-09-09ic. 2008 2011 true xt74mw289c97 section xt74mw289c97 
IN ATTENDANCE:
Minutes Investment Committee Board of Trustees September 9, 2008
Investment Committee Members:
Community Advisory Members:
Board of Trustees Members:
Ms. JoEtta Y. Wickliffe, Acting Chair Mr. Stephen P. Branscum Mr. James F. Hardymon
Mr. James W. Stuckert Mr. Billy B. Wilcoxson
Ms. Mira S. Ball Dr. Britt Brockman
Investment Staff & Mr. Marc A. Mathews
Consultants: Ms. Susan I. Krauss
Ms. Donna Counts
Mr. Russ Kuhns (R.V. Kuhns & Associates) Mr. Rob Palmeri (R.V. Kuhns & Associates) Mr. Bruno Grimaldi (R.V. Kuhns & Associates)
Others: Dr. Lee T. Todd, Jr.
Mr. Frank A. Butler Ms. Barbara W. Jones Mr. Sergio Melgar
The Investment Committee meeting was called to order at 8:30 am. Ms. Wickliffe asked for a motion to approve the June 16, 2008 minutes. Mr. Hardymon made the motion to approve the minutes, Mr. Branscum seconded the motion and all approved.
Ms. Wickliffe stated that the Investment Committee needed to go into closed session in order to hear a report on the evaluation of proposals for the Non-U. S. equity manager search because an open discussion of the firms and deliberations of the committee could jeopardize the retention of the recommended firms. Ms. Wickliffe made a motion to go into closed session pursuant to KRS 61.810(1) (g), to discuss specific proposals because an open discussion could jeopardize the proposals. Mr. Hardymon seconded the motion, all approved, and the committee then went into closed session.
The Chair announced that the closed meeting was concluded and the committee was now in open session and would proceed with a vote on a recommendation. Mr. Hardymon made a motion to approve IC 1 to approve a contract amendment with Capital Guardian and authorize contract negotiations with two new firms for the management of the non-U. S. equity allocation. Mr. Branscum seconded the motion. The motion was approved unanimously.
Ms. Krauss began discussing the next item on the agenda, IC 2, by giving the background for the proposed action. The Investment Committee approved a revised asset allocation on June 16, 2008 which included a strategy change within the U.S. equity asset class. The new strategy would include a passive large-cap allocation complimented with an active small cap allocation, which will replace the previous
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"whole-stock" strategy. Ms. Krauss noted that the U.S. large cap market is very efficient, therefore it makes sense to hire an index manager for this space. She reported that RVK and staff requested fee proposals on managing this allocation from State Street and Northern Trust, existing service providers. RVK and staff also performed a review of the four leading index fund service providers, which includes Barclays Global Investors and Vanguard, in addition to State Street and Northern Trust. As a result of this evaluation RVK recommended hiring State Street. While Barclays had less historical tracking error as compared to the Russell 1000 index, State Street had the lowest fees. Ms. Krauss said the difference in fees should offset the expected difference in tracking error to provide the desired index returns. Since State Street is a current manager, this strategy change can be done with a contract amendment. Staff and RVK recommend entering into a contract amendment with State Street for the management of the 23.95% Russell 1000 allocation. Mr. Mathews pointed out that the 23.95% large cap allocation represents roughly 92% of the University's total U.S. equity allocation of 26%, in line with the composition of the broad U.S. equity market. Mr. Branscum made a motion to approve IC 2 to approve a contract amendment with State Street for the management of the passive Russell 1000 allocation. Mr. Hardymon seconded the motion. The motion was approved unanimously.
Mr. Mathews introduced the next item on the agenda, IC 3, and stated that this was the second part of the new U.S. equity allocation. RVK and staff reviewed leading active small-cap U.S. equity managers, one of which is Wellington, the current small-cap manager. Based on this review it is recommended to remain with Wellington since it is an excellent firm and ranks in the top quartile of returns for this area. Their research team is deep, the company is 100% employee owned and has a long history as an asset manager. Mr. Mathews noted that Wellington offers two investment options, an Emerging Companies Strategy and a Small Cap Strategy. The Emerging Company Strategy is deemed a better fit due to a lower weighting of non-U. S. securities. Also, the Emerging Companies Strategy has outperformed the Smaller Companies Strategy over the long-term. In addition, this is the current Wellington investment for the Fund. Mr. Hardymon made a motion to approve IC 3 to retain Wellington for the management of the active Russell 2000 allocation. Mr. Branscum seconded the motion. The motion was approved unanimously.
Ms. Krauss began discussing the next item on the agenda, IC 4. She noted that another strategy change was a new allocation to the real return asset class. Staff and RVK reviewed leading real return managers, two of which are PIMCO and Wellington, existing managers. PIMCO offers a "fund of funds" strategy that allocates assets to a variety of PIMCO mutual funds. PIMCO's product provides exposure to a variety of fixed income securities, including TIPS, emerging market bonds, and other real return investments, such as commodities and real estate. The fund of-funds product provides a high level of diversification, as evidenced by its low historical volatility. Wellington's Diversified Inflation hedges strategy has a significant allocation to global equities in certain inflation-related industries, as well as commodities and TIPS. Due to the use of equities, Wellington's strategy has produced higher returns with higher volatility, as compared to PIMCO's strategy. Ms. Krauss stated it is recommended that the real return allocation of 7% of the total portfolio be accomplished by allocating 5.25% to PIMCO and 1.75% to Wellington and that contract amendments be approved with PIMCO and Wellington. The combination of the two strategies at a 75%/25% weighting should produce the desired return and risk levels for this asset class. Mr. Branscum made a motion to approve IC 4 for contract amendments with PIMCO and Wellington for the management of Real Return allocations. Mr. Hardymon seconded the motion. The motion was approved unanimously.
Ms. Krauss moved on to the next item on the agenda, IC 5, which was a recommendation that the Committee approve a change in the Endowment Investment Policy to authorize staff to make commitments to successor funds of approved private equity and real estate managers to reach and maintain the approved policy allocation and ensure diversification across vintage year, strategy, etc. The revised asset allocation approved in June provided for an increase in the private equity allocation from 5%
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to 7% and an increase in the real estate allocation from 8% to 12%. Ms. Krauss presented forecasting analyses for private equity and real estate which revealed that significant commitments will need to be made in the next five years to these asset classes in order to reach the target allocations of 7% and 12%, respectively. Additionally, upon reaching the target allocations, new commitments will need to be made in order to maintain the target allocations. Private equity and certain real estate investments are structured as closed-end funds, with capital calls over a period of time and distributions back to investors as the underlying investments in the fund are sold. Managers typically open new funds every two years. Pantheon, one of the University's existing private equity managers currently has two new funds open that the Staff will make commitments to upon approval of this action. Mr. Hardymon made a motion to approve IC 5. Mr. Branscum seconded the motion. The motion was approved unanimously.
Mr. Mathews than gave an update on the plan for implementing the new asset allocation and reported that the implementation was on schedule. Ms. Krauss described one suggested change to the implementation plan that would allow RVK and staff to complete an RFP process for Value Added and Opportunistic Real Estate managers and bring finalist recommendations and rationale to the committee at the regular session scheduled for December 9, 2008, eliminating the interviewing of finalists by the Committee in a special session on December 8, 2008. Ms. Krauss explained the suggested change is appropriate since the University has been investing in the real estate asset class for some time, increasing the comfort level for Committee members and staff.
Ms. Krauss reviewed the asset allocation transition schedule and noted that by December 2008 the transition should be complete for all asset classes with the exception of Real Estate and Private Equity, contingent upon completion of contract negotiations. The undertarget private equity allocation will be invested temporarily in the U.S. and non-U.S. asset classes and the undertarget real estate allocation will be invested temporarily in the fixed income asset class.
The next item on the agenda was the performance review and market update by RVK. Mr. Grimaldi gave the capital market overview. He highlighted the continuing problems in the mortgage market, the underperformance of the financial sector continues and the outperformance of the energy sector. He stated that the best performing asset class in fixed income was TIPS.
Mr. Palmeri then gave the report on the endowment portfolio as of June 30, 2008. Compared to the median for all endowment funds, the UK allocation is overweight in U.S. Equity, underweight in international equity and significantly underweight in alternative investments. The investment allocation changes approved in June will bring the portfolio more in line with the median allocation of all Endowment funds which should improve returns and reduce volatility. Mr. Palmeri went through the RVK handout highlighting fund performance. For the year ended June 30, 2008, the total fund returned -8.17%, net of fees, underperforming the UK benchmark by 1.87%. He noted that the performance difference is primarily a result of high allocation to equities, poor performance in the domestic equities and poor performance in real estate. Domestic equity declined by 16.09% compared to the DTW 500 Index decline of 12.53%. Global equity declined by 8.23% compared to the MSCE ACW index decline of 9.27%. International Equity declined by 8.47% compared to MSCE EAFE index decline of 10.61%. Fixed income increased by 7.67% compared to the Lehman Brothers US Aggregate index of a 7.12%. Real Estate increased by 4.90% compared to the NCREIF Property index increase of 8.84%. Mr. Palmeri reported that the steps being taken to change allocations as approved in the June meeting will reduce the risk in the portfolio and increase the return through diversification into new asset classes.
After the portfolio discussion was complete, Mr. Branscum made note that a vote had not been taken on the proposed change in the implementation plan. He noted that a formal vote should be made on this since the Committee had formally approved the implementation plan in June. Mr. Branscum made a
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motion to approve the suggested change to the implementation plan. Mr. Hardymon seconded the motion. The motion was approved unanimously.
The next item on the agenda was a review of the Cash, Overnight and Short-Term Investment Report. Ms. Counts reported that as of June 30, 2008 the total portfolio subject to the short term investment policy was $260.1 million. Overnight investments totaled $62.5 million. Of this, $54.0 million was invested in the Kentucky Office of Financial Management (OFM) overnight repurchase agreement with an annualized monthly return of 2.07%. Short term investments totaled $197.7 million, of which $68.1 million was invested in the OFM short term investment pool with an annualized monthly return of 2.32%, $60.0 million was invested in the OFM intermediate pool with an annualized monthly return of 3.66%. $25.0 million was invested in the Fidelity Government Fund, with a return of 2.18% and another $40.6 million was invested directly in federal agencies and instrumentalities having yields ranging from 2.65% to 4.05%. Ms. Counts reported that investment returns compared favorably to the market performance indices of the three month T-bill rate of 1.68%, the fed funds rate of 2.0% and the 2 year Treasury note rate of 2.63% as of June 30, 2008.
With no further business the meeting adjourned at 10:30 a.m.
Donna Counts Office of the Treasurer
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IC 1
Office of the Treasurer September 9, 2008
Members, Investment Committee
APPROVAL OF CONTRACT AMENDMENT WITH CAPITAL GUARDIAN AND AUTHORIZATION TO ENTER CONTRACT NEGOTIATIONS WITH TWO NEW FIRMS FOR THE MANAGEMENT OF NON-U.S. EQUITY ALLOCATION
Recommendation: that the Investment Committee approve a contract amendment with Capital Guardian and authorize the University's Purchasing Division to enter into contract negotiations with two new firms for the management of the non-U. S. equity allocation.
Background: The Investment Committee approved a revised asset allocation and manager structure on June 16, 2008, which includes an increase in the non-U.S. equity asset class from 15% to 20%, plus a change in strategy to include more emerging markets exposure. The MSCI All Country World ex. U.S. ("ACW ex. U.S.") index was approved as the benchmark for the non-U.S. equity asset class, versus the MSCI Europe, Australasia, and Far East ("EAFE") index that was previously used, which only includes the developed markets.
Investment staff and R. V. Kuhns & Associates ("RVK") issued a Request for Proposals for non-U.S. equity managers in July 2008 and received proposals from 26 firms on 32 different strategies. Staff and RVK performed the evaluation of proposals and recommend that Capital Guardian be retained to manage a 10% core allocation in their ACW ex. U.S. strategy, complemented by one growth manager and one value manager, each with allocations of 5%. Capital Guardian's ACW ex. U.S. strategy has achieved top-quartile returns in this universe and the University will not incur transactions costs that would be associated with a manager change.
The recommendation to retain Capital Guardian and hire complementary growth and value managers, along with the supporting rationale, is included in a confidential memo from RVK dated August 26, 2008, which was distributed to the Investment Committee. Disclosure of the names of the growth and value managers could jeopardize the contract negotiations with these firms.
Action Taken:        0 Approved □ Disapproved □ Other


 

IC2
Office of the Treasurer September 9, 2008
Members, Investment Committee
APPROVAL OF CONTRACT AMENDMENT WITH STATE STREET FOR THE MANAGEMENT OF PASSIVE RUSSELL 1000 ALLOCATION
Recommendation: that the Investment Committee approve a contract amendment with State Street for the management of the 23.95% passive Russell 1000 allocation.
Background: The Investment Committee approved a revised asset allocation and manager structure on June 16, 2008, which includes a strategy change within the U.S. equity asset class. A passive large-cap allocation, complemented with an active small-cap allocation will replace the "whole-stock" strategy, which involved passive management of half of the U.S. equity allocation to the broad U.S. equity market, complemented by two active all-cap managers and an active small-cap manager.
R. V. Kuhns & Associates ("RVK") and investment staff requested fee proposals for this mandate from State Street and Northern Trust, current service providers for the University. RVK and staff also performed a review of the leading four index fund service providers, which include Barclays Global Investors ("BGI") and Vanguard, in addition to State Street and Northern Trust. As a result of this review, RVK recommends hiring State Street for the passive Russell 1000 mandate. State Street has tight historical tracking error as compared to the Russell 1000 index and offered a very competitive fee arrangement. State Street proposed an annual fee of 2 basis points on the first $50 million and 1 basis point on the remaining, which results in an effective fee of $27,500, or 1.2 basis points, based on an estimated allocation of $225 million. BGI had the tightest historical tracking error as compared to the Russell 1000 index, however typically charges a fee of 3 basis points for this size allocation. The 1.2 basis point fee offered by State Street will offset the expected difference in tracking error between BGI and State Street.
The attached RVK memo provides further background for this recommendation.
Action Taken:        0 Approved □ Disapproved □ Other


 

VKuhns
► ► \ ASSCX IA1I-S. INC .
MEMORANDUM
To: Susan Krauss - University of Kentucky Endowment
From: R.V. Kuhns & Associates, Inc.
Re: Russell 1000 Passive Investment Mandate Recommendation
Date: July 16, 2008
R.V. Kuhns & Associates, Inc. was asked to provide a recommendation on responses to UKY Staff's bid request to State Street Global Advisors (SSGA) and Northern Trust Global Investments (NTGI) - both existing contracted investment management vendors - for an estimated $225 Million passive investment placement in a Russell 1000 Index Strategy.
You have provided us with the following bid summary from the two firms:
 SSGA: 2 bp on first $50 MM, 1 bp thereafter - estimated fees ($225 MM) = $27,500
 NTGI: 4 bp on first $100 MM, 2 bp thereafter - estimated fees ($225 MM) = $65,000
We would note that both fee proposals are below the standard fee schedules offered by the providers reflective of both the existing relationship and the size of the mandate.
Our review process included the review of two additional leading providers of passive investment management via commingled fund offerings (Barclays Global Investors and Vanguard). Both additional providers did not appear to offer a standard fee/expense structure that was lower than SSGA or NTGI. Their comparative performance and investment process/firm abilities was reviewed as part of our standard due diligence.
Comparative gross-of-fees performance from the eVestement Alliance database:
Investment Performance
Universe ".ime: eA Luge C ip Loie Eijuin
Period Ending Dart; )Inch 31 2 'I,*
Return set: Crios* :esr^
Firm	Product	MRQ Returns Return Rank	V 11) Returns Retain Rank	1 Year Returns Return Raul	3 Years Returns Return RtrJ;	5 Years Returns Return Raol	7 Years Returns Return Rsiik	10 Years Returns Retain R»nl
B.ii da s Global Iiu estor s. N.A.	R»"ell 1000 Index Fund	-9.48      51	-9.48      51	-5.35 65	6.24 58	11.91 56	4.24 64	3.88 72
"ci rhem Xiusr Global Investments	Norruern Trust R1000 Il[(tr.\.	-9.47      51	-9.47      51	-5.41 66	6.21 59	11.92 56	4.27 63	3.89 72
St.lte Mieet Glob.il Advisors	Ru^ell 100U Index Sti.itesy	-9 51 51	-9.51 51	-5.37 66	6.22 59	11.87 56	4.22 65	3.87 72
Vanguard	Y.iusu.nd Russell 10H0 Index Trust	-9 50      5 1	-9.50 51	-5.40 66	6.20 59			
Russell Index	Russell 10fm	-0.48 51	-9.48 SI	-5.40 66	0.19 59	11.86 57	4.20 65	3.S3 73
Universe Performance Comparisons								
25t'.: Percentile		-7.74	-7.74	-0.18	8.08	13.77	6.31	6.41
Median		-,;'.39	-9.39	-3,48	■6.58	12.20	4.92	5.12
75tl: Percentile		-10.78	-10.78	-6.22	5.47	10.87	3.68	3.77
= ofObser.-3foud        539 339 338 321 286 249 186
Page 1 of 3


 

Tracking error (on a rolling-three-year basis) was also reviewed as it indicates the ability of an index manager to provide consistent performance in-line with the target index. _ March 31. 2008
Tracking Error: Rolling 3-Yr Periods vs. Russell 1000
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6/07
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6/06 6/05 12/05
Three Years Ending
6/04
6/03
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Barclays Global Russell 1000 IndeK Fund SSgA Russell 1000 IndeK Strategy
Northern Trust Northern Trust R1000 IndeK Vanguard Vanguard Russell 1000 IndeK Trust
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Fi m'Frocuc:	RV C-'C5	6:05   _    3.'05   ■   12/04 n 9,'	A   :     6«04   ,     3/04 ;	12:03 ■ 9:03	■
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We would note that the primary source of tracking error in Russell 1000 is differing strategies used during regular index re-constitution because of the efficiency of maintaining a full-replication strategy (i.e. index sampling is typically not necessary because of the fact that a cost-effective basket of index constituents in this relatively more liquid index can be maintained). NTGI's relatively higher index tracking appears to be derived from the impact of higher securities lending revenue while SSGA's tracking error (which has been more controlled recently) was due to positive performance due to differentiated trading strategies around the annual rebalancing of the index. All providers examined appear to offer evidence of well-contained tracking error results (3 year annualized tracking error =0.1%)
R.V. Kuhns & Associates, Inc. Page 2 of 3


 

Given that two existing high-quality managers are currently under contract (SSGA & NTGI), the first question is whether an open RFP process is warranted by the results of our diligence efforts on your behalf. We would note that Barclays Global Investors (BGI) appears to offer strong performance and is a significant player in the passive investment management space. However, it appears that the combination of the higher expected fees from BGI and the presence of two highly qualified firms as existing vendors offset such benefits.
Recommendation: Limit the candidate universe to the two providers (SSGA and NTGI) currently under contract as investment management providers.
Between SSGA and NTGI, we would comment that while both firms are experienced and talented providers of passive investment management services, the offering (inclusive of the superior fee proposal received) from SSGA appears to make them the preferred candidate because of net of fees performance experience and tighter tracking error results.
Recommendation: Retain State Street Global Advisors (SSGA) for the Russell 1000 Index Strategy mandate.
There may be opportunities to consider in-kind transfers as part of the restructuring necessary to effect asset manager changes for which the retention of a transition manager is optimal. We would comment that the transition management affiliates of both Northern Trust and State Street are strong providers. Given the anticipated retention of SSGA, it would appear sensible to obtain a transition management proposal from State Street that can be reviewed in conjunction with asset allocation restructuring efforts. We would be pleased to assist with this process.
Please do not hesitate to contact us with any questions.
R.V. Kuhns & Associates, Inc. Page 3 of 3


 

IC3
Office of the Treasurer September 9, 2008
Members, Investment Committee
APPROVAL OF RETAINING WELLINGTON FOR THE MANAGEMENT OF ACTIVE RUSSELL 2000 ALLOCATION
Recommendation: that the Investment Committee approve retaining Wellington for the management of the 2.05% active Russell 2000 allocation.
Background: The Investment Committee approved a revised asset allocation and manager structure on June 16, 2008, which includes a strategy change within the U.S. equity asset class. A passive large-cap allocation, complemented with an active small-cap allocation will replace the "whole-stock" strategy, which involved passive management of half of the U.S. equity allocation to the broad U.S. equity market, complemented by two active all-cap managers and an active small-cap manager.
R. V. Kuhns & Associates ("RVK") and investment staff reviewed leading active small-cap U.S. equity managers, one of which is Wellington, the University's current small-cap manager. As a result of this review, RVK recommends remaining with Wellington since it is an excellent firm and ranks in the top quartile of returns for this mandate. Wellington actually has two products that rank in the top quartile of the Russell 2000 universe, which are the Emerging Companies Strategy (current fund UK is invested in) and the Smaller Companies Strategy. A comparison of the two strategies revealed that the Emerging Companies Strategy is a better fit for this mandate due to a lower weighting of non-U. S. securities. The Emerging Companies Strategy allows up to 20% investment in non-U. S. securities, while the Smaller Companies Strategy allows up to 30%. Additionally, the Emerging Companies Strategy has outperformed the Smaller Companies Strategy over the last eight years, which is the timeframe both strategies have been in operation.
The attached RVK memo provides further background for this recommendation.
Action Taken:        0 Approved □ Disapproved □ Other


 

I^k. U-1*11*1 s
► ► \ ASSOC"IA1I-S. i\r.
MEMORANDUM
To: Susan Krauss and Marc Mathews
From: RVK Manager Research Group
Subject: Recommendation for Domestic Small Cap Manager
Date: July 14, 2008
The purpose of this memorandum is to outline a recommendation to the University of Kentucky for the Domestic Small Cap component of the portfolio. The portfolio currently has an allocation of 3.4% (roughly $35 million) to small cap equity but the allocation will be brought down to 2.05% (roughly $18.5 million) after implementing the new asset allocation. The current mandate is managed by Wellington's Emerging Companies strategy team and the recommendation is to remain with the same strategy and team.
RVK's Manager Research Group knows Wellington well and considers the firm best of breed. Their central analyst research team is deep and has an attractive compensation structure to keep them with the firm. The firm is 100% employee owned with three managing partners. Wellington's long history as an asset manager is also a strength of the firm.
RVK staff recently met with Wellington on May 19th in its Boston, MA office to review UK's current investment in the Emerging Companies Strategy. Also reviewed was the Smaller Companies strategy, which is managed by the same team within Wellington. The Team's biographies are attached at the end of the memo.
The Emerging Companies strategy has been a solid performer for the portfolio, particularly over the long-term. Over the past five years, the Emerging Companies strategy is a top quartile performer in the Small Cap Universe. While the shorter term returns are below that of the benchmark, the strategy has a large overweight in micro cap stocks. Micro cap stocks have been the worst performing segment of the market cap over the past four years. Taking this into consideration, the Emerging Companies strategy has benefited from strong individual stock selection.


 

Table 1 Annualized Performance
As of 3/31/08
	Quarter	1 Year	3 Years	5 Years	10 Years
Wellington Management Company - Emerging Companies	-10.63	-15.35	4.32	17.38	9.20
Russell 2000 Index	-9.90	-13.00	5.06	14.89	4.96
Excess Returns	-0.73	-2.35	-0.74	2.49	4.24
The Emerging Companies strategy purchases stocks below $1 billion, while the Russell 2000 Index holds stocks with market cap from $100 million to over $7 billion. This naturally results in a lower weighted average market cap for the Emerging Companies strategy. While this is not a concern in and of itself, the market cap limitations of the strategy leave the portfolio with limited weighting to the larger small cap stocks.
The Smaller Companies strategy is run by the same portfolio management team as Emerging Companies and migrates up the market cap range. The portfolio management team and investment process are identical for both strategies. There are two differences between the strategies: 1) Market cap range at purchase, which is the largest differentiator, and 2) International allocation.
1. The Emerging Companies strategy does not purchase securities above $1 billion in market cap, while the benchmark, Russell 2000 Index, market cap ranges from $100 million to over $7 billion. This results in the strategy owning much smaller companies than the Index and placing the strategy at a disadvantage when the larger securities within the Index outperform. Both Wellington strategies have a smaller weighted average and median market cap than the benchmark. This is due to the large allocation to micro cap stocks ( $400 million in market cap) in the strategies compared to the Index.
While the Smaller Companies strategy has a higher weighted average market cap than the Emerging Companies strategy, it is well below that of the Index. This is due to the cap range of the strategy versus the buy-and-hold strategy of the Index. Stocks are removed due to market cap restrictions from the Russell 2000 Index once per year. The Smaller Companies strategy sells stocks when they violate their size boundaries, regardless of timing. The Smaller Companies strategy does have a similar median market cap to the Index.
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Table 2
Market Capitalization Breakdown
As of 3/31/08
Cap Range at Purchase ($mil) Weighted Avg, Mkt Cap ($mi!) Median Mkt. Cap ($rnil) Mkt Cap; % In $1,5-7.5 billion Mkt Cap: % In $750-1.5 billion Mkt Cap: % In $400-750 million Mkt Cap: % In  $400 million	Smaller Companies	Emerging Companies	Russell 2000
	S100 million to $2 billion	 $1 billion	N/A
	$871	$502	$1,309
	$516	$252	$515
	17%	4%	31%
	15%	11%	37%
	37%	30%	20%
	31%	55%	13%
2. Both strategies have the ability to purchase international securities, but the Smaller Companies strategy has a much higher percentage invested in international securities. The Smaller Companies strategy is allowed to invest up to 30% in international securities, while the Emerging Companies strategy can invest up to 20%. As UK is already invested in the Emerging Companies strategy, the additional weighting toward international might not be a cause for concern. The additional weighting to international is 0.3%, based on the 2% allocation to small cap equity.
Table 3 International Ownership
As of 3/31/08
% in ADRs % in Ordinary Shares	Smaller Companies	Emerging Companies
	2%	0%
	24%	15%
The investment team at Wellington has been stable. The performance of the Smaller Companies strategy has been solid relative to the index and peers, particularly when taking into consideration the over weight to underperforming micro cap stocks. Refer to Table 4 and 5 for more on performance.
Table 4 Annualized Performance
As of 3/31/2008
	MRQ Returns	1 Year Returns	3 Years Returns	5 Years Returns	7 Years Returns	8 Years Returns
Wellington - Emerging Companies	-10.63	-15.35	4.32	17.38	12.2	10.03
Wellington - Smaller Companies	-10.51	-9.95	8.73	21.57	12.62	6.1
Russell 2000 Index	-9.9	-13	5.06	14.89	7.57	4.4
eA Small Cap Core Equity Universe Median	-10.05	-12.44	5.56	15.47	9.5	7.96
Wellington - Emerging Companies: Excess Returns	-0.73	-2.35	-0.74	2.48	4.63	5.63
Wellington - Smaller Companies: Excess Returns	-0.61	3.05	3.67	6.67	5.05	1.7
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Table 5 Calendar Year Returns
As of 3/31/2008
	Calendar Year 2007 Returns	Calendar Year 2006 Returns	Calendar Year 2005 Returns	Calendar Year 2004 Returns	Calendar Year 2003 Returns	Calendar Year 2002 Returns	Calendar Year 2001 Returns	Calendar Year 2000 Returns
Wellington - Emerging Companies	-3.24	16.28	10.26	24.37	53.38	-11.59	25.08	12.24
Wellington - Smaller Companies	4.15	17.17	14.55	27.96	56.11	-19.51	17.44	-8.09
Russell 2000 Index	-1.56	18.36	4.55	18.32	47.25	-20.48	2.49	-3.02
eA Small Cap Core Equity Universe Median	1	16.1	8.06	20.37	45.58	-14.74	6.31	11.32
Wellington - Emerging Companies: Excess Returns	-1.68	-2.08	5.71	6.05	6.13	8.89	22.59	15.26
Wellington - Smaller Companies: Excess Returns	5.7	-1.19	10.01	9.64	8.86	0.97	14.95	-5.06
The performance of the Emerging Companies strategy has been strong over long time periods compared to peers and the micro cap benchmark. Over the past five calendar years, Emerging Companies has trailed its peers only once, 2007, and the Russell Microcap Index twice, 2003 and 2006.