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Board of Governors, March 30, 2000 - APPENDIX II, Annex 6

REPORT OF THE INVESTMENT COMMITTEE

This report outlines the performance of the investment portfolio and the recent activities of the Investment Committee.

Performance

The portfolio returns for various periods were as follows:

As indicated above, except for the current year and 1996, the performance of the University's portfolio exceeded the performance of the median fund in the Frank Russell universe of approximately 65 Canadian portfolios.

Over the five year period ending December 31, 1999, the annualized performance of the portfolio was 15.2% in comparison to the median return of 14.6% in the Frank Russell universe. This represents second quartile performance for our portfolio.

For additional information, please refer to the attached pages which show amounts held by each Investment manager at December 31, 1999, the annual and annualized returns by manager over the five years ending December 31, 1999 and the returns in relation to other Canadian balanced portfolios in the Frank Russell universe.

Returns in relation to the objective of a 5% real rate of return

One of the Investment Committee's objectives is to earn a 5% real rate of return over the long term. (i.e., to earn 5% over the rate of inflation, as measured by the Consumer Price Index). Inflation has averaged 1.6% per year for the past five years.

For the five years ending December 31, 1999, the annualized real rate of return for the portfolio was 13.6%, which consisted of a nominal (actual) annualized return of 15.2% less 1.6% for inflation. For the four years ending December 31, 1999, the annualized real rate of return was 12.9%, consisting of a nominal return of 14.5% less inflation of 1.6%. These returns exceed the Investment Committee's performance objective of a real rate of return of 5%.

Value added by Active Management

Another of the Investment Committee's objectives is to earn the return produced by the asset mix policy, based on the returns of the market indices, and a premium to reflect the additional fees related to active management. In order to achieve this objective, investment managers with active investment mandates need to outperform their benchmark indices. For example, Canadian equity managers need to outperform the TSE 300 index over time and Canadian bond managers need to outperform the SCM universe index over time.

Over the five years ending December 31, 1999, the actual returns for the portfolio were 15.2% and the returns generated by the market indices for the portfolio were 16.1% (the policy return). Over this period, the Canadian bond managers have added value over their benchmark, but the Canadian equity managers have not. The Committee continues to focus on this issue. For some markets, such as US equities, the Committee selected an index manager. Over the past four years, this has resulted in first quartile performance for US equities, since the majority of active US managers have been unable to outperform the return of the Standard and Poor 500 stock index.

Book and Market Value of the Portfolio

As at December 31, 1999, the operating and endowment portfolio had a book value of $153,158,000 and a market value of $182,659,000, as follows:

At December 31, 1999, the portfolio consisted of the following components:

Portion related to Endowed funds: $ 95,598,000

Portion related to Operating and non-endowed funds: 87,061,000

Total market value of portfolio: $182,659,000

During the month of January 2000, the assets held by the investment managers were adjusted to the Committee's new target mix which consists of:

Bonds: 40%
Canadian equities: 20%
US equities: 25%
Non-North American equities: 15%

Total: 100%

Manager Review - Beutel Goodman

On February 25, 2000, the Investment Committee interviewed the President of Beutel Goodman & Company Ltd., Mr. Bill Ashby, to discuss this firm's disappointing results for the 4^th quarter of 1999. Beutel Goodman, whose mandate is to outperform the TSE 300 index, had a return of (5.2%) in relation to a return 21.4% for the TSE 300 index for the fourth quarter of 1999. This resulted in Beutel Goodman achieving a return of 7.3% versus a return of 31.7% for the TSE index for the year ending December 31, 1999.

Beutel Goodman underperformed the TSE 300 index in 1999 because this firm did not invest in Nortel and Bell Canada Enterprises. These two securities contributed to over 91% of the TSE 300 return for 1999. Without these two companies, the remaining stocks in the TSE 300 index returned 6.9% for 1999. Nortel and Bell Canada Enterprises represented more than 27% of the entire TSE index at December 31, 1999 and the change in the value of the shares of these two companies has a major impact on the return of the TSE 300 index.

Beutel Goodman did not hold any shares of Nortel and Bell Canada Enterprises because these investments did not fit Beutel Goodman's value style of investing. This manager feels that these stocks were too expensive to buy and chose not to include them in the portfolio. The Committee was aware that Beutel Goodman had not invested in these companies and, until the fourth quarter of 1999, this decision had not hampered their returns.

The Committee has used two managers, Beutel Goodman and Laketon, for Canadian equities for the past five years in order to achieve diversification and to try to add value above the returns of the TSE 300 index. The Committee plans to review alternative structures for investing in Canadian equities at its next meeting on May 25, 2000. If the Committee adopts a new strategy for Canadian equities, the next step will be to select the appropriate investment manager(s).

{The accompanying graphs are not available in electronic format. Copies are available in the University Secretariat.}