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COUNCIL:
State of the University
The
following was presented at the November 7 University Council meeting
as a component of the annual State
of the University .
Endowment
Overview
by Landis Zimmerman, Chief Investment Officer
FY 2001
AIF Return
For
fiscal year 2001 the Associated Investments Fund ("AIF"),
which is the endowment's main investment vehicle, out-performed
its benchmark by 13.4%. The AIF returned a positive 6% during the
year versus a loss of 7.4% for its benchmark. In more intuitive
terms, a hypothetical portfolio consisting of 70% in the S&P
500 and 30% in the Lehman Government Corporate Bond Index would
have lost 7% over the same period. Domestic equities and international
equities contributed the bulk of this out-performance because together
they represent the largest part of the endowment's assets and had
strong positive returns in an environment where most major market
indices were down substantially. The performance in these portfolios
resulted from their tilt toward value stocks and, as a result, very
little exposure to the technology, media and telecommunications
sectors which performed very poorly and dragged the market down
over the last 18 months or so.
Other
asset classes including bonds, absolute return investments, and
real estate also out-performed their benchmarks and produced strong
positive returns in an environment that was extremely negative.
Two disappointments were the high-yield bond portfolio and the AIF's
investment in emerging markets equities. We have since transitioned
half of the high-yield portfolio to a new manager and, based on
a strategic review, eliminated our dedicated allocation to emerging
markets equities although our international managers may still participate
opportunistically up to a modest limit. We have continued to make
good progress building the AIF's nascent private equity portfolio
but will not be able to judge its performance for several more years.
Compared
to our peers for fiscal 2001, Penn's performance was well into the
top quartile for the year. The median return among 32 endowments
over $1 billion was a loss of 2.4%. Any endowment returning greater
than a loss of 0.1% was in the top quartile. What is interesting
about these numbers is that our peers' returns were not more negative
as a result of their substantial allocations to venture capital
investments, which performed miserably over the last year. We think
there are two reasons for this. The first has to do with the way
the venture capital industry values its investments. Some venture
firms have not written down their investments entirely and the numbers
are reported on a lagged basis; they can be three to six months
old. As a result, it is likely that the poor performance in the
venture industry will continue for another six to nine months. The
second reason is that many of our peers hedged at least some of
their exposure to venture capital investments and thereby were able
to offset some of the losses.
Although
the AIF has out-performed its benchmarks over the last five years
it has been compounding at a fairly modest absolute rate commensurate
with market conditions. Therefore, one issue that faces Penn now
is that while over the decade of the 90s the endowment has been
able to produce substantial growth in spending available to the
University, that growth is slowing as a result of recent years'
performance. We believe, however, that the AIF's investment strategy
is appropriate to preserve its value in today's difficult markets.
Previously,
many regretted that Penn had not participated in some of the growth
and technology investments of the latter half of the 1990s. Some
of the restructuring that has taken place in the AIF has been to
address that. However, it would have been a mistake had we abandoned
our strategic philosophy and bought growth and technology at the
top of what we now know was a market "bubble." Much of
the AIF's current rebound in good relative performance resulted
from sticking to our strategic philosophy.
Our
investment activities over the last fiscal year focused on 1) continuing
to re-orient our domestic equity portfolio, which is the AIF's single
largest allocation, and 2) continuing to build the AIF's two alternative
investment programs. These include its absolute return hedge fund
investments and its private equity fund investments.
With
regard to domestic equity, last year we invested $150 million in
a new large cap manager and as a result this portfolio is now one-third
indexed to the Wilshire 5000 and two-thirds invested with five active
managers. It retains a value tilt, which is why we had substantial
out- performance this past year.
New Investments
We
added $200 million in new investments to seven absolute return hedge
fund managers and one new high yield bond manager, which we transitioned
from our existing high yield bond manger. Our absolute return strategies
include long-short equities, convertible bond arbitrage, merger
arbitrage, non-merger event arbitrage, and investments in distressed
securities. This is the part of our portfolio we believe will produce
long run equity returns but in a pattern that is different than
the public markets. For example, when the blended stock-bond index
lost 7% in fiscal 2001, this hedge fund portfolio earned 16.6%.
We
made $80 million in commitments to ten new private equity funds,
which brings the total commitments to private equity to $328 million.
But because of the way this money is deployed very little has actually
been drawn and invested. So the allocation to private equity in
the AIF is only $60 million or about 2% of the endowment.
There
was substantial other activity over the fiscal year outside of new
investments. We changed the bond portfolio investment guidelines
to improve its overall credit quality. Bonds represent the University's
"insurance" during poor economic times and, as a result,
we want to have a very high quality portfolio that will retain its
value, which it has. Second, the Trustees adopted a new policy to
review potential conflicts of interest that may involve Trustees
whose firms manage investments. Third, we made significant improvements
to our custodial services and improved the AIF's securities lending
program. Fourth, we simplified the organization of the endowments'
myriad components and consolidated assets under the AIF umbrella.
We believe as a result we can manage the endowment more efficiently
and reduce its associated operating costs. Fifth, Ed Mathias joined
Penn's Investment Board in June. Ed is a partner of the Carlyle
Group, which is a preeminent private equity firm located in Washington
D.C. Finally, the Office of Investments added two new investment
professionals to make sure that we have the staff to appropriately
source, monitor and manage the AIF's investments.
First Quarter
FY 2002
The
first quarter of fiscal 2002 was very difficult. During the quarter,
the AIF lost 5.8% compared to a loss of 8.1% for its benchmark.
Again for a more intuitive comparison, a hypothetical portfolio
consisting of 70% in the S&P 500 and 30% in bonds lost almost
9%. Over the quarter, the S&P 500 lost almost 15%. It has been
a very, very difficult quarter for everyone. So although the AIF
out-performed its benchmark, which we are pleased about, we nonetheless
sustained losses.
Again
Penn's domestic equities and international equities were largely
responsible for the AIF's relative out-performance versus the benchmark.
The AIF's investments in bonds, real estate and absolute return
hedge funds turned in modest, but importantly positive returns during
a quarter that produced extraordinarily negative market returns.
Fiscal
Year 2001 Performance
|
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Penn
AIF
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Benchmark
|
7/2/01
Allocation
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Total
Fund
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6.00%
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(7.4%)
|
|
|
|
|
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Domestic
Equities
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9.8
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(15.4)
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46%
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International
Equities
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3.4
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(23.6)
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11
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Bonds
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12.3
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11.1
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21
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Absolute
Return
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16.6
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11.3
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10
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High Yield
Bonds
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(8.1)
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(1.2)
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5
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Private
Equity
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8.7
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8.7
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2
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Real Estate
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13.4
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11.6
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5
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Emerging
Markets
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(29.0)
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(25.9)
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--
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70%
S&P / 30% Lehman GC
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(7.0)
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--
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Almanac, Vol. 48, No. 13, November 20, 2001
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ISSUE HIGHLIGHTS:
Tuesday,
November 20, 2001
Volume 48 Number 13
www.upenn.edu/almanac/
Penn
receives over $15.5
million from JDRF and W.W. Smith Trust to establish two
centers to find a cure for Type 1 diabetes and its complications |
For
FY
2001, the Associated Investments Fund, Penn's main investment
vehicle, out-performed its benchmark, returning a positive performance. |
Penn's
paystubs
have been redesigned to be more informative and easier to
understand. |
Penn's
Way weekly raffles begin; envelopes must be submitted to
Payroll by this Wednesday for the first drawing. |
With
fall semester classes ending December 10, the Provost reissues
the Rules
Governing Final Examinations. |
Two
types of grants
are available to faculty to conduct cancer-related research
projects; the deadline is January 15 for both. |
As
the holidays approach, there are special events
and performances to attend and there are the annual appeals
to donate and contribute to those less fortunate. |
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