Click for Philadelphia, Pennsylvania Forecast


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

Penn AIF


7/2/01 Allocation

Total Fund



Domestic Equities




International Equities








Absolute Return




High Yield Bonds




Private Equity




Real Estate




Emerging Markets




70% S&P / 30% Lehman GC



Almanac, Vol. 48, No. 13, November 20, 2001


November 20, 2001
Volume 48 Number 13

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.