Endowment/Development
I will report on a number of issues; I will then
ask my colleague Landis Zimmerman to speak on the endowment performance,
and then the provost will give his report. We have tried to coordinate
them so that we are all talking about quite different things
and you get a broad range of the many things going on in the
University.
Let me set the
context for Mr. Zimmerman's report
by talking just a little bit about the endowment--not from the
perspective of its performance--but from the perspective of development.
Clearly last year was extraordinary because of the $480 million
that we raised, $150 million was from the Annenberg Foundation:
$100 million for the school and $50 million for the Sunny Lands
Trust which is doing a number of very interesting conferences
related to the area of youth at risk. But even netting out the
$150 million, last year's performance given the economic climate
was very strong and we are on a very strong path this year. We
already have $51 million or so in pledges, last year at this
time we had $48 million, absent the Annenberg gift, and $51 million
the year before. What is notable this year is that we have $62
million in receipts compared to $35 million at this time last
year and $34 million at this time the year before. This is where
I think you can really see the impact of the economy really turning
around so that people are beginning to pay pledges that were
made and feel more comfortable in doing that. Many people seem
to be rushing to get some '03 tax credits by paying on some of
their pledges when the market has done relatively well this year.
That's all to the good because then we can put it into either
the endowment, if it's for the endowment or into the programs
for which they are designated, and of course put it to work much
more quickly. We are quite enthusiastic about those data.
We are planning
a capital campaign for the University of Pennsylvania. We're in a wonderful situation of having extremely
generous alumni and donors, but as you know well seeing the new
strategic plan, it is extraordinarily ambitious and it really
relies on ratcheting up the level of annual philanthropy significantly.
So we are planning the kind of campaign that would do that. We
are doing a number of feasibility studies and some understanding
both of the market and the economy and also how our external
constituencies are receiving and responding to our strategic
plan. That's very useful because we know what our strategy is
and where we are going. We've had broad discussion many times,
as members of the community, about that strategic plan; and the
schools as well are doing that. If there are areas that are of
high strategic significance that don't appear to excite or interest
some of our prospective donors, then we will do an even better
job of educating our donors before we go out and start a campaign
and ask for money. But we will not take money for things that
really are not high institutional priorities. We will come back
to the actual performance of the endowment in a moment.
Diversity/Equity
We continue to
move quite aggressively I think in both setting goals, and
in trying to address those goals.
Just to remind us, we had a committee working on gender equity
as it related to the faculty in particular, and we received a
report from that committee over a year ago. During the last academic
year, the Provost's Office has done a number of things and the
Faculty Senate Executive Committee actually did a number of additional
things that have helped to move us further toward those goals.
It's very clear that meeting any target with regard to faculty
hiring and faculty retention requires intervention not only at
the school level but also truly at the department level where
the hiring decisions are made. During the last year the Provost's
Office has required of the schools and all of the departments
that we keep track of--and report on--information regarding the
number of women who are in the applicant pool for faculty positions,
those who are interviewed and ultimately those to whom offers
are extended. We have been actively monitoring the number of
women on search committees relative to the number of women on
the faculty in the department. The Faculty Senate has been terrific--the
leadership particularly--about reminding the faculty that this
is a serious and shared goal to increase the number of women
on the faculty and to do well with regard to retention.
We have some
data which we will make available in a report shortly but I
want to provide a bit of texture around
what we think are some successes after a more vigorous intervention
in the last year. These are women who started July or September
of this year, as well as a number of completed recruitments where
the faculty member isn't starting until later this academic year.
For example we have two new women coming in mathematics and the
same thing is true in engineering. In Arts and Sciences last
year 24.9% of the faculty were women and this year 27.1% of the
SAS faculty are women. What's notable about that is that 47.5%
of the recruits were women. So what you are seeing is a much
more stepped-up recruitment process and a lot of attention to
retention that's providing those numbers. 9.6% women in engineering
has gone up to 10.7%, again we know of cases who have accepted
a year from now so the recruiting season actually is better than
it looked. 16.3% in the prior year at Wharton, 17.7% this year,
so again movement in the right direction. The School of Medicine
went up from 25.2% to 25.9% and here too almost half the new
recruits were women. So this is an ongoing process.
It clearly isn't something that can be completely
addressed in any single year, but the very elaborate new monitoring
process, the incentives that are in the pipeline, and the increased
attention on the part of the faculty, I think have done just
what we, and certainly what the Gender Equity Committee, hoped
and that is to really raise everyone's consciousness and continue
to do a better job of recruiting and retaining women faculty
members. That is particularly true in some departments and much
less true in others. That's why the monitoring from department
to department, rather than just aggregate data, is so important
and we are continuing to work there.
In parallel fashion a Minority Equity Committee
was appointed, again this was focusing solely on faculty, and
that committee, we hope, will resume steam over the next couple
of weeks, and I thank the Faculty Senate leadership for taking
the initiative to reanimate the leadership of that committee
and to help us to move it forward. We are very eager for the
outcome of those deliberations as well.
Neighborhood/Community
I want to talk
a little more elaborately about Penn's continuing commitment to the neighborhood and to the community.
It is something that is very important to us institutionally
and certainly is ingrained in so many areas throughout the University.
It would be hard to do justice and thank completely all of the
organizations and all of the groups throughout the faculty and
students and staff who do such a wonderful job and who are so
interested in moving ahead Penn's institutional commitments to
our neighborhood and neighbors in West Philadelphia. I'm going
to highlight just a couple.
The Center for
Community Partnerships last year celebrated its 10th anniversary.
We have a $10 million fundraising
campaign going on for the Center--an endowment campaign--the Center
has a much larger annual budget. It continues to get more faculty
and students involved in academically based community service
learning courses. It has a number of strong and important initiatives
in the community and this is one clear source of energy in our
community interventions and one that nicely links the academic
and volunteer or the applied component of Penn's efforts. Faculty
and students from the schools of Nursing, Medicine, Dental Medicine,
Arts and Sciences, Social Work and Education are all working
together in the newest of the Center for Community Partnerships
programs. That's the one at Sayre Middle School which is off
the ground and I think that we'll benefit very significantly
from the involvement of so many schools and so many of our colleagues.
We have a standing
Trustee Committee called Neighborhood Initiatives Committee
that I formed with the Trustees about four
or five years ago when we began even more aggressively our interventions
in West Philadelphia. That Committee meets regularly; it stays
in close contact with, and indeed now monitors the University
on our progress and goal-setting. It's very important to know
that because this is an institutional and important Trustee effort;
it's not an ad hoc committee--it's one that now has statutory
responsibility for our neighborhood initiatives and exists with
other Trustee committees like Budget and Finance or Audit or
Academic Policy, and I think that's very important.
Glenn Bryan,
our director of City and Community Relations, hosts First Thursday
Meetings, where Penn leadership--and
it varies from month to month who's there--shares information
related to what's going on within the University, what the University
is doing that ought to be consulted upon with the West Philadelphia
community. It was at these meetings, as well as in many other
venues, that we discussed construction projects, the Alexander
School, retail initiatives and the like. It's a very popular
venue and one that we think gives us a predictable source of
interacting with members of the community in a more informal
way.
The Division
of Business Services has institutionalized Penn's program of economic inclusion. We now review every project,
every construction project, every renovation project and every
purchasing program that we have throughout the University, to
set minority inclusion goals for contracting. This has dramatically
changed the way we do business at Penn and I think has helped
to achieve its goal, which is to help to build economic infrastructure
and capacity back into the West Philadelphia neighborhood in
a way that really is a win-win. We buy materials, we do construction,
and this allows the community to benefit with their business
plans and programs to benefit from those activities of the University. We
have raised University procurement from minority-owned vendors
from $9 million about six years ago to $60 million this year.
It is a very significant initiative and the inclusion on the
construction projects is also quite substantial.
Penn has made
financial commitments to the West Philadelphia community in
the education area. We are subsidizing
for ten years the Alexander School--our neighborhood public school
in West Philadelphia--and we have taken responsibility for three
of the lowest performing elementary schools in the West Philadelphia
area through the Graduate School of Education as part of the
State takeover of the Philadelphia School System. I announced
last year, but probably it's worth bragging again given that
it's bragging for the Graduate School of Education, that our
three schools under the leadership of GSE, showed the largest
improvement in reading scores of any of the takeover schools
last year. The faculty and students from GSE who have become
really deeply involved in these three schools are doing a wonderful
job.
We renewed our
commitment to the University City District at the end of last
year for another five years. We've
made an additional three-year commitment to UC Green, which is
the community greening project that Penn began in 1998. I hope
that those of you who are in West Philadelphia really do see
the results of those programs because they have been quite effective.
Our main effort has been to continue to solicit partners for
all of these things. We want to have people and organizations
in the community, who feel that we are a good partner in these
initiatives and that they have some sustainability over time
and we feel very optimistic about those relationships and indeed
the longevity of these initiatives.
Facilities
We recently dedicated
the Weiss Tech house. It was terrific--it's located at 3340 Walnut St. so you can enter
from Walnut St. or you can enter through Levine Hall. It is the
newest of our hubs for tinkerers and entrepreneurs. The Provost
and I had the pleasure of being there and we saw new student
inventions--there is an entrepreneurship fund that the students
are able to use to support one another's projects. We saw an
energy-efficient ventless clothes dryer, a rollerblading robot,
a computer program that makes the use of computers simpler, and
one of our students who is already handing out his business cards--because
he has five employees, so it has really served well the function
which we hoped it would serve. These all are extracurricular,
not-for-credit--as Kelly Writers House is, as Civic House is--places
where people can come together and really use their imagination
and creativity and do things that interest them.
We dedicated
Levine Hall earlier this year and it has opened for the department
of computer and information
sciences and really has done quite a lot to move the ambitions
of that department forward. We broke ground for the new bioengineering
building--Skirkanich Hall--which will both serve as a home for
bioengineering but be the final piece of the puzzle linking all
of the engineering buildings together in a much more effective
and quad-like way. We're looking forward to the completion of
that project.
We will be unveiling
the commemorative sculpture for the 125 Years of Women Celebration--the never-ending celebration
that was two years ago--and I think we'll finally conclude with
the installation by Jenny Holzer--a world renowned sculptor--a
series of benches labeled 125 years. The artist selected quotes--by
and about women--from Penn's Archives reflecting the last 125
years. It is integrated into another never-ending project, the
work on Hill Field which hopefully will be completed by the dedication so
that we can free once again part of that field for student pick-up
athletic activities. But I think the landscape design will be
very attractive and will support more linkage to the rest of
the community.
We have broken
ground for the Life Sciences Building; we have relocated the
Greenhouse at least temporarily and continue
on-site preparation. The excavation is scheduled for November.
That will become the new home for part of the biology department,
for genomics, for cognitive neuroscience and in Phase II, the
rest of biology and psychology will move to an integrated program
on that site. We're very pleased that that will finally be underway.
We're in the
design phase for a new McNeil Center for Early American Studies
which is going to be on the corner
of 34th and Walnut St., diagonally across from Zeta Psi fraternity.
That will be a small building that matches in size the fraternity
building and will house a very significant program that has developed
in the study of the early American period.
The design for
the School of Veterinary Medicine's
new teaching and research building is also underway. Its occupancy
is projected for the fall of 2006.
We have a couple
of other exciting announcements on projects that we think the
general University community has
been waiting for a long time but we're going to take them to
the Trustees in November first and make sure that they approve. You
will hear about them in the week after next. We're enthusiastic
about launching some of those after clearly a long period of
thinking.
We have signed
our memorandum of understanding with the Post Office to purchase
the land. It's been widely publicized
so I won't talk specifically about that except to say, I think
a more important thing that hasn't been in the press or in our
internal communications, is that we have joined other stakeholders
to create the Schuylkill River Development Corporation. These
are all the stakeholders on both the east and west side of the
river, including Amtrak, SEPTA, builders and developers who own
land, Penn, Drexel, and a lot of private developers, and for
the first time we have really come together and we are working
with the federal government on transportation money, with the
Commonwealth on Department of Transportation infrastructure,
for bridges--we're working with the Army Corp of Engineers. You
will see, moving forward finally, a really integrated plan for
the development of the east and west side of the Schuylkill from
Bartram Gardens up to the Fairmount Park Water Works area. That's
pretty terrific and we won't all be competing with one another,
but we're all speaking with the same voice. We expect a lot of
progress in that area. It's going to be terrific for Penn in
particular, given that it will get us to the river and get us
to Center City with a wonderful gateway that's important to other
stakeholders in the City as well.
On the east edge
of campus, the former Hajoca building, which has gone through
many iterations at 32nd and
Walnut St., now will become the new home for WXPN and the World
Caf„. It's going to feature a 350-seat live music performance
venue that certainly will contribute to the vibrancy of Walnut
St. and a very visible home for WXPN that has really just continued
to grow and succeed. There is a private developer for that project--Dranoff
Properties--the developer of the Left Bank.
Finally, also
using a private developer we are transforming the Eastern Apparatus
Building--which is at 31st
St. between Chestnut and Walnut--into a translational, tech transfer
research facility. Our partner here is Forest City Radnor. They
are investing $55 million in this venture which will meet the
Medical School's increasing research needs, and Penn's research
needs to create generic lab space, particularly in the biotech
related areas.
We've reached 95% occupancy for our retail assets.
A lot of retail activity going on or in planning and we are hard
at work on energy conservation. We are the largest purchaser
in the Commonwealth of wind energy; we continue to win awards
for our conservation efforts. We were awarded a 2002 Governor's
Award for Environmental Excellence and we were also awarded the
2002 Green Power Leadership Award. This is a tough battle, natural
gas prices have gone up and we continue to push our environmental
consciousness at the same time the costs of energy have increased
dramatically. Now 10% of our energy needs are satisfied by wind
power that we've been able to purchase and we're very pleased
about that.
With that, I will ask Landis Zimmerman to give
a report on the performance of the endowment.
Endowment
I'm going to talk
briefly about fiscal year 2003. I'll give you an example of what
our peers did in the same time and then I'll give an update of
for the first quarter of 2004.
Here's fiscal
2003 (table 1). If you start at the top in the center column
which is outlined with the box, we earned 4.7% for the fiscal
year versus a benchmark of 3.6% so that's a little over a percentage
point ahead our benchmark. If you look to the left where it says
fiscal year quarter 4, you can see all that performance came
in the 4th fiscal quarter, which as many of you may know was
a tremendous rebound for stock markets globally. So thanks to
the 4th quarter we ended the year substantially positive. If
you now look at the domestic and international equities you can
see that's where a huge gain was made in the last quarter of
the fiscal year. But interestingly the point to make here is
that domestic and international equities together contributed
only a little over one percentage point to the overall endowment
for the year, despite the tremendous rally in the 4th quarter.
Since we have half the endowment invested in public equities
we got about half a percent out of our 4.7% from public equities.
While we're thankful that public equities rallied in the quarter,
to me what's more important is all the other stuff because if
we got 50 basis points from global equities it means that we
got 4.2% from everything else. I think that's tremendously important
in a volatile stock market. So for example contributors in fiscal
2003 were our hedge fund portfolio, which is labeled absolute
return which is third from the bottom, our high yield portfolio
in which we had a pretty meaningful credit bet on in the portfolio
and of course investment grade bonds which did quite well. So
if you add up our allocation in those three categories it's about
40% of the portfolio and contributed about 12% total return.
So I'm quite pleased that in an environment where notwithstanding
a good rally in the stock markets stocks performed merely ok,
we had other things working in the portfolio that contributed
to the overall total return.
Table 1 -
FY 2003 Performance Summary
|
FYQ4
|
FY03
|
FY03 Benchmark
|
AIF
|
11.0%
|
4.7%
|
3.6%
|
AIF Composite
|
Domestic Equity
|
16.8
|
2.3
|
1.3
|
Wilshire 5000
|
International Equity
|
18.3
|
-1.2
|
-6.5
|
EAFE
|
Private Equity
|
-3.9
|
-19.5
|
-19.1
|
Venture Economics
|
Real Estate
|
1.6
|
1.6
|
7.0
|
NCREIF
|
Absolute Return
|
8.6
|
11.2
|
5.4
|
Custom
|
High Yield
|
7.1
|
22.0
|
26.4
|
Citigroup High Yield
|
Invest. Grade Bonds
|
2
|
9.6
|
12.0
|
Lehman Blended
|
This is what our
peers did last year (table
2). We came in at 4.7% which is above
the median return of 4.0%; Harvard came in the highest at 12.5%,
Emory came in the lowest at -8%. Although one year is interesting
to look at obviously for an institution like ours and our peers,
multiyear periods are much more important. So if you look at
the three-year period (table
3), we've compounded a 3.5% per
year for three years versus a benchmark which lost 3.6% per year
for three years. So we've remained positive over a very difficult
market environment and not withstanding Harvard's particularly
good return last year, we have a better three year number than
Harvard's and most of our peers for that matter. Our peer median
came in at a 1.3% loss.
Table 2
- Peer Performance Summary
Based
on 26 endowments over $1billion
|
FY03(e)
|
Highest
|
12.5% (Harvard)
|
25th Percentile
|
6.5
|
Penn
|
4.7
|
Median
|
4.0
|
75th Percentile
|
1.9
|
Lowest
|
-8.2 (Emory)
|
Table 3 -
Penn's 3-Year Return is Positive -- Most Benchmarks are Still
Negative
|
FY 2001
|
FY 2002
|
FY 2003
|
3 Years
|
Penn
|
6.0%
|
0.1%
|
4.7%
|
3.5%
|
AIF Composite
|
-7.4
|
-6.7
|
-3.6
|
-3.6
|
70/30
|
-7.7
|
-9.4
|
5.3
|
-4.2
|
Peer Median
|
-2.3
|
-4.3
|
4.0
|
-1.3
|
I thought I'd
give you a snapshot of what the portfolio looks like and I'll
make two comments on this slide (table
4). The gray area is the
bond portfolio which represents 20% of the endowment so we have
an equity heavy portfolio. We think it's important to remain
in equity or equity like strategies because to support the institution
we believe it's important to earn the long run equity risk premium
over bonds. Therefore, we will always be equity heavy. Our global
equity portfolio, representing about half of the endowment, is
shown on the first three lines of the chart labeled index, U.S.
equities, and international equities. Everything below that is
what contributed to the performance this year and so we've made
a significant effort over the last couple of years as we've repositioned
the endowment to add other strategies that will produce total
return when public markets don't.
Table 4 - AIF Asset Allocation
by Strategy
Portfolio Strategy
|
AIF%
|
Liquidity
|
Tilt
|
W 5000 Index
|
5
|
|
Market cap weighted
|
Long U.S. Equities
|
28
|
High
|
Mid cap value; 50% in 27 stocks
|
Long Int'l Equities
|
17
|
|
Mid cap value, 50% in 34 stocks
|
Long/Short Equities
|
6
|
|
30% to 40% net long exposure, 105% gross exposure
|
Event Arbitrage & Other
|
6
|
|
Event arbitrage, convertible arbitrage, statistical arbitrage
|
Credit/Distressed
|
11
|
Medium
|
High yield 46%, distressed & cap structure arbitrage
54%
|
Real Assets
|
0
|
|
Initial core plus real estate commitment
|
Opportunistic Real Estate
|
4
|
|
Leveraged 2:1, preference for regional operators
|
Private Equity
|
3
|
Low
|
56% venture, tilt to franchise firms, 44% buyouts, tilt
to small
|
Total Equities
|
80%
|
|
|
|
|
|
Spread product
|
13
|
|
Mortgages and A-rated corporate bonds, shorter duration
|
Governments
|
7
|
High
|
Indexed, intermediate duration
|
Total Bonds
|
20%
|
|
Finally here's
where we are for the first quarter of the fiscal year (table
5). I've told our board and trustees that investing is back to
a game of inches. We have to grind out performance in every category
that we can and for the first quarter we are up 3.7% compared
to the benchmark of 2.8% so again we are ahead for the quarter
and things are generally working across the portfolio.
Table
5 - 1Q Fiscal 2004 Update
|
FY 1Q
|
FY04 Benchmark
|
AIF
|
3.7%
|
2.8%
|
AIF Composite
|
Domestic Equity
|
4.1
|
3.7
|
Wilshire 5000
|
International Equity
|
10.6
|
8.1
|
EAFE
|
Private Equity
|
-0.5
|
-0.4
|
Venture Economics
|
Real Estate
|
0.1
|
2.1
|
NCREIF
|
Absolute Return
|
2.4
|
1.8
|
Custom
|
High Yield
|
2.2
|
2.5
|
Citigroup High Yield
|
Invest. Grade Bonds
|
0.0
|
-0.7
|
Lehman Blended
|
Dr. Rodin's Closing Remarks
I think it's especially
important to note three things about this. I'll just underline
Landis' comment that over the three year period which has been
the worst certainly in my presidency we were one of few endowments
over $1 billion that didn't loose principal during that period.
The
second point is that we clearly used the income from the endowment
to fund
ongoing programs. We have a spending rule at the University,
as do all of our peers; the peer group spending ranges between
5% and maybe 4% of the endowment. So in these three years in
order to meet our spending rule we were beginning to use principle
rather than cut out programs and so we relied on performances
before that which were over 4.7% which is the spending rule.
We need to rebuild now to make sure there continues to be a buffer
for the ongoing programs of the University during the lean years
by putting away money in the good years when you make excess
of the spending rule.
And finally the
performance is really quite important as we go out on a fundraising
campaign. A lot of our donors make their money this way too and
so they look at how we perform in terms of their willingness
particularly to give us funding that will go into the endowment.
Some of the toughest negotiations I ever have are with investors
who say "why should I put it in the endowment if I can do better." So
this is very, very important as we continue to plan for a large-scale
campaign.