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Letter from the Executive Management

Fiscal Year 2009
The Permanent University Fund (the "PUF") and the General Endowment Fund (the "GEF") - together the "Endowments" - experienced losses of 13.0% and 13.2%, respectively, for the fiscal year ending August 31, 2009. PUF assets totaled $9.67 billion and GEF assets totaled $5.36 billion at fiscal year end. The Intermediate Term Fund (the "ITF") experienced a loss of 7.1% for the full year with assets totaling $3.57 billion at fiscal year end.

The PUF outperformed its benchmark by 2.44%, the GEF outperformed its benchmark by 2.20%, and the ITF outperformed its benchmark by .49%. The outperformance was due to both portfolio-level tactical asset allocation as well as active external managers delivering better than market average returns. In the face of severely volatile and distressed capital markets, we were pleased that $430 million of added-value was produced during the fiscal year.

For the year ending June 30, 2009, as measured against the 20 largest university endowments, public and private, investment returns were just below the average.

Investment Strategy
This will be the third annual letter articulating the same long term investment strategy for the Endowments which places emphasis on:

  • Use of active external investment managers,
  • Increasing exposure to emerging markets,
  • Increasing exposure to natural resources and real estate, and
  • Prudent use of illiquidity with private investments.

An integral element of this strategy is its phased implementation.

Again this year we engaged in a thorough Investment Policy review with the UTIMCO Board of Directors and the Board of Regents of The University of Texas System, which affirmed the strategy and fine-tuned its implementation.

Tactical Allocation
During the fiscal year, tactical asset allocation produced .65% of outperformance, or $138 million. An overweight position of 5%-6% in Investment Grade Fixed Income and a 4% underweight position in Developed Country Equity contributed positive returns. Underweight positions of 1-2% in Emerging Market Equity and Real Estate detracted from returns.

Long-only ("More Correlated and Constrained" or "MCC") Investment Grade Fixed Income of $1.8 billion remains 12% of total assets.

Hedge funds ("Less Correlated and Constrained" or "LCC") managers remain the single largest allocation, but decreased over the year from 32% to 29% of total assets.

The major shift in asset allocation occurred through the build-up of Credit-Related Fixed Income exposure through private investments, hedge funds and more recent initiatives with long-only managers. These investments now represent 17.3% of total assets.

During the past year, another $360 million in private investments, $578 million in hedge funds and $305 million in long-only mandates were deployed, in addition to the $1,186 million that was deployed fiscal year 2008.

Developed Country MCC decreased from 18.4% to 14.7% of assets, while Emerging Market MCC remained constant at 9.7%. Real assets - Real Estate and Natural Resources - decreased from 13.7% to 11.8% of total assets.

Private Equity investments in buy-out, growth and venture capital increased from 10.8% to 11.4% of total assets.

Active Management
During the fiscal year, active management produced 1.51% of outperformance, or $268 million. Active management is the measurement of how the funds' third-party investment managers actually perform versus their benchmark or market average.

As in previous years, the Less Correlated and Constrained managers accounted for the bulk of active management contribution. The LCC portfolio lost 7.9% during the fiscal year versus a market average loss of 13.4%

Private investments also outpaced their benchmark, although such shorter term measures are of limited relevance because of the long-term nature of these types of investments. The Private Investment portfolio is broadly diversified across investment styles (venture capital, growth equity, buy-out), sizes, geographies and year of commitment.

The More Correlated and Constrained Developed Country and Emerging Market active managers again detracted from overall active management value-add.

FY 2009 Market Overview and FY 2010 Market Outlook
The fiscal year and "Market Year" meshed over the past twelve months, as two weeks into the fiscal year, Lehman Brothers failed.

By November 30 - the end of the fiscal year first quarter - the Endowments lost 22.7%. During these three months, U.S. public equities were down 30%, Europe and Japan stocks were down 36%, and emerging market stocks were down 45%. Oil had dropped over 50%, and real estate fell 44%. Bonds were down a paltry 3.2%. Global capital markets felt at the abyss.

The Endowments lost another 5.5% during December, January and February, the second quarter of the fiscal year bringing losses to 27% midway through the fiscal year. During the second quarter, stock markets fell another 17% in the U.S., 14% in Europe and Japan, and 5% in emerging markets. Oil was down another 18% and real estate was down another 20%. Bonds were flat for the quarter. Government monetary and fiscal policy was debated and then massive stimulus was deployed across the globe.

Endowment investment returns rebounded 11.5% from March through May. The U.S. stock market gained 26%, Europe and Japan were up 34%, and emerging markets returned 56%. Oil rose 48% and real estate was up 45%. Bonds posted a 7% return. Financial markets concluded that the world was not coming to an end.

The Endowments returned an additional 6.8% return in the final quarter of the fiscal year. The U.S. stock market gained 12%, Europe and Japan were up 14%, and emerging markets returned 9%. Oil rose 5% and real estate was up 18%. Bonds were up another 4%.

For the full fiscal year, contrasted to the Endowments 13.2% loss, U.S. public equities were down 18%, Europe and Japan stocks were down 15% and emerging market stocks were down 10%. Oil had dropped nearly 40%, and real estate fell 23%. Only bonds were up a healthy 8.5%.

Investment Outlook
Our base case for most developed countries is a slow, subpar economic recovery as global assets and liabilities are rebalanced. At the same time, many developing economies around the world have good prospects for growth and development.

Global excess capacity retards inflation and, together with limited credit supply or demand, deflation concerns are understandable. The vast amounts of monetary stimulus governments have injected, however, cause concerns about inflation and currency devaluation over the longer term.

In the face of such uncertainty and downside risk, we remain cautious, diversified, and will continue to approach investments through a long-term lens.

Board and Staff
The key to UTIMCO's success is its people, including its Board of Directors and staff, as well as The University of Texas System Board of Regents and staff.

UTIMCO is grateful for Regent Robert B. Rowling's many years of service, including as Chairman. We welcome Regent Janiece Longoria and Chancellor Francisco Cigarroa to our Board. And we are most grateful for Erle Nye's extraordinary service as Chairman, beginning in the middle of the year.

We are grateful for the strong relationships we have with The University of Texas System Board of Regents and staff. The Regents and staff are fully engaged with the UTIMCO Board and staff, providing strong direction, oversight and support. This partnership further enhances UTIMCO's efforts and probability of success.

Finally, we are delighted to be colleagues with the fifty plus people who are UTIMCO. We believe we have a great team. We believe our newer colleagues have transitioned well, that the continuing development of staff remains on target, and that UTIMCO continues to be a collaborative and caring organization.

We remain confident in our abilities to continue to weather the storms that are inevitable, to capitalize on investment opportunities as they present themselves, and to produce strong risk adjusted returns over the long term. We appreciate all of the support we receive from The University of Texas and The Texas A&M Systems.

As always, we welcome your inquiries and input.

Bruce Zimmerman Sig
  Cathy Iberg Sig

Bruce Zimmerman
Chief Executive Officer and
Chief Investment Officer


Cathy Iberg
President and Deputy
Chief Investment Officer