UNIVERSITY of WASHINGTON TREASURY OFFICE ENDOWMENT REPORT

Transcription

1 UNIVERSITY of WASHINGTON TREASURY OFFICE ENDOWMENT REPORT

2 C O N T E N T S THE METROPOLITAN TRACT THE FIRST PERMANENT GIFT An endowment is a permanent fund established to support a specifi c purpose. A portion of the return generated each year is used to support current year programs. An endowment can contribute greatly to the quality of a university s teaching, research and public service mission. The Metropolitan Tract is an outstanding example of the importance of permanent gifts. When the Territorial University was established in 1861, Seattle was a tiny wilderness village of approximately 300 settlers. The Denny, Lander and Terry families gave a ten-acre plot of land on which the fi rst campus building was constructed. While the University of Washington eventually outgrew the site in downtown Seattle, the income from the property has continued to provide important support to the institution for more than a century. It is unlikely anyone in ENDOWMENT 2 THE UNIVERSITY OF WASHINGTON ENDOWMENT 4 BENEFITS OF THE CONSOLIDATED ENDOWMENT FUND 6 CONSOLIDATED ENDOWMENT FUND PROGRAM SUPPORT 8 CONSOLIDATED ENDOWMENT FUND SPENDING POLICY AND OBJECTIVES 10 CONSOLIDATED ENDOWMENT FUND INVESTMENT STRATEGY AND PERFORMANCE 12 TRUSTS AND NON-CONSOLIDATED ENDOWMENTS GENERAL 14 GLOSSARY 15 INVESTMENT MANAGERS 16 GENERAL INFORMATION 1861 anticipated the kind of value that would be placed on downtown core property in the twentieth and twenty-first centuries. Fortunately, those fi rst donors had the foresight to provide a permanent asset that has appreciated in value with each passing decade.

3 ENDOWMENT HIGHLIGHTS FISCAL YEAR 2008 The market value of the UW endowment and similar funds increased by $48 million The Consolidated Endowment Fund: Added 324 endowments Distributed $94 million to programs, up from $81 million in fi scal year 2007 Established 76 new endowments through the Students First matching initiative, with a market value of $32 million as of June 30, 2008 Returned 1.9% on investment, placing in the second quartile of large college and university endowments FISCAL YEARS The market value of the UW endowment and similar funds increased by $1.6 billion The Consolidated Endowment Fund: Added 1,445 new endowments Distributed over $562 million to programs Established 102 Students First endowments with a market value of $57 million Diversifi ed the portfolio for higher returns by adding real assets and expanding allocation to global markets Placed in the second quartile of large college and university endowments, with an average annual return of 9.7% Life income trusts and annuities returned 7.7%, exceeding benchmark UW TREASURY OFFICE ENDOWMENT REPORT

4 THE UNIVERSITY OF WASHINGTON ENDOWMENT The Metropolitan Tract was the University of Washington s fi rst and only permanent gift for over 40 years. In 1905, the University received its fi rst cash endowed gift of $400. Thus began the accumulation of endowment and similar funds that are held today. Those funds are in four groups. The largest pool by far is the Consolidated Endowment Fund (CEF) with a market value of $2.2 billion. The growth, structure, investment strategy and performance of the CEF are described on pages three through 11 of this report. The next largest group is life income trusts and annuities with a market value of $85 million. These trusts pay income to designated benefi ciaries during their lifetimes, after which the University receives the remaining principal value. Externally held trusts total $53 million. These funds are invested at local banks and the income distributed supports University programs. Finally, funds totaling $48 million are held in various non-consolidated endowments. Trusts and non-consolidated endowments are described more fully on pages 12 and 13 of this report. * ENDOWMENT AND SIMILAR FUNDS* as of June 30, 2008 ($ in millions) $48 Non-Consolidated Endowments $53 Externally Held Trusts $85 Life Income Trusts & Annuities $446 Operating Funds + $446 Operating Expenses $1715 Endowed Funds $2161 Consolidated Endowment Fund $1,715 Endowed Funds UW TREASURY OFFICE ENDOWMENT REPORT

5 The Board of Regents of the University of Washington is responsible for the University s investments. The University of Washington Investment Committee, (UWINCO), comprises Board members and investment professionals, and serves as an advisory committee. Current Regents and UWINCO members are listed on page 16. Growth of the CEF* FY ($ in millions) $2,161 The primary focus of UWINCO is the Consolidated Endowment Fund (CEF). The CEF, which is similar to a mutual fund in that each individual endowment buys units in the fund, consists of 2,825 separate endowments. The CEF market value was $2.2 billion as of June 30, 2008 compared to $575 million at July 1, During the past ten years, gifts and transfers totaling $677 million were added to the CEF. $ * reflects inclusion of Operating Funds in the Consolidated Endowment Fund starting July Value without would be $1.7 billion. uw treasury office endowment report

6 BENEFITS OF THE CONSOLIDATED ENDOWMENT FUND A gift invested in the CEF will grow over the long term. This growth results from spending a portion of the investment return on program support and reinvesting the remainder. This growing base increases program support, ensuring that a gift made today will not be eroded by infl ation in the future. As pictured to the right, a $100,000 gift invested in the CEF 10 years ago would have distributed $53,200 to donor selected programs and grown to $146,991. KEEPING PACE WITH INFLATION A GIFT OVER 10 FISCAL YEARS ENDING JUNE 30, 2008 Investment & Administration Fees... $12,423 Program Distributions... $53,200 Fees & Program Distributions... $65,623 Reinvestment... $46,991 Initial Gift... $100,000 Gift Value After 10 Years... $146,991 UW TREASURY OFFICE ENDOWMENT REPORT

7 The impact to program support has been substantial, with $562 million distributed over the past 10 years. annual program support FY ($ in millions) CEF distributions increased to $94 million in fiscal year Recent increases in program support are primarily a function of strong returns and a successful fund raising campaign. In addition, $ $81 $94 million in operating funds were invested in the CEF in fiscal years 2001 through $62 $ $ $ $ $ $22 $26 uw treasury office endowment report

8 CONSOLIDATED ENDOWMENT FUND PROGRAM SUPPORT The CEF supports University programs as designated by its donors. Programs supported by endowment distributions include scholarships, fellowships, faculty professorships and chairs, and research activities. Permanent funding through endowment is critically important to advancing the University s mission. During fi scal year 2007, the UW launched Students First, a matching program to increase the endowment for need-based scholarships benefiting undergraduate, graduate and professional students. This matching program brought in 102 new endowments with a market value of $57 million as of June 30, ENDOWMENT SUPPORT FY % Office of the President 4% Law 5% Business 7% Engineering 6% Centrally Administered 12% Arts and Sciences 14% Other By School and College 27% Medicine 21% Operating Funds 10% Research Activities By Purpose 27% Scholarships and Fellowships 21%* Other University Activities 22% Professorships and Chairs 20% General Academic Support UW TREASURY OFFICE ENDOWMENT REPORT 2008 * Includes operating funds invested in the Consolidated Endowment Fund. 6

9 schools, colleges and programs which have received endowed gifts Schools, Colleges and Programs with Endowments Endowment Value at 6/30/08 Number of Individual Endowments Academic Medical Affairs $521,001, Arts & Sciences 266,242, Engineering 147,829, Business Administration 100,662, Student Financial Aid 83,124, Office of the President and Provost 82,999, Law 79,301, Graduate School 39,574, Undergraduate Education 35,939, Libraries 34,881, Forest Resources 30,978, Intercollegiate Athletics 28,974, Ocean and Fishery Sciences 27,107, Tacoma Campus 26,849, Nursing 26,507, Architecture & Urban Planning 22,441, Dentistry 22,119, Public Affairs 20,186, Alumni Association 13,776,764 2 Education 12,853, Pharmacy 12,348, Public Health & Community Medicine 11,498, Social Work 9,415, University of Washington Press 6,243, Office of Research 4,484,643 3 Information School 3,837, Office of Intellectual Property 3,163,644 1 Bothell Campus 3,117,444 8 Friday Harbor Laboratories 3,091, Office of Minority Affairs 2,317, University of Washington Extension Services 939,930 1 University Advancement 614,025 4 Subtotal $1,684,424,009 2,820 Evergreen State College Foundation & KUOW 7,217,478 2 Students First 23,811,661 1 Operating Funds 445,985,337 2 Total Endowed Funds $2,161,438,485 2,825 uw treasury office endowment report

10 CONSOLIDATED ENDOWMENT SPENDING POLICY AND OBJECTIVES The spending policy authorizes the annual transfer of a certain percentage of the endowment market value to support the purpose designated by the donor. The CEF spending policy, set by the Board of Regents, is 5% of a three-year moving average market value. In addition, internal fees of.2% are charged for Treasury Offi ce oversight and management and.8% for University-wide development. A signifi cant majority of universities tracked by the National Association of College and University Business Offi cers (NACUBO) use a spending policy based upon a percentage of a moving average market value. SPENDING POLICY APPLIED TO THE CEF FY Sources of Return 9.7% Income 1.9% Appreciation 7.8% Uses of Return 9.7% Internal Fees 1.0% Program Support Distributions 4.9% Reinvestments 3.8% UW TREASURY OFFICE ENDOWMENT REPORT

11 The spending policy provides a disciplined approach to moving money from the endowment on a predictable, endowment distribution vs. total return FY consistent basis. Year-to-year CEF returns reflect the up and down volatility of the financial markets (as shown by the jagged line on the chart to the right). Distributions from the CEF change gradually as a result of the smoothing effect of the spending policy. per unit distribution ($) CEF total return 1 (%) CEF returns are shown net of external management fees of.3%. 2 The estimated payout for fiscal year 2009 is $4.18 per unit. uw treasury office endowment report

12 CONSOLIDATED ENDOWMENT INVESTMENT STRATEGY AND PERFORMANCE At June 30, 2008, 76% of the CEF was invested in equities, 9% in fi xed income and 15% in real assets. CEF investments are all externally managed by investment professionals. The CEF is broadly diversifi ed. The best performing asset one year may be the worst some other year. Given that it is not possible to predict performance in advance, the University s investment policy requires exposure to a variety of asset classes; this reduces overall risk (volatility). CEF ASSET ALLOCATION FY % Fixed Income 15% Real Assets 14% Non-Marketable Alternatives 16% International Equity Developed Markets 14% Domestic Equity 12% International Equity Emerging Markets 20% Marketable Alternatives UW TREASURY OFFICE ENDOWMENT REPORT

13 The CEF has performed well over time compared to that of performance comparisons 1 peer colleges and universities as measured by Cambridge 1, 3, 5 and 10 year fiscal periods Associates. This solid performance placed the CEF in the for periods ending june 30, 2008 second quartile of large college and university endowments over the past 10 years. The CEF also compares favorably against broad capital market indices, returning 9.7% over the 10 years ending June 30, During this period, the S&P 500 returned 2.9% and the Lehman Brothers Government Bond Index returned 5.7%. 1 year 3 years -13.1% 1.9% 0.1% 11.2% 14.0% 4.4% 14.4% 5 years 12.8% 7.6% 9.7% 10 years 8.9% 2.9% Consolidated Endowment Fund Cambridge Median Return 2 S&P CEF returns are shown net of external investment management fees. 2 Preliminary Cambridge Associates College and University Investment Pool Top 50 (by Investment Pool Market Value) uw treasury office endowment report

14 TRUSTS AND NON-CONSOLIDATED ENDOWMENTS NON-CONSOLIDATED ENDOWED FUNDS The University of Washington non-consolidated endowment funds totaled $48 million as of June 30, These gifts include limited partnership interests, real property, closely held securities, externally-managed trusts and funds on deposit with the state of Washington. While some may eventually be invested in the CEF, most are illiquid or have donor restrictions that do not allow consolidation. LIFE INCOME TRUSTS AND ANNUITIES Life income trusts and annuities are invested in separately managed irrevocable trusts. Money or other property is contributed to the University on the condition that the trust will make payments to the donor or other designated benefi ciaries for a specifi ed term or life of the benefi ciaries. The remaining trust principal passes to the University, with most becoming endowments. As of June 30, 2008, the total market value of the UW s life income program was $85 million. EXTERNALLY HELD TRUSTS The University of Washington receives income annually from funds held in irrevocable trusts managed by trustees other than the University. The market value of these funds at June 30, 2008 was $53 million. During the last 10 years, these funds have provided over $19 million to support schools, colleges and programs at the University. UW TREASURY OFFICE ENDOWMENT REPORT

15 life income trusts 1 asset allocation returns compared to benchmark 3% Short-Term Investments 2% High Yield Bonds 17.4% 11.1% 4% Hedged Foreign Fixed Income 5% Domestic Fixed Income: Investment Grade 30% Domestic Large Cap 6.1% 7.7% 15% Domestic Fixed Income: High Quality 4.3% 5% International Real Estate 9% Domestic Real Estate 3% Emerging Markets 9% Domestic Small Cap 13% International Large Cap 2% International Small Cap - 7.6% - 5.1% 1 Year 5 Years 10 Years 1 Represents the Growth portfolio which holds over 60% of Life Income assets. Life Income Trusts Return 60% S&P % Lehman Bros. Intermediate Government/Credit uw treasury office endowment report

16 glossary Asset Allocation. The diversification of endowment assets among various asset classes. Asset allocation affects both risk and return and is a central concept in investment management. Asset Classes. Including, but not limited to, domestic equity, international equity, domestic fixed income, international fixed income, cash, real assets, marketable alternatives and non-marketable alternatives. Cambridge Associates. A leading provider of investment and financial research and consulting services to nonprofit endowed institutions in the country. Cash. Cash and short term liquid assets (e.g., Treasury bills, commercial paper, and non-convertible bonds with remaining maturities of under one year). Closely Held Securities. Securities of a corporation whose voting stock is owned by only a few shareholders. Equity. Investments where the underlying asset is the ownership interest in a company. Fixed Income. This usually refers to government, corporate, or municipal bonds which pay interest until the bonds mature. It also refers to preferred stock, which pays a fixed dividend. Lehman Brothers Government Bond Index. An index made up of treasury and agency bond indices that aims to measure total return of the domestic, taxable government bond market. Lehman Brothers Intermediate Government/ Credit Index. An index of all publicly held U.S. Treasury, government agency, quasi-federal and corporate debt guaranteed by the U.S. government with maturities of 1 to 9.99 years. Limited Partnership. A partnership that includes one or more partners who have limited liability. The partnership is managed by a general partner. Marketable Alternatives. An investment strategy which focuses predominantly on insulating the investor to some extent during declining markets while enhancing overall portfolio returns over complete market cycles. NACUBO. National Association of College and University Business Officers. Since 1971, NACUBO has published an annual endowment study. Non-Marketable Alternatives. Higher risk investments, generally held in limited partnerships, with the potential for significantly higher returns. Real Assets. Investments in real estate, natural resources and inflation protection vehicles. Spending. The amount withdrawn from an endowment for program support and investment expenses. Spending Policy. The guidelines used to determine the frequency and rate of distributions from the endowment. Total Return. The accepted method of measuring the performance of equity and bond funds. The total return is the combination of income (interest and dividends) and appreciation/depreciation in the fund s value for a specified period of time. uw treasury office endowment report

17 Investment Managers as of June 30, 2008 Domestic Equity AXA Rosenberg Investment Management Northern Trust Investments Rainier Investment Management Renaissance Institutional Management Snyder Capital Management Tygh Capital Management Fixed Income Aberdeen Asset Management BlackRock Financial Management Brandywine Global Investment Management Morgan Stanley Alternative Investment Partners Payden & Rygel Pugh Capital Management International Developed Markets Arrowstreet Capital Axiom International Investors Grantham, Mayo, Van Otterloo & Company Harris Associates Liberty Square Asset Management Silchester International Investors Steel Partners Japan Asset Management International Emerging Markets Arisaig Partners (BVI) Atlantis Investment Management City of London Investment Management Goldman Sachs Group Lone Dragon Capital Martin Currie Matterhorn Investment Management Mekong Capital Prosperity Capital Management Tree Line Investment Management Ward Ferry Management Life Income Kaspick and Company Marketable Alternatives Adamas Partners Baupost Partners Bridger Captial Brookside Capital Partners Chesapeake Partners Management Fir Tree Partners HIG Capital Highfields Capital Lone Pine Capital OZ Advisors Rimrock Capital Management Satellite Asset Management Sirios Capital Management Tiger Asia Management Valinor Management Varde Partners Non-Marketable Alternatives Angelo, Gordon & Co. ARCH Venture Partners Bain Capital Battery Ventures Bessemer Venture Partners Centerbridge Capital Partners ChrysCapital CLSA Capital Partners Code Hennessy & Simmons Commonfund Capital Domain Associates Endeavour Capital Frazier & Co. General Catalyst Partners Greenbrier Equity Group HarbourVest Partners HIG Capital Ignition Partners InterWest Partners JC Flowers Madrona Venture Group MatlinPatterson Asset Management New Enterprise Associates Oak Investment Partners Oaktree Capital Management Parthenon Capital Paul Capital Partners Polaris Venture Partners Pomona Capital Quadrangle Group Sequoia Capital Sevin Rosen Funds Shott Capital Management TA Associates TPG The Riverside Company Vestar Capital Partners Voyager Capital Weston Presidio Capital Real Assets Aetos Capital AGL ArcLight Capital Partners Beacon Capital Partners Berwind Property Group Cabot Properties Cadent Energy Partners CarVal Investors Commonfund Capital Crow Holdings Denham Capital Management Fidelity Investments Gemini Oil and Gas Advisors Grove International Partners LaSalle Investment Management Merit Energy Company Morgan Stanley Natural Gas Partners Orbis Real Estate Advisors Phoenix Property Investors Resource Management Services Square Mile Capital Management Thackeray Partners Wellington Management Company uw treasury office endowment report

18 GENERAL INFORMATION Board of Regents as of June 30, 2008 Stanley H. Barer* (Chair) Herb Simon* (Vice Chair) Kristianne Blake* Jeffrey H. Brotman* Craig W. Cole William H. Gates Sally Jewell* Frederick C. Kiga* Erin L. Lennon Constance L. Proctor *Members of the Finance, Audit and Facilities Committee University of Washington Investment Committee as of June 30, 2008 Jeffrey H. Brotman (Chair) David Bonderman Jeff Greenstein Frederick C. Kiga Michael Larson Mary Pugh This report on the management of the University s endowed funds was prepared by the Treasurer of the Board of Regents for donors and other interested parties. Reports are also available, upon request, to donors and fund administrators for each of the 2,825 separate funds in the Consolidated Endowment Fund. For Further Information If you have questions or comments about this report, or would like copies of the Consolidated Endowment Fund investment policies, please contact: V Ella Warren Treasurer of the Board of Regents (206) vwarren@u.washington.edu Keith Ferguson Chief Investment Offi cer (206) kfergus@u.washington.edu For further information on the University s investment program please visit: If you would like to receive information on how you can support the University s programs, please contact: Connie Kravas Vice President for University Advancement (206) ckravas@u.washington.edu Judy Peterson Senior Associate Treasurer (206) jp01@u.washington.edu 16

19 Photography: Erik Andersen (cover), Mel Curtis, Mary Levin, Dennis Wise University Advancement, November 2008 Produced using green process printing. FSC certified paper made with 30% postconsumer waste. Printed with vegetable-based inks. Environmental savings includes: 3,115 gallons of water, 679 lbs. of greenhouse gases, and 5,100,000 BTUs of energy. Environment impact estimates made using the Environmental Defense Paper Calculator.

20 BOTHELL SEATTLE TACOMA