Baylor Endowment 2013 Overview

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1 Baylor Endowment 2013 Overview

2 Introduction Thanks to the generous support of alumni and friends, Baylor s Endowment has been growing in size over the last 40 years and has become an important source of funding for scholarships, professorships, academic programs and other operations of the University. Through programs such as The President s Scholarship Initiative, which concluded in April of this year and raised over $100 million for current and endowed scholarships, University leasdership has consistantly expressed the importance of growing endowments. It is only through continued support for the endowment that Baylor can grow the number and impact of scholarships for deserving students and programs to meet the needs of the future. This 2013 Overview describes the Endowment, the investment strategies employed by the Office of Investments, the recent performance of the portfolio, and the market conditions within which the Endowment operates. Current or potential donors who would like a more in-depth description of the Endowment are encouraged to go to the Office of Investments web site at

3 Executive Summary Baylor s Endowment exceeds $1 billion in value in a portfolio of diversified investments. Endowment distributions to the University have steadily grown over the years, hitting a high of $56 million in fiscal year (FY) Over 3,500 students and 1,100 academic programs benefitted from these funds throughout the year. The Endowment is managed by a team of investment professionals led by Dr. Brian Webb, a former Managing Director of UBS Global Asset Management. Dr. Webb has more than 20 years of experience in developing investment strategies for multi-asset class portfolios and in originating and managing investment portfolios for institutional investors. Endowment Value (in millions) Endowment distributions (in millions) Scholarship donors and recipients meet together each year to establish a personal connection between donor and student Endowment distributions by designated purpose The Endowment portfolio is comprised of a blend of public and private equity, credit, and real assets. The senior staff of the Office of Investments is a seasoned team of five professionals who collectively span all the capabilities needed to manage such a diverse portfolio. The team manages the Endowment to support the infinite life of the University s mission. The intergenerational value of the Endowment is maintained, with distributions made from returns on the underlying investments. The Endowment portfolio is meeting all the distribution requirements and return objectives established by the Baylor Board of Regents. Distributions from the Endowment to the University are used for the purposes designated by the donors. The Endowment s diversified portfolio is well positioned to take advantage of future investment opportunities as they arise.

4 Endowment portfolio Performance comparison Returns since inception fy Endowment portfolio Diversification BAYLOR S ENDOWMENT A growing Baylor Endowment is essential to the University in its ability to compete with top-tier academic institutions while keeping tuition at an affordable level. It is designed to ensure donor contributions maintain their real (adjusted for inflation) value into perpetuity, while providing a consistent 5% distribution of the underlying value to fund the designated purpose of the gifts each year. The University s Office of Investments, under the direction of The Board of Regents and the Baylor Executive Investment Committee, maintains a well diversified portfolio of investments with an aim to exceed the 8% return objective (given the current inflation rate) currently required to meet this goal. The Office of Investments measures its performance against established objectives and in comparison to other university endowments across the United States. Since FY 2003 when the Office of Investments was established to manage the growing Endowment s assets, Baylor s Endowment has outperformed its return objective by 80 basis points per year and exceeded the average of U.S. university endowments (as measured by the National Association of College and University Business Officers NACUBO) by 170 basis points annually. The Endowment portfolio consists of publicly traded stock, bond and alternative investments, along with investments in private equity and real assets. The diversity of this portfolio, along with broad access to non-traditional investments, has proven to provide significantly better returns than a traditional stock and bond portfolio. MARKETABLE ALTERNATIVES Investments in some of our private investment funds Office Building in New York Real Assets Oil and Gas production Corporate stocks among those in our portfolio

5 MARKETABLE Alternative investments Stocks and bonds continue to be important parts of the Endowment portfolio. Bonds and other fixed income investments assure there is sufficient liquidity in the portfolio to cover all obligations of the Endowment. Our stock portfolio is well-diversified and focused on quality companies across the globe that serve growing and enduring markets. Marketable alternative investments (largely hedge funds) provide access to markets and strategies that often exhibit low correlations with traditional stock and bond investments. Transparency and liquidity are two things we require from all our alternative investment managers. These investments span credit- and equity-type investments and provide flexibility to enhance returns or mitigate risks in the portfolio. Private equity investments provide opportunities to access different areas of economic activity than possible through publicly-traded stocks. The illiquidity premium that can be captured with these investments generally allows higher returns to be achieved. Real assets provide access to investments that provide inflation protection and diversity to the portfolio. Real assets include commercial real estate, oil and gas, and infrastructure investments such as ports and power generation plants. Health Food Grocery Chain PRIVATE Equities Local Television Stations Baylor s Endowment has outperformed its return objective by 80 basis points per year and exceeded the average of U.S. university endowments by 170 basis points annually.

6 S&P 500 Index 10-year Treasury RateS CENTRAL BANKS BALANCE SheetS (in TRILLIONS) Market OutlOOk Investment markets have recovered their highs following the financial crisis of 2008, even as economies across the globe remain pressured by burdensome debt levels, geopolitical concerns and changing regulatory environments. Prices of investments generally reflect slower and more volatile expected economic growth, and are trending within normal historic bounds. Opportunities exist for discerning investors to take advantage of various macro trends and capital dislocations created in this dynamic marketplace. Positioning the Endowment portfolio to benefit from growing economies in developing countries will be important in maintaining outperformance over the long run. This can be done through investments in companies in developing countries that service growing local demands, or through investments in domestic companies that service these multinational markets. Monetary policies of Central Banks in the US, UK, EU, Japan and elsewhere are impacting a wide range of markets. Central Banks activities, along with the reversal of the long-term decline in U.S. interest rates, are two macro forces that are important to consider when making investment decisions. Transitioning to investments that perform better in generally rising inflation and interest rate environments should enhance performance over the long term. When markets reach inflection points, as interest rates may have recently, it is important to have sufficient liquidity to take advantage of opportunities that arise as markets transition from a long-standing trend to a new regime. The markets remain highly focused on the direction and degree of future global Central Bank policy and will react as these policies adjust and eventually reverse. Successful investing requires continuous attention to ever-changing market conditions and the expertise and flexibility to adjust as changes occur. Baylor s Endowment portfolio is diverse and nimble enough to take advantage of opportunities that present themselves over time in the global marketplace, and to benefit from intermediate- to long-term trends that drive higher returns.

7 Conclusion A growing Baylor Endowment is essential to the University in its ability to compete with top-tier academic institutions while keeping tuition at an affordable level. Growth is dependent on the success of efforts like The President s Scholarship Initiative to increase annual donations to the Endowment, and through skilled management to enhance long-term returns on investments in the portfolio. Baylor s Endowment is currently benefitting from increased levels of giving from alumni and friends of the University and from strong investment performance. The Endowment s diversified portfolio is well positioned to take advantage of future investment opportunities as they present themselves. If you have not done so already, establishing and contributing to an endowed fund at Baylor is something that benefits the University today and leaves a legacy long into the future.

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