Fiscal 2002 Report
Investment Performance Commentary for the Year Ending June 30, 2002
The investments of the Rochester endowment produced a respectable negative 3.8% total return, net of all fees, during the fiscal year ended June 30, 2002. This was the first negative return by the endowment in over a decade.
The loss of the past year should be taken in context鈥攊t was the third consecutive year of double digit declines in the value of domestic and international equity markets, marking the worst performance by equities since the mid-1970s, and, according to some measures, the worst period of domestic equity performance since 1929-1930. It was a year, though, when Rochester鈥檚 active investment managers and diversification worked in tandem to preserve capital, quite a feat considering nearly one-half of the endowment is invested in publicly-traded equities.
Asset Allocation and Performance
Major asset classes generated the following performances in fiscal year 2002:
During the past ten years, the total value of Rochester鈥檚 endowment increased by 77%, from $620 million to $1.1 billion, primarily a result of the ten-year average annual net investment return of 11%. Rochester鈥檚 ten-year investment return ranked third among the eight members the University Athletic Association. For the most recent five-year period Rochester鈥檚 average annual investment return of 8.3% placed second in this peer group.
The increased use of alternative strategies, particularly hedge funds, was an important factor in improving the endowment鈥檚 performance during the past decade. Rochester鈥檚 increase in alternative strategies was accomplished by reducing exposure to both domestic equities and domestic fixed income. Alternative strategies now represent approximately 30% of the endowment. Rochester鈥檚 asset allocation policy, which emphasizes the use of ranges rather than fixed allocation targets, also helped performance. These ranges allowed the Investment Office and the Trustees鈥� Investment Committee to deemphasize asset classes that were judged to be overvalued (leading to relatively small positions in growth stocks, venture capital and, very recently, additional and significant reductions in domestic fixed income) and to overweight asset classes, strategies or styles that may be out of favor or under-priced (examples include value-oriented stocks, hedge funds, distressed debt and real estate). This flexible approach has served Rochester well over the past decade and we believe it will continue to do so.
Despite the improved investment returns, endowment growth through charitable giving remains a significant challenge. The University鈥檚 five-year and ten-year endowment growth rates are among the lowest in its peer group, primarily a result of consistently below-average charitable giving to the endowment. Endowment growth is also constrained by Rochester鈥檚 relatively high endowment spending rate and, recently, the temporary use of endowment funds for litigation to protect the value of the University鈥檚 intellectual property.
To reflect the realities of a weaker investment and economic environment, the University鈥檚 financial planning model now contains an average annual endowment return target of 8%, a full 2 percentage points lower than the 10% return target of 2001 and earlier years. A long-term annual investment return of at least 8% is necessary for Rochester鈥檚 endowment to maintain the level of support it now provides to the University鈥檚 academic programs.
Prudent investors must always 鈥渆xpect the unexpected鈥� and constantly guard against complacency, which is the primary reason for conducting detailed annual in-depth reviews of the University鈥檚 investments.
We thank all donors and Investment Committee members for volunteering their time, wisdom and financial resources to the perpetuation of the Rochester endowment鈥攚hich has enabled tens of thousands of students to further their education at this wonderful and robust institution.