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Contributions
During the year ended August 31, 2002, $88.2 million was withdrawn from the PHF. These withdrawals were funds appropriated by the 76th Legislature to the University of North Texas Health Science Center at Forth Worth, and two of the three permanent endowments, the Permanent Health Fund for Higher Education Nursing, Allied Health and Other Health-Related Programs and the Permanent Health Fund for Minority Health Research and Education. These endowment funds are now under the investment management of the State Comptroller.
Investment Return
The PHF posted a negative investment return of 7.1% (net of investment management fees) for the year ended August 31, 2002. Beginning with the purchase of General Endowment Fund (GEF) units on March 1, 2001, the PHF no longer invests in individual securities except for the GEF units and a negligible amount of cash. Therefore, the PHF's investment return is dependent on the GEF return. The GEF invests in a broad mix of investments and is actively managed to the Endowment Policy Portfolio. The GEF's performance results are available in the GEF section of this report.
Expenses
The PHF incurs direct expenses for UTIMCO's management fee and other operating expenses directly attributed to its separate management costs. Since the PHF's assets are invested in the GEF, external manager fees, consulting fees, custodial and other operating expenses were paid by the GEF. The PHF expenses for the year, including its share of the GEF expenses, were $2.2 million, or .27% of the PHF's average net asset value. During fiscal year 2001, the PHF's fees totaled $1.9 million, and represented 0.20% of the PHF's average net asset value.
Distributions
Consistent with the spending policy for the Endowment Policy Portfolio, the long-term target distribution rate for the PHF is 4.5% of the PHF's net asset value. Distributions are increased annually at the average rate of inflation provided that the distribution rate remains within a range of 3.5% to 5.5% of PHF net asset value. UTIMCO smoothes annual spending by calculating PHF net asset value for distribution purposes as the average value for the trailing twelve quarters. As of August 31, 2002, the distribution rate was 4.66 % of the twelve-quarter average.
The distribution rate for the PHF was $.047 and $.046 per unit for the years ended August 31, 2002 and 2001, respectively. The rate will remain at $.047 for the year ending August 31, 2003. The fiscal 2002 distributions, at $.047 per unit, represented 5.04% of the PHF's five-quarter average net asset value during the year.
Preservation of Purchasing Power
Preserving the PHF's purchasing power over time is dependent on the PHF's ability to meet its distribution policy objectives.
PHF distribution policy objectives are to:
- Provide a predictable, stable stream of distributions over time
The initial distribution rate for the PHF was established at $.045 per unit, or 4.5% of initial market value, beginning with the year ended August 31, 2000. For the years ended August 31, 2001 and 2002, the distribution was increased each year by 2.2%, approximately the average inflation rate.
- Ensure that the inflation adjusted value of distributions is maintained over the long-term
Over the two-year period ended August 31, 2002, the PHF's distribution rate was increased by 4.4% on a nominal basis which kept the distribution whole on an inflation-adjusted basis.
- Ensure that the inflation adjusted value of PHF assets after distributions is maintained over the long-term
As reflected in the chart below, the PHF's purchasing power over the three-year period has not been maintained and was negative 7.91%. Equity markets may produce negative returns in any given year, but long term have provided better inflation adjusted returns when compared to fixed income investments. As such, preservation of the PHF's purchasing power should be viewed over longer-term investment cycles.
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