Letter from the President
Chief Executive Officer and Chief Investment Officer

Fiscal 2004 was another year of very positive results in the endowment funds. The high octane mixture of the Bush tax cuts, easy monetary policy by the Federal Reserve Bank, and a weak dollar ignited economic growth and job creation which, in turn, imparted substantial positive momentum to equity markets in the United States and abroad. Unfortunately, with the warmth of spring came concerns that the Federal Reserve would be forced to apply the monetary brakes, compounded by a spike in oil prices resulting from supply disruptions in the middle-east and Latin America. Although these concerns weighed heavily on capital markets during the later stages of the fiscal year, our laser focus on taking every advantage of the rare opportunities of the past year resulted in double digit returns in the endowment funds.

The Permanent University Fund and General Endowment Fund achieved returns of 14.73% and 14.77% respectively in fiscal 2004, the second consecutive year of double-digit returns for the endowment funds. Riding the strong positive momentum in the capital markets, the favorable results for the fiscal year were due to a rich mix of assets in the endowment portfolios and significant value-added in several asset categories. All asset categories enjoyed positive returns last year, with benchmark returns ranging from a high of 24.15% in inflation hedge commodities, to a low of 1.06% in cash equivalent assets. The UTIMCO staff and our external investment managers were able to expand these favorable returns even more by making successful value-added decisions in several asset categories. For example, the actual returns in our absolute return hedge fund portfolios were 13.01% in the Permanent University Fund, significantly better than the 4.49% benchmark return for that asset category. In aggregate, marketable assets in the Permanent University Fund and the General Endowment Fund advanced by 15.01% and 15.07% respectively, well ahead of the 12.42% benchmark return for all marketable assets. Our non-marketable private capital assets recovered from the post technology bubble malaise to post positive double-digit returns that trailed benchmark results. The net result of our efforts was value-added, above benchmark returns, of approximately $200 million. Our value-added efforts propelled the performance of the endowment funds within the top 5 of all large endowment funds in the United States over the past year, moving UTIMCO a step closer to its goal of being recognized as one of the 5 best endowment managers in the country.

The positive performance results are continuing dividends from the new organizational structure put in place over the past two years at UTIMCO. We have changed the management structure and staff composition to intensify our focus on high potential value-added asset categories. High potential value-added investments offer the opportunity for superior returns and include actively managed domestic and international public equities, private capital, hedge funds, real estate and other inflation hedge assets. We now have skilled and experienced investment professionals managing more narrowly focused asset categories, overseeing both internal and external investment managers. To maintain control over the more expansive asset set, we have a skilled and experienced risk manager armed with the technical tools necessary to assist our investment management team.

Although our new structure and focus have proven to be valuable over the past two years, their true worth should be evident over the challenging economic and capital market environments we expect over the next three to five years. Even with the enhancements we have made to focus on higher value-added assets, the longer run expected return for the endowment portfolios is now between 8.0% and 8.5% per year, barely above the return necessary to maintain payout rates at current levels and allow the endowment funds to grow at the rate of inflation in order to maintain purchasing power for future generations. But, with a skilled and experienced staff in place organized to focus on adding value in a difficult environment, and with the support and guidance of the dedicated UTIMCO Board of Directors, I am confident that UTIMCO is well positioned to face the challenges of the future and meet the needs of its many constituents.

Bob L. Boldt, CFA
President, Chief Executive Officer,
and Chief Investment Officer