Chief Executive Officer and Chief Investment Officer

I am pleased to present the President’s Letter for the 2006 Annual Report. In 2006, as always, our staff monitored global economic and political news and attempted to assimilate the events and data to enhance our management of the endowment funds. As I describe below, there was plenty of contradictory news for us to evaluate this year, and for the first time in four years the endowment funds lagged their benchmarks.

During the 2006 fiscal year, the Fed continued raising interest rates and did not stop its tightening campaign until August, at which point the Fed Funds Rate was 5.25%, up from 1.0% in June of 2004. The global political arena continued to create uncertainty for the markets, as conflicts in the Middle East and North Korea remained unresolved. While oil and gas prices have moderated at the beginning of fiscal year 2007, they moved to near record highs during the 2006 fiscal year, and continued to put pressure on the U.S. consumer and companies that are dependent upon hydrocarbons as manufacturing inputs. Additionally, 2006 finally witnessed a slowdown in the appreciation of housing prices and many are predicting an outright decline in median home values for 2007.

Despite these negative drivers, the Dow and Russell 3000 indices were up 11.2% and 8.8%, respectively, during the year ended August 31, 2006. Apparently, investors were more focused on the continued growth of the U.S. economy, the low level of unemployment, and a decrease in inflation fears.

The Permanent University Fund and General Endowment Fund achieved returns of 11.17% and 11.10%, respectively, during 2006. The benchmark return of the PUF and GEF was 12.51%. These investment returns drove net asset values of both the PUF and GEF to record highs, even though those funds distributed $577.3 million during the year. All asset classes, except commodities, generated positive returns for 2006. The endowments’ REIT portfolios led the way, posting a 28.0% gain for the year. The commodities portfolio posted the sole negative return
(-4.56%), but that portfolio produced a 40.7% return the prior year.

During 2006, we positioned the portfolios conservatively, which caused us to underperform the benchmarks that benefited from strong gains in the emerging markets and more developed international markets. Additionally, our private capital portfolio lagged its benchmark due to the relative youth of our portfolio compared to its benchmark. That said, our private markets portfolio still generated a 23.0% return for the PUF and a 21.8% return for the GEF. Despite the underperformance relative to our benchmarks, our staff has still generated $1.34 billion in value-added over the past four years. Stated differently, if the PUF and GEF had simply earned the benchmark returns over that four-year period, they would be $1.34 billion smaller than they are today.

During the year, we made significant progress in achieving one of our three main goals: to be recognized as one of the top 5 endowments in the country. Foundation & Endowment Money Management and Alternative Investment News named UTIMCO as one of three finalists for the award of Large Endowment of the Year. Similarly, Institutional Investor Magazine nominated UTIMCO as one of four finalists for Endowment of the Year. Our competition for that second award is Princeton University, George Washington University, and Rice University. Good company, indeed.

In July, Woody Hunt stepped down from the UTIMCO Board after 7 years of extraordinary service. As a Board member and long-time Chairman of the Board, Woody guided UTIMCO through some challenging times and was a leader in the UT System’s push to make UTIMCO a more competitive organization. We thank him for all his contributions.

In 2006, we were fortunate to gain two new Board members: Regent Colleen McHugh, of Corpus Christi, and independent Director, Ardon E. Moore, of Fort Worth. Both Directors have already begun to make contributions to the organization and we expect them to add significant value to the endowments in coming years. Finally, after four years as Chief Investment Officer of UTIMCO, Bob Boldt resigned on September 1, 2006 to pursue activities in the private sector. We wish him well in his future endeavors. As interim Chief Investment Officer, I am confident that UTIMCO has the team, resources, and vision necessary to manage the assets of the UT and Texas A&M Systems in a competitive manner for years to come.