Why Higher Education Why the UA Why Now The University of Arizona Foundation 2009 Endowment Report
About the Cover: “Girl with Doves,” by David Wynne, in front of the UA Main Library. Sculpture from the University of Arizona Public Art Collection.
Photo by Jacob Chinn
Photo by Jacob Chinn
Stairwell and dome at the Student Union Memorial Center.
Contents “A” Mountain Symbolic of University’s Resolve
Arizona Assurance Bridges the Gap Our Performance Our Top Performing Allocations
4 5-8 9
Promoting a Spirit of Inquiry
Helping UA Medical Students Find Balance
Our Portfolio: Composition and Positioning
Our Investment Committee
A New Vision for Health Care
Significant Actions Taken in Fiscal 2009
Levin Family Endowed Chair
Why Endowed Chairs
Holdings by Asset Class
Glossary of Terms
Board of Trustees
Robert N. Shelton President The University of Arizona
James H. Moore, Jr. President & CEO The University of Arizona Foundation
Peter E. Calihan Chair of the Board The University of Arizona Foundation
Message from the Presidents and UAF Board Chair Dear Friends of the University: We can say with certainty that the past year was most uncertain. The turbulent economy presented us with challenges unprecedented in the 125-year history of the University of Arizona. Even the Great Depression, which threatened the permanent closure of Old Main, was, in many respects, an easier time for the University. That’s because 75 years later, there is so much more at stake. The UA has evolved from its modest land-grant, agricultural roots into a $1.5 billion enterprise that employs 14,000 people, educates 37,000 and serves as the central nervous system for economic activity in Southern Arizona. In the past 12 months, the UA has seen its state appropriation reduced by about $100 million – nearly one-quarter of its state funding. Additional reductions are likely. Our challenge over the next two years will be to protect the UA’s world-class stature that took generations to build. We believe it’s a worthy cause, and based on the tremendous show of private support last fiscal year, UA friends and alumni agree. Total giving for the year was more than $141 million, a 7 percent decrease over the previous fiscal year. This is phenomenal considering all of us have been, in some way, personally affected by the economic downturn. You can take great pride in knowing your generosity has helped the UA weather this economic storm and, in many areas, continue to excel. Your private gifts provide a margin of excellence beyond our base state support, making the UA truly world class in a number of important areas. We are incredibly grateful for all of the individuals, corporations and foundations that contributed to advancing the University during a time when we needed you more than ever. While there are many obstacles ahead, we remain focused on opportunity. We pledge to use your support to make strategic investments that build those areas with the greatest potential to benefit our students, our faculty and our future. Gifts made in a variety of ways and to a variety of funds help to support and advance the institution. We have a dual focus on building endowment gifts for the long-term prosperity of the institution and increasing annual gifts to advance the UA in the nearer future. Thank you, again, for your tangible demonstration of trust and confidence in the University of Arizona. Your gifts are helping to strengthen UA people and programs, and to position the institution as a national leader in research and academia. Sincerely,
Photo by Jacob Chinn
“A” Mountain Symbolic of University’s Resolve
It was a thrilling 7-6 Arizona football victory over
many donors to reconsider the legitimacy of making
Pomona College in 1914 that led to the establishment
of “A” Mountain. Post-game enthusiasm inspired team member Albert H. Condron to suggest to his civil engineering professor that a class assignment be made to survey Sentinel Peak for the location of an “A.”
short-term consequences. However, when considering the long-term objectives of the UAF investment strategies, the principles that underlie the endowment
Working on Saturdays for two years straight, students
model still hold true. It is the execution of those
took on the back-breaking work to build the rock
principles – and the ability to stay the course and not
and mortar “A” that stands 70 feet wide and 160
be swayed by short-term market gyrations – that is
feet tall. Completed in March 1916, the project made
a statement for an institution 31 years young: the University of Arizona is here to stay.
Recent events have validated one enduring investment principle: there is no return without risk. The University
Now 93 years later, the UA remains rock solid, thanks
of Arizona Foundation Investment Committee has taken
in large part to the many benefactors who have made
a conservative approach that protects capital and aims
its success their priority. While the beginning era of the
to preserve the purchasing power of the endowment for
University was defined by true grit, the level of success
the University achieves during the next 125 years will be determined by the financial bedrock it lays today.
How far in the future must we look? One of the oldest private endowments is the Lucasian Chair of
Paramount is growing the endowment. By definition,
Mathematics at Cambridge that was first held by
endowments are designed to be as enduring as the
Isaac Newton in 1669, and most recently by
institutions and purposes they support. An endowment
is a gift where the principal is invested in perpetuity to provide annual cash support. The University’s endowment is its anchor to windward – an independent source of income not subject to the ebbs and flows in tuition, state or other annual, shorter-term support. The recent turmoil in global financial markets has led some to speculate whether the modern endowment investment model is still a valid strategy for supporting higher education. Record investment losses at America’s most prestigious institutions have prompted 2
This is an understandable position when looking at the
In contrast, around the time Newton was developing his theory of gravity, Father Eusebio Francisco Kino made his first visit to the Old Pueblo residents who lived along the Santa Cruz River under Sentinel Peak. It would be 300 years before the UA created its first endowed chair in 1972. Endowments ensure the University remains as enduring as the “A” that, with prideful care from generations of students, will watch over campus for the next 300 years.
Our Goal Our goal in managing the endowment is straightforward: To manage the assets such that the return exceeds the “Hurdle Rate” (the sum of the Payout and the Cost Recovery Fee) so the endowment principal is able to grow and fund in perpetuity the activities you envisioned when you made your gift. Avoiding losses is a critical component of achieving our goal, as is generating a return over the Hurdle Rate which exceeds the Higher Education Price Index (HEPI), the inflation measure most applicable to the University. The Payout is equal to 4% of the average fair value of the endowment principal at the three-previous calendar year-ends. The Cost Recovery Fee is 1.25% of the fair value of the endowment principal. Our Investment Committee and Board set the Payout and Cost Recovery Fee each year after considering a number of important factors. We invite you to review these factors, as well as all other important aspects of our policies and practices, in our Investment Policy Statement which you can find at: www.uafoundation.org/investmentpolicy.
Our Approach The year just completed marks our sixth year of managing the endowment using a “model” portfolio. Under this approach, our Investment Committee dedicates the first meeting of each fiscal year to consider the target allocations for each asset class for that year. These recommended targets are then presented to our Board for approval; approved targets are published in Exhibit B to our Investment Policy Statement. The Committee works
Photo by Jacob Chinn
throughout the year to maintain and/or reach our target allocations.
Alumni Plaza Keating Family Foundations
Dr. Theodore G. Tong and Arizona Assurance Scholar Ajla Hadzic.
Building Bridges for Arizona Assurance Scholars
Faculty and peer mentors through the University of
Tong both formally and informally mentors Arizona
Arizona’s Arizona Assurance scholarship program are
Assurance Scholars with a variety of academic interests.
helping new and returning scholars navigate through their UA experience. This year, in addition to the program’s nearly 500 returning scholars, there are about 750 freshmen to mentor. Dr. Theodore G. Tong, associate dean and professor in the UA College of Pharmacy, has served as a faculty mentor to Arizona Assurance scholars since the program’s inception in 2008. He finds the process mutually beneficial for both his own development and his mentees.
He met Ajla Hadzic, a pre-pharmacy sophomore, at a UA function recognizing outstanding scholars at the end of last semester. Hadzic is a second-year Arizona Assurance scholar who also serves as a peer mentor to first-year scholars. “I’ve had a lot of experience with transitions,” said Hadzic, who immigrated to Phoenix from Bosnia twoand-a-half years ago. “I can relate to the stories of my mentees.” For Hadzic, scholarship assistance from the Arizona
Arizona Assurance is a financial assistance and retention program at the University of Arizona. It is designed to expand University access for low-income Arizona students, while providing critical services to foster their success.
finances and focus more on academics, building her leadership skills, and helping others along the way. “Being a part of Arizona Assurance means being part
Qualified students have annual family incomes of up to $42,400 and earn University admission as freshmen directly after high school. Through grant awards that cover tuition, fees, books, and room and board, the program aims to graduate scholars debt-free. To continue this program, it is essential to build an Arizona Assurance endowment fund. The fund must reach $100 million to ensure Arizona Assurance is self-sustaining in perpetuity.
“Mentoring doesn’t work for everyone, but when it does you can see it on both sides,” Tong said. “It helps to connect me with what it’s like to be a student in the 21st century. The students help me to shape my efforts based on what they find effective.” 4
Assurance program allows her to worry less about
of an organization that benefits the greater Arizona community,” Hadzic said. “A lot of my friends don’t have the same benefits.” Both Tong and Hadzic value their ability to help Arizona Assurance scholars succeed. Through sharing their own experiences, they hope to lend perspective to the students as they plot the course of their academic careers. “We are bridge builders,” Tong said, referring to the poem, “The Bridge Builder” by Will Allen Dromgoole. “As mentors, we help others cross bridges we built, so they do not have to build the same bridge.”
Our Performance Our performance for the six years ending June 30, 2009 is as follows:
Return before Hurdle Rate
Return after HEPI Hurdle Rate
2004 14.62% 8.85% 4.6%
2005 12.49% 7.18% 3.6%
2006 12.31% 7.23% 5.0%
2007 15.53% 10.63% 3.4%
2008 1.60% (3.52%) 3.6% (7.12%)
2009 (17.68%) (23.21%)
Our return before the Hurdle Rate in fiscal 2009 was (17.68%). We will not know the exact quartile this return places us in until the 2009 NACUBO-Commonfund Endowment Study is published later in this fiscal year. However, we have seen several less comprehensive studies which indicate the median endowment had a return of approximately (19%). These studies support the fact that fiscal 2009 was the most challenging year in a generation, with only cash and certain bond strategies providing positive returns. That fact also is demonstrated by the performance of a number of benchmarks: Benchmark
Barclays Capital U.S. Aggregate Index Barclays Capital U.S. Treasury Inflation Notes Index
Asset Class Core Bond Index
Russell 2000 Index
U. S. small-cap equity index
Standard & Poorâ€™s 500 Index
U.S. large-cap equity index
MSCI Emerging Markets Index
Russell Mid-Cap Index
U.S. mid-cap equity index
MSCI EAFE Index
Intâ€™l developed equities index
FTSE EPRA/NAREIT Developed Real Estate Index
Global public real estate index
DJ-UBS Commodity Index
We are proud that we protected capital in a very difficult environment in fiscal 2008. In fact, fiscal 2008 marked the first year in our history where our returns placed us in the top quartile of the NACUBO survey for the 1-, 3and 5-year period. Though pleased that we protected capital in an incredibly difficult fiscal 2009 at least as well as a majority of our peers, we are disappointed with a loss of this amount.
Focus on Private Equity and Absolute Return Much has been written and said about investing in alternative asset classes since the financial crisis began in full during September 2008. Most of the discussion has been negative, with the criticism focusing on three areas: (1) Liquidity; (2) A lack of transparency which allows for a higher possibility of fraud; and (3) Failure to protect capital. Liquidity: We did not experience any liquidity issues during fiscal 2009. One reason for this: our allocations to the most illiquid alternative asset classes, private equity and private real estate, are relatively modest at 5.1% and 2.1%, respectively. Another reason is that all our cash reserves are invested in the highly liquid and secure JP Morgan U.S. Government Money Market Fund. A final reason is we have not participated in a securities lending program since January 2007. Lack of Transparency: We perform careful due diligence on each manager before it is added to our portfolio, with a major component of our process being the work of Arnerich Massena, our independent investment consultant. We receive timely and thorough communication from our alternative managers, and we only work with managers who use high-quality professional service firms (e.g. auditors). As a result, we have not experienced a loss in our endowment due to fraud or exposure to Madoff, Stanford, Amaranth, Bayou, or any other well-publicized scandal/blow-up. Protecting Capital: Alternative asset classes did a much better job protecting capital in fiscal 2009 than most ‘traditional’ asset classes. For example, the Hedge Fund Research Fund of Funds index posted a return of -15.1% versus the Standard & Poor’s 500 index return of -26.2%. However, some alternative asset classes did a better job protecting capital than others. As investing in alternative assets is an important component of our strategy, we believe it is important to provide you with detailed information on performance in these asset classes.
“Curving Arcades,” by Athena Tacha, located at the UA Mall entrance. Collection of the University of Arizona Museum of Art, funded by a matching grant from the National Endowment for the Arts; the Richard Grand Foundation; the Janss Foundation; and the Edward J. Gallagher Jr. Memorial Fund.
Private Equity (return of -21.6% in fiscal 2009): Over time, we believe top managers in this asset class can generate returns which are at least 500 basis points (5%) higher than the S&P 500 Index and, thus, some of what we would otherwise allocate to traditional long equity should be invested here. Given that our first private equity commitment was approved in October 2004, our investments are still in the early phase, which means returns are expected to be negative as management fees are being incurred while the underlying partnerships are being built out. These losses arising from the relative newness of our investments were increased by the financial crisis in fiscal 2009, which both impacted the valuation of existing portfolio holdings and made it more difficult for our managers to exit the underlying investee companies through the public markets. Managers in this asset class who relied on financial engineering (high levels of debt) to provide returns will not be successful in the current environment. Such managers are not in our portfolio. Note that our investments in this asset class are widely diversified both geographically, with dedicated investments in the U.S., Europe, Asia and Africa, and by type (buyout, growth capital, and venture capital). Mean Reversion (return of -1.2% in fiscal 2009): All of our money in this asset class is invested in the GMO Mean Reversion Fund, a global macro hedge fund. You will recall that this fund was one of our top performers in fiscal 2008, as it also has been in other years since we made our investment in April 2004. We believe a return of -1.2% in such a difficult year justifies our high level of confidence in this manager/asset class. Global Allocation (return of â€“2.2% in fiscal 2009): Our target return in this space (CPI + 5%) aligns well with our target return for the endowment as a whole (HEPI + 5.25%). While falling short of that target in fiscal 2009, the two funds in this asset class proved our belief that in todayâ€™s difficult market environment, it is sensible to give world-class asset allocators the ability to move quickly among and between asset classes. The PIMCO All Asset Fund turned in a respectable -7.03% return, while the -0.06% return of the GMO Global Allocation Absolute Return Fund in a year like 2009 was nothing short of heroic.
Long/Short Equity (return of -3.0%): As with private equity, this asset class is another way to obtain equity exposure with a goal of at least matching the performance of the S&P 500 over time with significantly lower volatility. Given that our return in this asset class was (3.0%) vs. the (8.1%) of the Hedge Fund Research Long/Short Equity Index and the (26.2%) of the S&P 500, we believe our goal was achieved in fiscal 2009. Two of our investments, Oak Hill REIT Plus and 7 x 7 Offshore, generated returns which placed them as the 1st and 5th best performers in our endowment in fiscal 2009, respectively. The returns of the other funds in this asset class ranged from (10.2%) to (15.6%), significantly better than the S&P 500. Low Volatility Hedge Funds (return of -9.0): We believe the best low volatility hedge funds can provide absolute returns in any market environment. This proved to be an excruciatingly difficult thing to achieve in fiscal 2009 due to three factors largely beyond the control of the hedge fund industry: 1. On September 19, 2008 the SEC initiated a temporary ban on the short-selling of â€˜financialâ€™ stocks, a term which was broadened during the life of the emergency order. This ban was followed by similar moves in a number of overseas markets. Given that short-selling is a key component of many low volatility strategies, these bans (combined with concerns about possible extended or additional bans) caused a number of hedge fund managers to cover and close out their short positions, negatively impacting their performance in the first half of fiscal 2009. 2. Hedge Funds rely on prime brokers to provide custody services and borrowing capacity to their funds. Bear Stearns and Lehman Brothers were major providers of prime brokerage services, and their failures caused severe distress to their hedge fund clients who were forced to cover their short positions at a time when many other funds/investors were doing the exact same thing, driving up the cost of covering these shorts and negatively impacting performance. The remaining prime brokers faced their own severe liquidity issues and as a result reduced the lending capacity of their hedge fund clients. These actions also resulted in additional forced selling, with the same negative impact on performance. 3. As you have likely read, many large endowments and foundations faced their own liquidity issues arising from their asset allocation, and these institutions looked to their low volatility hedge funds with easy redemption terms as sources of ready cash. In addition, the negative performance experienced by many of these low volatility funds caused other investors, looking for absolute returns in all market environments, to become disillusioned and to request redemptions at December 31, 2008. Both of these forces caused additional losses at these funds, as they were forced to sell their long positions and cover their short positions during a very difficult time. We still believe top low volatility hedge funds can generate positive returns in any environment. In fact, the Rimrock Low Volatility Fund in this asset class was our No. 4 performer in the fiscal year. We are looking at adding a direct hedge fund manager during fiscal 2010 to replace investments we are exiting in Arden Strategic Offshore Advisors (our committee voted to redeem our investment as of June 30, 2009) and Commonfund Absolute Return (the manager elected to go into liquidation mode, as generous withdrawal terms led to significant withdrawal requests).
Our top performing allocations Our top performing strategies and their returns in fiscal 2009 are shown below.
10% 8% 6% 4% 2% 0%
Oak Hill REIT Plus
Vanguard ST Rimrock Low Vanguard ST Volatility Bond Index Investment Grade
Oak Hill REIT Plus is a long/short equity fund which was net short Public Real Estate Investment Trusts (REITS). REITS experienced a steep decline from February 2007 through March 2009. As a result of the length and magnitude of these declines, we redeemed this investment as of December 2008; the position was established in November 2005. The Vanguard Short Term Bond Index Fund has been our primary fixed income investment since November 2005. We believe a passive approach to U.S. traditional fixed income investing (vs. an active approach of picking bonds) provides a strong, cost-effective result. We added a position in the Vanguard Short Term Investment Grade Fund during fiscal 2009 to exploit an opportunity resulting from the financial crisis. Investor preference during the crisis for U.S. Treasury Securities drove yields on those securities to unusually low levels and yields on U.S. investment grade corporate securities to unusually high levels. The Rimrock Low Volatility Fund, also a top performer in fiscal 2008, demonstrates the value added by our independent investment consultant (Arnerich Massena) who identified this niche fixed income hedge fund. This fund was added to our portfolio in fiscal 2007. 7 x 7 Offshore is a long/short equity fund also recommended by our consultant. This fund, which focuses exclusively on technology companies, has generated solid returns with low volatility since we added them to our portfolio in May 2007. Performance in 2009 was especially hurt by our investments in international developed equities, public real estate, and emerging equities. One bright spot in these otherwise down asset classes was provided by the Leuthold Global Clean Technology strategy. This position, established during May 2009, provided a 1.8% return in the fiscal year. We believe clean technology investing will be quite rewarding over the next four to eight years, and we chose to exploit this opportunity through the Leuthold Group, one of our highest confidence managers with whom we have worked since October 2004.
Kissling Scholarship Promotes Spirit of Inquiry
“Without the help of every scholarship I have been given, I would not be who I am today.”
Anna Woods, UA senior in linguistics
When Anna Woods visited Zhenjiang, China, during a five-week exchange program in high school, her life was forever changed. “The experience had a profound impact on my life. It opened my eyes to a country that I had always known about, but never really knew anything about,” she said. What started out for Anna as an interest in Chinese culture has developed into a lifelong spirit of scholarship and a passion for the Chinese language. Anna, a University of Arizona senior, decided to study linguistics and Chinese after realizing early in her college career she could teach the Chinese language and culture to school children. Last year, she was selected as the Richard Kissling Scholarship Endowment award recipient for the Honors College. “The scholarship came at such a timely moment. I had just been married The Richard Kissling Scholarship
for about a year, and my husband and I were feeling the pressures of our budget,” Anna said.
Endowment celebrates the late Dr. Richard Kissling, a former University of Arizona
Her scholarship awards, which also include the Baird Foundation Scholarship and the President’s Award for Excellence, have allowed her to pursue her dreams without having to worry about finances. For Anna, scholarships have not only helped pay for tuition, books, and rent, but opened opportunities for her to further her studies both on and off of
professor and mentor. Kissling taught an Honors College course called “Spirit of Inquiry” that focused on students building lifelong passions and curiosity. The scholarship in his name honors students
the UA campus.
who undertake this spirit in their undergraduate studies.
The awards have enabled her to teach English at a high school in China, attend an intensive Chinese language immersion program, and work with Associate Professor Natasha Warner in the phonetics lab in the UA department of linguistics. Last spring, Anna traveled to Portland, Oregon, for a conference, where she presented with Dr. Warner about their work. “I never thought I would have the chance to do something like that, but even now I am designing and carrying out my very own research on Chinese phonetics,” she said. Anna’s spirit of inquiry doesn’t end with linguistics and Chinese culture. She also plays cello in the UA Philharmonic and leads the children’s chorus at her church. “Without the help of every scholarship I have been given, I would not be who I am today,” she said.
Why Scholarships Why Now Arizona is ranked 49th in the nation for expenditures of college student aid. Arizona spends an insignificant $12 per student compared to the U.S. average of $802 per student. Data from 2006 shows an Arizona 9th-grader’s chance of access to college by age 19 is the third-lowest in the country, after Alaska and Nevada. Males with high-school diplomas are 15 times as likely to be incarcerated as males with college degrees.
Hill Foundation Helps UA Medical Students Find Balance
Pursuing an advanced medical degree can be a bit of a balancing act. Many medical students are faced with the quandary of weighing the benefits of their education against the high debt they may incur. “The cost of attending medical school is both scary and prohibitive for some populations,” said Emily Anne Wilkinson, a second-year medical student at the University of Arizona College of Medicine. “Having a scholarship is definitely helpful because I will be funding my education entirely on my own.” Wilkinson is pursuing her Master’s of Public Health (MPH) with a concentration in International Maternal and Child Health. She received a scholarship from the Benjamin S. and Estella C. Hill Foundation last academic year. “Scholarship monies helped reassure my commitment to primary care and public health,” Wilkinson said. “One of the largest challenges for students who feel passionate about working for the underserved is that this work does not pay well. This scholarship means I am one step closer to the career path that I truly want.”
“Mrs. Hill was immensely loyal to the state of Arizona,” said Dean F. Smith Jr., the late Estella Hill’s court-appointed conservator and guardian. “She would be very proud of all the students she has helped and the many patients they are now serving.”
Wilkinson chose to attend the UA College of Medicine for a variety of reasons, including cost of attendance, availability of student resources, and the compassion she felt from its administration. “Additionally, I was drawn by the emphasis on primary care and underserved populations,” she said. “It was imperative that I attend an institution that thought highly of primary care and understood the importance of developing services for populations that are often overlooked.” Wilkinson’s research has primarily focused on a public health needs assessment for Latina Women in the rural northern Arizona region. Her efforts are assisted by help from the Coconino County Health Department. Outside of her studies, Wilkinson enjoys rock climbing, trail running, hiking and camping in the great outdoors, as well as practicing yoga and photography.
“Scholarship monies helped reassure my commitment to primary care and public health.” Emily Anne Wilkinson, second-year
Dan Stein Photography
UA medical student
Why Health Care Why Now There were 13,215 physicians in Arizona in 2005; By 2020, the need could be as high as 40,000. It’s projected there will be more than one million vacant positions for registered nurses by 2010. In 2007, medical-school graduates nationwide who had debts owed nearly $140,000 on average, according to the Association of American Medical Colleges.
Our Portfolio: Composition and Positioning Composition: Our $285 million endowment portfolio was composed of the following asset classes at June 30, 2009; a complete list of our holdings by asset class at June 30, 2009 appears at the end of this report.
Commodities 5% Real Estate 4% Low Volatility Hedge 10% Long/Short Equity 8%
Cash 4% U.S. Large-Cap Equities 15% U.S. Mid-Cap Equities 2% U.S. Small-Cap Equities 2%
Asset Allocation 6%
Intâ€™l Developed Equities 11%
Mean Reversion 3%
Emerging Equities 6%
Private Equity 5%
U.S. Fixed Income 15%
Intâ€™l Fixed Income 4%
This portfolio was constructed using the following major assumptions: 1. There are no cheap asset classes. As a result, it is extremely important for our portfolio to remain highly diversified. 2. To achieve our goal as outlined on page 3, we need to be able to generate equity-like returns. However, the broad equity markets are not priced to deliver strong returns over the intermediate (7-year) term. 3. In light of item No. 2, we need to make meaningful allocations to opportunistic strategies (mean reversion, asset allocation), private equity, absolute return and real assets to achieve our goal. We run projections on our model portfolio using two independent tools. The tool provided by one national service provider showed our 2009 model portfolio was expected to provide a total annual return of 9.2% with a standard deviation of 8.7% over a twenty-year period. (we use a longer-term forecast in our planning, as the statistical confidence in the forecast falls as the forecast period gets shorter). Standard deviation is a measure of the variability of returns around the mean; the higher the standard deviation (potential variability), the higher the potential risk.
Positioning: Given our belief that the market environment called for caution, the portfolio we maintained in fiscal 2009 was conservatively positioned. As noted above, one measure of the risk of a portfolio is its volatility as measured by the standard deviation of returns. As noted above, our 2009 model portfolio had a standard deviation of 8.7%, significantly less than the standard deviation for endowments (a) of comparable size (11.1%) and (b) greater than $1 billion (10.0%). It also is important to note that our equity investments contain a bias towards high quality stocks. While such stocks typically provide strong relative performance in down markets, these stocks lagged low-quality stocks by historic levels during the market rally which began on March 9, 2009. As a result, our performance during this rally was not as strong as peers who use a passive (index) approach to equity investing. We believe capital preservation will continue to be of great importance in 2010. We also believe there are pockets of opportunity where it is prudent to increase the risk in the portfolio. We will cover these changes in our 2010 annual report.
Our Investment Committee Our Investment Committee has done tremendous work over the past six years, and during fiscal 2009 was made up of the following individuals: Craig Berge
George Rountree, III
Ralph Silberschlag, chair
We would like to recognize departing committee member George Rountree for his service.
Photo courtesy of Weil Lifestyle, LLC
A New Vision for Medicine and Health Care
Dr. Andrew Weil wants to put the health back into the health care debate. This should come as no surprise to those who have followed the career of the Jones/Lovell Endowed Chair in Integrative Rheumatology, as well as the founder and director of the Arizona Center for Integrative Medicine (AzCIM) at the University of Arizona. A best-selling author who was named one of the 100 Most Influential People in the World by Time magazine, the Harvard-trained physician has devoted his considerable energies to raising public awareness of alternative healing practices that promote wellness, many of them originating in the East. In his numerous books and via his teachings at the UA – more than 500 physicians have passed through the Integrative Medicine Fellowship Program – Dr. Weil has extolled the benefits of prevention over intervention. In his view, conventional Western medicine tends to focus on combating disease after it has set in, rendering treatment expensive and, too often, ineffective. In his new book, Why Our Health Matters: A Vision of Medicine That Can Transform Our Future, Dr. Weil simply takes those ideas one step further and puts them into the larger context of America’s health care system. Indeed, he considers the term “health care system” a misnomer for what he calls “a disease management system.” Dr. Weil’s prescription? Dismantling our current system altogether and creating a culture of disease prevention. If this seems radical – not to mention impossible to achieve – one has only to remember that Dr. Weil’s ideas were considered controversial and far outside the mainstream only a dozen years ago, when the AzCIM was established at the University. Since then, Dr. Weil’s program became a founding member, along with the programs at Duke, Harvard, and Stanford universities, of the Consortium of Academic Health Centers for Integrative Medicine, which now has 44 member institutions. More to the point, many insurance companies now reimburse their customers for such alternative treatments as acupuncture, which would have been unthinkable before Dr. Weil’s ideas became widespread. So perhaps the gap between Dr. Weil’s vision for disease prevention and its adoption is not unbridgeable – less Grand Canyon, say, than San Francisco Bay.
Expanding the Reach of Integrative Medicine When it was established in 1997, the Arizona Center
years, the foundation has donated more than $1.8
for Integrative Medicine (AzCIM) was an immediate
million to the Center through an endowment at the
success with patients, who clamored for appointments,
but was considered too offbeat to secure funding from the state of Arizona. In a constant struggle to survive, it relied heavily on support from donors and from Dr. Weil’s personal contributions.
With private funding, the Center is able to expand its programs to serve a broader range of health care professionals and the public. In 2008, the AzCIM developed an Integrative Medicine in Residency
The AzCIM found life-support in the form of the
program to bring integrative medical education into
Weil Foundation. The not-for-profit foundation, which
primary care residencies. Programs in their early stages
helps fund the AzCIM and other academic integrative
of development include those in integrative oncology
medicine programs, gets much of its resources from
and mental health.
Weil Lifestyle, LLC.
“I want to do everything I can to make sure integrative
On what he calls “the Paul Newman model” after the
medicine gets to where it’s supposed to be,” Weil
late actor turned entrepreneur and philanthropist, Dr.
said. “I am grateful to the many donors who have
Weil donates all the after-tax profits from his lifestyle
supported our vision and share our commitment to
company into the foundation. Over the last three
promoting good health.” 17
Significant actions taken in fiscal 2009 There have been two principles guiding our work over the past six years: 1. We must build a portfolio worthy of the great institution we serve. 2. We must ensure every manager we are doing business with is a top quartile manager over a market cycle. We worked very hard in 2009 to continue improving the quality and diversification of our portfolio, and to strengthen and initiate relationships with leading managers. Significant actions taken by the Committee during the past fiscal year included: Added a distressed securities manager to our U.S. fixed income allocation. We believe the opportunity set will be quite strong for distressed securities managers during the next three to five years, and invested in the BeachPoint Distressed Securities Fund on October 1, 2008. We plan to add a second distressed manager during fiscal 2010. Added a dedicated short manager to the portfolio. We invested $10 million in the Leuthold Grizzly Short Fund in early October 2008 to provide additional downside protection during the unprecedented market decline which proved to be the steepest since 1932. We liquidated portions of that investment in February, April, and May 2009. While this position provided excellent protection during the period through March 9th, the historic market rebound during the remainder of the fiscal year from that point resulted in the position being a slight detractor from portfolio performance in fiscal 2009. Made a commitment to an additional private real estate fund. We made a commitment to Perseus Realty Partners II in fiscal 2009, bringing to six the total number of private real estate funds in which we invest. We believe this manager will be able to exploit the opportunities which are coming in a rapidly declining commercial real estate market. Reduced our underweight in U.S. large cap equities. We added a total of $2 million to our investment in the top-decile Leuthold Select Industries Fund in equal installments of $1 million in February and May 2009. Reduced our underweight in international developed equities. We added an international equity fund (Research Affiliates Enhanced International Fund) to the portfolio and invested a total of $5 million with them during the fiscal year in $1MM increments on October 1 and November 1, 2008, and on February 1, March 1, and April 1, 2009. Achieved target weighting in emerging equities. We added $1 million to both of our emerging equity managers during October/November 2008. Additional investments of $500K to both managers were made on April 1, 2009. These additional investments, combined with market appreciation during the second half of fiscal 2009, brought us to our 6% target for this asset class.
Participated in limited re-openings of previously-closed funds. We were given the opportunity to add to our investment in three funds which had limited re-openings during the fiscal year. We took advantage of these opportunities and added $1 million to the GMO Mean Reversion Fund (December 2008), the GMO Global Allocation Absolute Return Fund (January 2009) and 7 x 7 Offshore (January 2009). Increased our exposure to Precious Metals. We increased our exposure to precious metals by adding $1.75 million to our investment in the SPDR Gold Shares exchange traded fund in April 2009. We believe our investment in this asset class enhances diversification and provides protection to our portfolio in a number of possible adverse scenarios. Maintained the Payout rate at 4%. What a difference a year makes! In last year’s report, we addressed what was the hot topic at that time: the call by elected officials to raise endowment payout rates, either through legislative or other means. The financial crisis which began in full in September 2008 quickly changed the topic to: Can endowments afford to maintain their payout rates? Our Investment Policy Statement, as well as Arizona law, requires us to specifically address a number of factors each year when setting the Payout Rate. A Payout Rate should not be adjusted each year to reflect the return achieved in the previous year, but should be a rate which provides “intergenerational equity” (the beneficiaries of today should not benefit at the expense of the beneficiaries of tomorrow, and vice-versa). We believe the 4% rate declared for fiscal 2010 is the rate which gives us the best chance to achieve that equitable result. It is also important to note that we maintained a payout rate which was below the national average for several years in part to allow us to maintain that rate during more difficult market periods. The Investment Committee receives reports from selected managers during its meetings throughout the year. Reporting managers in fiscal 2009 included: Ben Inker-GMO, Director of Asset Allocation Shelby Notkin-Capital Guardian, Chairman of Personal Investment Management Abby Mason-Kaspick & Company, Director of Investments Steve Leuthold-The Leuthold Group, Founder and Chief Investment Officer John West-Research Affiliates, Director Bill Jansen-Commonfund, Managing Director Marketable Alternatives
UA Biomedical Communications
LEVIN FAMILY ENDOWED CHAIR
In the English language, four-letter words are often
“Our family is impressed by the dedication of Dr.
the culprit of anxiety, fear, anger and countless other
Curiel and the researchers at the Skin Cancer
emotions. There is, however, a six-letter word that may
Institute,” said Alan Levin, who has been a patient
get even farther under people’s skin – cancer.
In the United States, skin cancer is the most prevalent
The chair position is indicative of Curiel’s past
variety of the disease. More than one million new
performance and demonstrates a commitment
diagnoses are made each year.
to her future promise. She is the Arizona Cancer
Dr. Clara Curiel from the Arizona Cancer Center’s Skin Cancer Institute is on a mission to quell this daunting disease. She is the director of the Pigmented Lesion Clinic and the Multidisciplinary Oncology Program at the institute, and also is an assistant professor of dermatology at the UA College of Medicine.
Center principal investigator of a grant from Science Foundation Arizona to study ways to adapt satellite remote-sensing technology to image the human body for medical purposes. Through this research, she hopes to improve and increase early detection of melanoma and other forms of skin cancer. “Clara Curiel is an immensely talented cutaneous oncology specialist with a tireless work ethic and a
The Alan and Janice Levin Family Endowed Chair for Excellence in
strong desire to conquer skin cancer. Generous support
Cancer Research at the Arizona Cancer Center is the sixth endowed
like this from Alan and Janice Levin and their family are
chair at the center. It was funded by a $1 million gift from the Alan
critical to our research activities,” said Arizona Cancer
and Janice Levin family to the University of Arizona Foundation.
Center Director Dr. David S. Alberts. “Endowed chairs support basic and translational research that we can
Curiel became a member of the Arizona Cancer Center in 2005. She is certified by the American Board of Dermatology and specializes in cutaneous oncology. Earlier this year Curiel was named the Alan and Janice Levin Family Endowed Chair for Excellence in Cancer Research.
apply to our patients and help in our goal to prevent and cure cancer.”
Why Endowed Faculty Chairs Why Now Upon his arrival in 2006, UA President Robert N. Shelton made increasing the number of endowed faculty chairs at the University of Arizona one of his most pressing priorities. Donors generously responded to the cause, endowing 19 faculty positions in the last three years for a total of 87 chairs at the University. Still, the UA remains highly vulnerable to “brain drain” from peer institutions, which in many cases, have hundreds of endowed chairs at their disposal to attract top talent. Departing faculty are not only a loss to the campus community, but also take with them valuable research grants and support staff that make the UA a world-class university. A named, endowed chair is one of the most prestigious honors a college or university may offer. Only the most
Photo by Jacob Chinn
Photo by Will Seberger
outstanding scholars are considered for endowed chairs.
Dr. Ron Allen
Charles Roe, Professor
Phyllis and Roy Hislop Endowed Chair in Animal Sciences
Amelia T. Rieman Endowed Chair in Opera
College of Agriculture and Life Sciences
College of Fine Arts
Number of Endowed Chairs
Sarver Heart Center
Steele Children’s Research Center
Arizona Arthritis Center
Arizona Cancer Center
College of Medicine
College of Agriculture and Life Sciences
College of Social and Behavioral Sciences
Eller College of Management
College of Engineering
College of Fine Arts
James E. Rogers College of Law
College of Education
College of Science
Mel and Enid Zuckerman College of Public Health
College of Pharmacy
Holdings by Asset Class Asset Class
Cash JPMorgan U.S. Equities Large-Cap
Capital Guardian; Research Affiliates; Leuthold Select Industries & Grizzly Short;
Commonsense Portable Alpha
Artisan; Times Square
Lord Abbett & Research Affiliates
Int’l Equities Developed
Dodge & Cox; William Blair; Research Affiliates; Forward International;
Leuthold Global Clean Technology
Grantham, Mayo Van Otterloo (GMO); Berens Global Value
U.S. Fixed Income Govt/Corporates
Vanguard ST Bond Index; Vanguard ST Inv Grade; GMO Domestic;
Rimrock Asset Backed; BeachPoint Distressed; Privately managed
TIPS Vanguard Inflation Protected Securities Int’l Fixed Income
GMO International Bond; PIMCO Developing Local Markets
Blackrock Private Capital; JPMorgan U.S. Corporate Finance; Spur Ventures II & III;
Oak Hill III; Commonfund Private Capital VI and VII; BPEA Life Sciences;
Keyhaven; Conversus; BPEA II; Venture Investment Associates; Tech Partners;
Asia Alternatives I and II; Africa Development Partners
Absolute Return Mean Reversion
GMO Mean Reversion
GMO Global Allocation Absolute Return; PIMCO All Asset
Long Short Equity
Landmark Value; Commonsense Long Biased; Commonfund Hedged Investors;
7 x 7 Offshore
Commonfund Absolute Return; Arden Strategic; Rimrock Low Volatility;
Public Real Estate
Cohen & Steers Global Realty
Private Real Estate
Morrison Street II & III; New Boston; Commonfund Realty; Legacy Partners;
Perseus Realty Partners II
First Eagle Gold; GLD
Commonfund Multi-Strategy Commodity
Glossary of Terms Historic dollar value reflects the sum of all gifts received into the fund since its creation. There may be timing differences between the date charitable contributions are received and the date they are credited to the endowed fund. Fair value represents the actual worth of the endowment fund as of the specified date. Payout is the percentage (as determined periodically by the Foundationâ€™s Board of Trustees) of the fair value of the fund, which is distributed to and maintained in a separate Foundation account solely for the benefit of the purpose of the fund. The payout is equal to 4 percent of the average fair value of the corpus of an endowment account at the calendar year-end of the three previous years. Cost recovery fee is assessed by the Foundation to cover the cost of managing and stewarding the endowment. Effective July 1, 2006, the UAF lowered the cost recovery fee rate from 1.5 percent to 1.25 percent.
Our Commitment to You Thank you again for your support of the University of Arizona and the University of Arizona Foundation. Please let us know should you have any questions on this report or if you have a suggestion on how to improve our report
Photo by Jackie Alpers
to you next year.
Wildcat statue near Administration building.
Board of Trustees Officers Chair of the Board Peter E. Calihan President, Hughes-Calihan Konica Minolta, Inc.
trustees Craig Barker Senior Vice President Financial Services The University of Arizona Foundation
Chair-Elect Jon O. Underwood Desert Mountain Properties (Retired)
Peter E. Calihan President Hughes-Calihan Konica Minolta, Inc.
Secretary Sarah B. Smallhouse President, Thomas R. Brown Family Foundations
Robert F. Charles, Jr. B & J Enterprises
Treasurer G. Wallace Chester Principal, WDP Partners, L.L.C. President & CEO James H. Moore, Jr. Past Chair of the Board Peter A. Ladigo Harris Trust Bank (Retired) Officers of the corporation James H. Moore, Jr. President & CEO Craig Barker Senior Vice President, Financial Services Mark R. Harlan Senior Vice President, Central Development Roger Neuhaus Senior Vice President, Development & University Campaigns Ken R. Dildine Vice President, Fiduciary Compliance & Gift Transactions Linda S. Seitz Vice President for Development, University Programs Shaun Sommerer Vice President for Development, Arizona Health Sciences Rita M. Williams Vice President, Financial Services & Comptroller William J. Bowen Special Counsel to the UAF President for Board Relations
G. Wallace Chester Principal WDP Partners, L.L.C.
Nancy C. Loftin Pinnacle West Capital Corporation & Arizona Public Service Company (Retired) Stephen J. MacCarthy Vice President for External Relations The University of Arizona Philip G. May Shareholder Collins, May, Potenza, Baran & Gillespie, P.C., Attorneys at Law
Robert L. Davis Senior Vice President Industrial & Investment Services Grubb & Ellis Company
Manuel C. Molina President & CEO Molina Media Group, Inc.
June Dempsey Senior Vice President Cedric Dempsey Consulting
James H. Moore, Jr. President & CEO The University of Arizona Foundation
Karl Eller Chairman & CEO The Eller Company
Allan J. Norville Financial Associates, Inc.
Peter A. Fasseas Chairman of the Board & President Metropolitan Bank Group Lloyd C. Fox Broker & Owner Long Realty â€“ The FOX Group
Stephen E. Quinlan Chairman Long Realty Company Peter W. Salter President & Owner Salter Labs
Philip W. Hagenah Producer Film House, Inc.
Eugene G. Sander Vice Provost & Dean College of Agriculture & Life Sciences The University of Arizona
Meredith Hay Executive Vice President & Provost The University of Arizona
Robert N. Shelton President The University of Arizona
Ted H. Hinderaker Hinderaker & Rauh, P.L.C., Attorneys at Law
Ralph Silberschlag Vice President Merrill Lynch
Linn T. Hodge, III President & Owner Linn T. Hodge & Sons Insurance James L. Hunter Vice Chairman of the Board Baron Real Estate Augustine B. Jimenez, III Montoya Jimenez, P.A., Attorneys at Law I. Michael Kasser President Holualoa Companies Thomas W. Keating Chairman Loma Catalina Company Peter A. Ladigo Harris Trust Bank (Retired)
Helaine D. Levy Executive Director Diamond Family Philanthropies
Richard H. Silverman General Manager Salt River Project Sarah B. Smallhouse President Thomas R. Brown Family Foundations Jon O. Underwood Desert Mountain Properties (Retired) Joel D. Valdez Senior Vice President for Business Affairs The University of Arizona Christopher J. Vlahos President & Executive Director The University of Arizona Alumni Association
Photo by Jacob Chinn
Pocket (inside back cover)
1111 North Cherry Avenue PO Box 210109 Tucson, AZ 85721-0109 520.621.5590 uafoundation.org
Published on Mar 31, 2013