Endowment Annual Report

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Endowment Annual Report

Endowment Annual Report

June 1, 2004 May 31, 2005

    2005 Endowment Annual Report 1 Table of Contents

    Overview 2

    Endowment Fund Structure 3

    Portfolio Management 4

    Investment Strategies 5

     Portfolio Asset Allocation 5

     Equity 6

     Fixed Income 6

     Alternative Investments 6

     Non-pooled Funds 7

    Endowment Comparison 8

    Conclusion 9

    Table I Market Value of Endowment Assets 10

    Pacific Lutheran University

2005 Endowment Annual Report 2


    Pacific Lutheran University’s endowment income provides the university with financial stability and allows the university to implement long-range plans. The endowment is a permanent fund from which income may be spent at a rate established by the Board of Regents. At PLU, endowment funds primarily provide student scholarships. Other endowment funds support undergraduate research, lectures, athletic facilities, specific faculty members, global education and equipment.

The endowment grew rapidly through the 1990’s. Through the current capital campaign, The

    Next Bold Step, The Campaign for Pacific Lutheran University, the endowment has experienced

    a significant increase in value and will continue to grow as deferred gifts and pledges come to the university. On May 31, 2005 the total value of the PLU endowment was $57.1 million.

    Growth of Endowment











    FIGURE 1

    This graph shows the historical growth of PLU’s Endowment. The rate of growth

    includes both market investment performance and annual gifts to the university.

    Pacific Lutheran University

2005 Endowment Annual Report 3

    Endowment Fund Structure

The university’s endowment is made up of pooled and non-pooled funds. The university

    manages pooled funds and external trustees manage non-pooled funds.

    Most endowment gifts made to Pacific Lutheran University programs are pooled for investment purposes, creating a vehicle similar to a mutual fund. As gifts are invested in the pool, they effectively buy “shares” of the endowment. Each share is issued at a net asset value, a process that allows the university to unitize the endowment for accounting of the value of the underlying investments. As of May 31, 2005 (fiscal year end), the market value of the pooled investment fund was $45.55 million.

    Non-pooled funds are held in trust by outside managers. This includes charitable trusts that are professionally managed by banks for the benefit of more than one institution. While the university is entitled to an income from the contractually set portion of the trust, it is unable to make decisions regarding the management of those assets. As of May 31, 2005 (fiscal year end), the market value of the non-pooled endowment was $11.55 million.

    The endowment is meant to payout cash every year, to fund scholarships, programs, equipment, lectures and some faculty positions. The current annual payment is equal to five-percent of the average assets over the last three fiscal year ends. Although the pool is setup in a diversified manner, it is still correlated with the stock market. As the market has dropped in the last few years, new contributions to the endowment have kept the total value of the endowment constant.

    Pacific Lutheran University

2005 Endowment Annual Report 4

    Portfolio Management

    A team of people, each of which has a distinct and important task, manages PLU’s endowment. The highest level of responsibility goes to the five member Investment Subcommittee of the Board of Regents of PLU. The subcommittee is responsible for the strategic direction of the fund. The subcommittee meets at least three times each year and conducts additional meetings via telephone when needed. Committee tasks include asset allocation, manager selection, and setting the overall investment and spending policy. The committee reports to the Budget and Finance Committee of the Board of Regents.

    Working with the Investment Subcommittee are staff members of the university. The President of PLU, Dr. Loren Anderson, the Vice President of Finance and Operations, Dr. Sheri Tonn, and PLU’s Controller, Robert Riley, work closely with the Investment Subcommittee to recommend and support the strategic decisions of the subcommittee. In addition, many others at PLU work in the areas of account management, manager monitoring, risk management, asset allocation and rebalancing, and essential communication among various parties.

    PLU consults with Slocum & Associates, an investment advisory firm which works closely with the other members of the team in investment selection, risk management and ongoing monitoring of current investments. Our investment advisor is also consulted before the Investment

    Subcommittee makes any strategic allocation changes.

    And finally, but most importantly, the underlying investment managers we select to actually invest the assets. They have the crucial task of security selection, and are most essential to the continued performance of PLU’s endowment.

    Investment & Spending Policy X X X

Asset Allocation and Rebalancing X X

Manager Selection X X X

Monitoring Managers X X

Risk Management/Portfolio

    Management X X

Communication with Board X X X

Security Selection X

    Pacific Lutheran University

2005 Endowment Annual Report 5

    Investment Strategies

Portfolio Asset Allocation

    The strategic asset allocation parameters are set by the Investment Subcommittee, and reviewed periodically. The actual asset levels are reviewed at each meeting, and are considered before a new investment is actually made or sold. The allocation parameters are used as a guide, both for new investments and for ongoing rebalancing. Due to the perpetual nature of the endowment, investments are made with the intention of holding them for a long-term period. While many of the investments are liquid and can be sold at any time, others have an investment horizon as long as ten years. Real estate included in the portfolio may be held even longer.

    As of May 31, 2005, the current allocation is within the allowable range for each type of asset.

    Target Asset Allocation Actual Allocation

     (May 31, 2005)

     Venture Capital and CashPrivate Equity Venture Capital and 4%Cash1.9%Private Equity2% 5%Liquid Alternative Investments Domestic Equities29%30% Liquid Alternative Investments Real AssetsDomestic Equities27%4%35%

    International Equities 3%

     Real EstateReal Estate10% Fixed IncomeInternational Equities13%Fixed Income20%4% 12%

    *The target asset allocation was most recently adjusted May 2003.

    Pacific Lutheran University

2005 Endowment Annual Report 6


    The endowment equity investments are invested in ten different mutual funds, fully diversifying the sector by geographic location, company size, industry, and market characteristic (growth vs. value). While each of the mutual funds is diversified, all are still correlated to some degree with the United States equity markets (with the exception of our international fund). While equities have historically had high returns, they also carry a high amount of risk, demonstrated over the past three years.

    Equity Managers as of May 31, 2005

    Boston Partners Asset Management, LP

    Buffalo Funds


    Dodge & Cox Funds

    Meridian Funds

    Olstein Funds

    T. Rowe Price

    Thompson Plumb & Assoc.

    Thrivent AAL

    Tweedy Brown Funds

Fixed Income

    The fixed income investments are made up of four different bond funds, diversified by credit, maturity, company size, and geographic location. With interest rates at the lowest levels in the past thirty years, the Investment Subcommittee has recently reduced the endowment’s exposure to long-term, high grade bonds, and has increased the exposure to lower, high yield credit bonds. This asset class has very little correlation with equities, and serves as a good source of diversification.

    Fixed Income Manager as of May 31, 2005

    PIMCO Total Return

Alternative Investments

    The endowment currently has investments with five different funds of hedge funds, comprised of more than 100 individual hedge funds. In addition, the endowment has also made six tactical allocations to individual hedge funds. While the strategies of the hedge funds varies widely, each of the funds in the endowment is used to further diversify the pool’s exposure to market risk. The funds of hedge funds are each diversified among a wide range of alternative investment sectors, with a goal of high absolute returns and low correlation to any of the other investment classes in the endowment. The individual hedge funds include a long-biased equity hedge fund, and a fund that specializes in distressed securities, both on the long and short side.

    The venture capital and private equity section of the endowment is investments made into three long-term, primarily venture capital funds, although two of them also have exposure to private equity as well. These funds represent the highest potential return in the endowment, but also carry the highest amount of risk. They are well suited to an endowment, as the length of investment is typically ten years or longer.

    Pacific Lutheran University

2005 Endowment Annual Report 7

    Finally, the real estate segment of the endowment includes various residences located near the PLU campus, a fund of pooled real estate assets, and the recent addition of commercial properties near campus. The pooled fund is a partnership consisting of diversified real estate

    assets, located throughout the country. They are further diversified by type (residential, commercial, etc.), and are all located in affluent suburban regions of major metropolitan areas. The purpose of the real estate assets in the portfolio is to collect current income and lower the overall volatility of the endowment.

    Alternative Investment Managers as of May 31, 2005

    Adams Street Partners

    Arden Capital Management

    Common Sense Investment Management, LLC

    Harris Associates, LP

    ING Clarion

    Ivy Asset Management

    Lighthouse Partners, LLC

    Marathon Asset Management

    Olympic Venture Partners

    Ritchie Energy

    Spinnaker Global

    Thomas Weisel Partners, LLC

    Tiedemann Emerging Markets

    Vega Relative Value

Non-pooled Funds

    This category reflects permanent endowment assets managed by others. In setting allocations for the funds managed by PLU, we take specific investments of the trusts into account. These investments reflect a traditional 60% equity, 40% fixed income allocation, with little or no investment in alternative asset classes. Most of the equities are individual blue chip stocks and the fixed income investments are in investment grade bonds. Performance of these trusts generally reflects the performance of the respective indices. They experienced significant loss of value in 2000-01 and gains match the market rebound.

    Pacific Lutheran University

2005 Endowment Annual Report 8

    Endowment Comparison

    The university benchmarks endowment performance each year by participating in the NACUBO endowment study. In addition, we compare our endowment size with Pacific Northwest, ELCA and ANAC peers. Table I illustrates the total value of PLU’s endowment compared to several universities for each of the past four years. The values reflect growth and appreciation, as well as payoffs. Many endowments experienced a decline in fiscal year 2001 and 2002, which we avoided. Traditionally, endowments have balanced their portfolios between publicly traded equities and fixed income in a ratio of about 60/40 or 70/30. Many large endowments have moved toward various alternative investments, real estate and real assets such as gold and commodities. PLU followed this trend and avoided the downturn seen by many of the smaller endowments.

    Pacific Lutheran University

2005 Endowment Annual Report 9


    The Pacific Lutheran University endowment is highly diversified into a number of asset classes, providing stability in principal. This stability has allowed the university to continue to provide a 5% payout each year even while experiencing a volatile market. Beyond maintaining the endowment value, continual growth has been realized due to careful management.

    The university and its managers expect the endowment to grow significantly in the long term, providing continual funds for undergraduate research, lectures, athletic facilities, specific faculty member, global education and equipment. This growth is not only supported by market expansion but also through the generosity of donors that continue to support the university.

    Pacific Lutheran University

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