T. Dennis Sullivan
Financial Vice President

The responsibility for the Foundation’s endowment rests with the Finance Committee of the Board of Trustees. Since September 1990, this Committee has been chaired by Charles E. Exley, Jr., retired Chairman and CEO of the NCR Corporation, and has included the Chairman, the President, and two or three other members of the Board of Trustees. In discharging their responsibilities, the members of the Committee have adopted formal investment policies and objectives, which are reviewed on an annual basis. Within the context of these policies, the Committee retains external managers to implement particular aspects of the investment program and monitors on an ongoing basis the managers’ investment performance.

In formulating objectives for the Foundation’s investment program, the Committee has sought to strike a reasonable balance between the needs of the present (as reflected in current spending) and the needs for the future (as reflected in reinvestment to maintain and extend when possible the purchasing power of the endowment). In the most general terms, the Foundation’s overall investment objective is to seek a total return over time—consistent with agreed-upon levels of risk—sufficient to satisfy federally mandated payout requirements, to cover operating costs and excise taxes, and to provide for inflation. In pursuing an absolute investment objective, the Committee also expects to achieve total returns that exceed over time relevant market averages and result in top quartile performance in comparison to other endowments with similar objectives.

In establishing, monitoring and, at times, reallocating the mix of assets among classes of investments, the Committee has sought to develop a diversified portfolio which includes market-traded equities and fixed income securities (both U.S. and international) as well as exposure to private markets including venture capital, buyout, and distressed securities, real estate and energy partnerships. Indeed, over the past decade, there has been a decided shift in the Foundation’s overall asset allocation as the members of the Finance Committee have authorized significant increases in the commitments to private markets. The portfolio’s actual asset allocation as of December 31, 2000 is shown below together with the "normal" policy and strategic ranges that have been established for each asset allocation.

The domestic, market-traded equity portion of the portfolio is anchored by a sizeable commitment to a Russell 3000 Index Fund with the remainder allocated among several active managers who follow a variety of strategies. This "core and satellite" arrangement is intended to maintain a significant commitment to U.S. equity markets while benefiting from the skills of active managers who specialize in one market segment or another. In addition, a few sizable new commitments were approved recently by the Finance Committee to "absolute return" managers to complement earlier, but more limited investments. These managers employ a variety of investment strategies that are intended to reap positive returns that are not correlated with the directions of the public equity and debt markets.

The international portion of the portfolio’s market-traded equity exposure is managed by three experienced managers. (A fourth relationship was established in January 2001.) These managers compares themselves with an international developed markets benchmark (MSCI EAFE), but authorization has been granted for these managers to invest in emerging markets on an opportunistic basis within established guidelines. The Foundation does not seek to "overlay" a currency hedge on the activity of its international managers.

As alluded to earlier, the portfolio’s commitment to private markets as reflected in "limited liquidity" investments has grown quite substantially over the past decade. Beginning in the fall of 1990, when these types of investments represented less than 2% of the total portfolio, the members of the Finance Committee have sought to establish long-term relationships with experienced venture capital and buyout firms. The basic thesis of this investment strategy was that the Foundation’s overall financial circumstances were sufficiently robust that a significant portion of the portfolio’s assets could be allocated to less liquid forms of investments provided that these investments delivered on their promise of superior return. Notwithstanding recent market corrections, especially in the technology sector, this thesis has been validated.

Over the past decade, the Foundation has established enduring relationships with a dozen U.S. venture capital firms and an equal number of private equity firms, including several international firms. Many of these relationships have involved multiple investments in a succession of limited partnerships. (To a lesser extent in terms of the number of relationships involved and the dollars invested, this same approach has been followed in the portfolio’s investments in distressed securities, real estate and energy opportunities.) As of December 31, 2000, these investments constituted approximately 18% of the portfolio and have contributed significantly to the portfolio’s overall growth.  During the past year, nearly $900 million was distributed from these relationships and converted into realized gains.

How has the portfolio fared over the past decade employing this general approach to investing? The following chart displays the growth of the Foundation’s endowment since December 31, 1990.

While the growth in assets over the past several years has been significant, market developments in 2001 are reminders that the future is inherently uncertain.