Looking Forward

Looking ahead, we expect the state of investing to be, in a word, challenging. Difficult financial market conditions will demand all of our skills and attention. It is especially important not to become complacent about the favorable returns earned by the endowment funds over the past three fiscal years. The fiscal and monetary policies that have provided such a strong tailwind for economic growth and capital market advances are now reversed. Beyond the U.S. borders, mounting economic and political tensions in the European Union, the rapid ascent of China as a world trade powerhouse and the imbalance of trade between the United States and China, and, of course, the ever-present terrorist threat, are all causes of intermediate term concern. We now expect future endowment returns to be in the range of 8.0% to 8.5% per year, perhaps only a razor thin margin above the 8.1% annual return we must earn to assure generational equity. Unfortunately, the days of double-digit expected annual returns now seem to be just a pleasant memory. In this new, lower expectation environment, the ability of organizations such as UTIMCO to add value through effective management will be crucial, and may, in fact, be the margin between earning our minimum 8.1% return target and falling short, with unpleasant consequences for both current and future endowment beneficiaries.

Value-added investing success will separate those endowments able to cope and even flourish in the challenging markets ahead from those that will stagnate and lose competitive edge. Competitive, successful, value-added organizations attract better investment talent, get access to the best external managers and partnerships, are better able to adapt to changing market environments, and earn consistently higher returns. UTIMCO has shown its ability to be competitive with the largest endowment funds in the United States. Value-added investing will be the key to future success not only in allowing UTIMCO to meet return targets despite the intermediate term challenges we anticipate, but over the long run as well, improving the odds that we can meet and exceed the needs of both current and future endowment beneficiaries.

Successful value-added investing requires skill, creativity, flexibility, commitment, and tenacity. Our goal at UTIMCO is to capitalize on the endowment funds' size and our conviction as well as the essential traits of successful value-added organizations, to build and maintain our competitive position so that we can earn the returns necessary to help build the legacies established by the endowment funds of The University of Texas and Texas A&M Systems.