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Market Commentary Fiscal year 2003 will be remembered as a remarkable year. The year began on a sour note as both weak economic indicators and boiling international tensions had investors on edge. While financial markets seemed to be transfixed with Iraq, business leaders were in the grips of a confidence crisis which led to extreme risk aversion in business expansion, most notably in capital spending and hiring. But the foundation for better times ahead was definitely in place. With significant help from the Federal government through fiscal policy (tax cuts), monetary policy (Federal Reserve rate setting), and a foreign policy which allowed a weak dollar, basic economic forces have overwhelmed CEO risk aversion to power the early stages of what is likely to be a strong business expansion. The low point in financial markets was reached in early March due to growing sentiment that the US was headed for a Viet Nam like quagmire in the battle for Iraq. As that sentiment turned out to be wrong and the Saddam statue toppled, markets soared. With the weight of military doom lifted, the economy began a solid advance in mid-summer. The endowment portfolios were very well positioned to take advantage of the economic lift as equities became the favored asset class. The result was a year with returns well above the 7.4% UTIMCO intermediate return expectation and a welcome change from the negative returns in the past two years. All endowment funds earned double digit investment returns for the year ended August 31, 2003, as reflected in Figure B. The returns for the year were driven by very strong absolute and relative performance in the absolute return hedge funds, inflation hedge, and domestic and international active equity management asset categories. The absolute return hedge funds enjoyed a 21.27% return for the fiscal year, significantly beyond the 5.49% benchmark return for that asset category. Inflation hedge assets also turned in an outstanding performance of 22.14% versus a benchmark return of 13.58%. In addition to the strong performance of the real estate investment trust (REIT) portfolio, UTIMCO made two effective shifts of assets into and out of commodities futures contracts which provided the margin of superior performance. UTIMCO's decision to overweight emerging markets international investments, and the external managers' success in managing those assets, provided returns totaling 26.95% versus a benchmark return of 12.22%. Likewise, UTIMCO's allocation decisions to small capitalization domestic companies and the external managers' skill in taking advantage of the larger allocations produced returns of 22.52%, well ahead of the 14.87% benchmark return. In total, the marketable endowment assets enjoyed a return of 15.51% for the fiscal year, substantially ahead of the 11.56% benchmark, resulting in a value added of more than $295.6 million for the year. |
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