Fiscal 2005 was a spectacular year for the endowment funds, the icing on the cake of a three year run over which the endowment funds have enjoyed investment growth totaling more than 53%. The most remarkable thing about the performance in this fiscal year is that it occurred despite persistent rate hikes by the Federal Reserve Bank, disappointments in Iraq and ominous nuclear threats in Iran and North Korea, sky high energy prices, and continuing economic malaise in the European Union and Japan. The saving graces for the capital markets were strong economic growth in the United States, generally benign inflation, and surprisingly low long term interest rates.

The Permanent University Fund and General Endowment Fund achieved returns of 18.80% and 18.82% respectively in fiscal 2005, the third highest total return in the history of the PUF. These returns drove the net asset values of both the PUF and the GEF to new all time highs, even though distributions totaling $547.5 million were made during the year.

The solid performance was the result of a well-diversified but high return-potential asset mix in the Funds, coupled with significant value-added in several asset categories. In fact, all asset categories enjoyed positive returns last year, with benchmark returns ranging from a high of 40.72% in inflation hedge commodities, to a low of 2.44% in cash equivalent assets. On top of these favorable benchmark return foundations, the UTIMCO staff and our external investment managers were able to make successful value-added decisions in several asset categories, expanding returns even further. For example, the actual return in our absolute return hedge fund portfolio was 14.26% in the Permanent University Fund, significantly better than the 5.55% benchmark return for that asset category. In aggregate, marketable assets in the Permanent University Fund and the General Endowment Fund advanced by 17.66% and 17.79% respectively, well ahead of the 14.54% benchmark return for all marketable assets. The news in our non-marketable private capital investments was even better as the Permanent University Fund earned returns of 30.00% versus a benchmark result of 17.70%. The bottom line of our efforts was total portfolio returns 3.75% higher than aggregate benchmark returns, translating to about $458 million in value-added for the fiscal year.

These positive performance results are continuing dividends from the organizational structure put in place over the past three years at UTIMCO. We have changed the management structure and staff composition to intensify our focus on high potential value-added asset categories. High potential value-added investments offer the opportunity for superior returns and include actively managed domestic and international public equities, private capital, hedge funds, real estate and other inflation hedge assets. We have skilled and experienced investment professionals managing narrowly focused asset categories, overseeing both internal and external investment managers. To maintain control over the more expansive asset set, we have a skilled and experienced risk manager armed with the technical tools necessary to assist our investment management team.

The UTIMCO Board has been particularly important to the organizational structure changes, providing critical advice and support. I want to take this opportunity to recognize and thank two recently retired board members for their service on the board since the creation of UTIMCO in 1996. Susan Byrne and Luther King have provided wisdom and wit, and will be sorely missed.

Although our organizational structure and value-added focus have proven to be valuable over the past three years, their true worth should be evident over the challenging economic and capital market environments we expect over the next three to five years. The result of the recent asset allocation review by the UTIMCO Board was a new asset allocation policy with an expected long term return of 8.34% per year, barely above the return necessary to maintain payout rates at current levels and allow the endowment funds to grow at the rate of inflation in order to maintain purchasing power for future generations. And with recent returns averaging more than 15% annually, it only stands to reason that at some point we will experience returns below the long term assumptions. But, with a skilled and experienced staff in place organized to focus on adding value in a difficult environment, and with the support and guidance of the dedicated UTIMCO Board of Directors, I am confident that UTIMCO is well positioned to face the challenges of the future and continue to help build legacies throughout the University of Texas and Texas A&M Systems.

Bob L. Boldt, CFA
President, Chief Executive Officer,
and Chief Investment Officer