Letter from the Executive Management
Intermediate Term Fund
The ITF benefits from the same group of external managers as the Endowments though maintains a different asset allocation in recognition of the more liquid nature of these assets. As such, the ITF does not contain any private investments and has a 35% allocation to investment grade fixed income. While this investment strategy is projected to lag the Endowments returns over the long term, during fiscal year 2008 the heavier weight in fixed income proved advantageous.
FY 2008 Market Overview and FY 2009 Market Outlook
Despite the unsettling events caused by the early subprime signals and increased market volatility during the summer of 2007, the final four months of 2007 ended relatively strong as our Policy Portfolio showed a 3.3% return for this period.
The first half of 2008 could best be characterized as filled with continued increased volatility as the markets reacted to new signs of excessive leverage and inadequate underwriting. In June 2008 however - as the full significance of the challenges of deleveraging, poor credit decisions and a slowing economy became clearer - the capital markets went into a steep fall. Liquidity vanished, credit markets seized and equity investors scrambled in attempts to preserve capital by placing it in 'risk free' investments. Losses of 10% and more were posted in markets across the globe during the summer of 2008.
The year will certainly be remembered as a watershed in capital markets. From two Bear Stearns sponsored subprime mortgage hedge fund meltdowns to the $700 billion U.S. rescue plan - and the multiple financial institution failures and trillions of dollars of government support in between - the world's financial system experienced periods of failure. There is no choice but to fundamentally reconstruct it over the years to come.
The outlook for fiscal year 2009 is sobering. Confidence in financial institutions and capital markets has yet to be fully restored. The world's developed economies are in recession and the emerging market growth is slowing. While shorter term inflationary concerns have eased with the slowdown in economic growth, longer term inflationary concerns have increased due to the injection of funds into the capital markets by governments across the globe. Because of the time it will take to work through existing credit problems and the structural issues surrounding reconstituting financial institutions and capital markets, it is difficult to envision a strong and vibrant economic environment for the upcoming year.
We believe, however, that it is a good time to have capital to invest. Because of the illiquidity in the system, those that can provide capital are in a position to receive very attractive risk-adjusted rewards. UTIMCO is strongly positioned to be just such a capital provider due to the size, diversification and liquidity of the funds we manage. We are, however, committed to continuing to exercise extreme prudence as we invest. All of our actions are thoroughly diligenced and discussed and we remain committed to a broadly diversified portfolio of asset classes, investment types, geographies, sectors, investment managers and individual securities.
Board and Staff
The key to UTIMCO's success is its people, including its Board of Directors and staff, as well as The University of Texas System Board of Regents and staff.
UTIMCO is grateful for Regent H. Scott Caven, Jr.'s many years of service, including as Chairman. While Chairman Caven left the UTIMCO Board upon his becoming Chairman of The University of Texas System Board of Regents, we continue to benefit from his counsel. UTIMCO's Board is most fortunate to now be chaired by Regent Robert B. Rowling who provides clear leadership and strong investment insight. We also thank Chancellor Mark G. Yudof for his service and support and wish him well in his new role. And we very much appreciate Chancellor Kenneth I. Shine's guidance as a Board member. Lastly we welcome Regent Paul Foster to the UTIMCO Board. We cannot overstate the quality of our Board or the value they provide.
We are also grateful for the strong relationships we have with The University of Texas System Board of Regents and staff. The Regents and staff are fully engaged with the UTIMCO Board and staff, providing strong oversight as well as support. This partnership further enhances UTIMCO's efforts and probabilities of success.
Finally, we are delighted to be colleagues with the fifty plus people who are UTIMCO. Over the past year, UTIMCO experienced very little turnover, exhibited high energy, insightfulness and a passion for our mission. We are pleased that more than a dozen people joined the organization, including senior investors in natural resources, real estate and public markets. Importantly, the support and control functions - risk management, legal and compliance, and operations, accounting and technology - are an essential and differentiating element of the organization. We are convinced that our team is now appropriately staffed with extraordinarily talented professionals and we are fortunate to have such a dedicated group of skilled colleagues.
We are confident in our abilities to continue to weather the storms that are inevitable, to capitalize on investment opportunities as they present themselves, and to produce strong risk adjusted returns over the long term. We appreciate all of the support we receive from The University of Texas and The Texas A&M Systems, and we welcome your inquiries and input.
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Bruce Zimmerman
Chief Executive Officer and
Chief Investment Officer
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Cathy Iberg
President and Deputy
Chief Investment Officer
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