The 2000-2001 fiscal year was one of retrenchment in the securities
markets, as investors sought to minimize the loss of wealth created
in the extraordinary but unsustainable bull market of the past
decade. The University's pooled endowment returned 2 percent during
the fiscal year, an average annual return of 20.2 percent over
the past three years, and an annualized 18.4 percent over the
past five years. All are top-quartile performance levels among
the largest university and college endowments.
In 2000-2001, the Board of Visitors made the decision to reduce
the endowment's investments in conventional long-only domestic
and international equity markets and to place greater emphasis
on alternative investments, primarily hedge funds. In addition
to reducing its long-only positions, the University sold as soon
as possible all distributions from its venture capital portfolio,
thereby locking in the exceptional gains of the previous year.
These assets were redeployed into hedge fund positions.
The hedge fund portfolio primarily consists of long/short equity
managers. Based on analysis of individual company fundamentals,
these managers purchase stock in companies that they believe to
be undervalued by the market and sell stock short in companies
that their research shows cannot sustain their market value. The
return on these hedge fund portfolios is determined, for the most
part, by the spread between the returns on the long portfolio
versus the return on the short portfolio and much less by the
direction of the overall stock market. Because the return is dependent
upon manager skill, the Board of Visitors and the staff are carefully
selecting managers for the portfolio. By year-end, 39 percent
of the endowment was invested in hedge funds (more than double
the previous year), 23 percent in non-marketable alternatives
including private equity and real estate, 15 percent in domestic
long-only equity, 4 percent in international long-only equity,
and 19 percent in fixed income.
Going forward, the road appears treacherous, but the endowment's
long time horizon and predictable and fairly low spending rate
allow for investments in less liquid areas where the potential
reward appears to be greater than in the traditional markets.
The University will continue to identify promising hedge fund
and private equity managers. While always hopeful for a robust
market, we do not wager on its overall direction, choosing instead
to emphasize areas that have the potential to yield positive returns
under both favorable and unfavorable conditions.
Spending from the endowment increased last year as a result of
the exceptional returns posted in the previous year. This increased
the funds available for faculty salaries, financial aid for students,
and priorities arising from the Virginia 2020 planning process.
Endowment income now provides 3.5 percent of the University's