At June 30, 2002, the University’s total invested funds had a market value of $2,445 million. The bulk of these funds were invested in the Endowment Investment Pool (EIP), which is comprised of assets of some 2,600 separate endowments, each owning shares in the EIP. Although the endowments are pooled for investment purposes, the individual endowments are accounted for on an individual basis to ensure proper compliance with donor restrictions. The balance of invested funds is made up of current funds (e.g., working capital, gifts intended for current use, foundation funds, and funds held under deferred compensation agreements) and charitable remainder funds.

The market value of the EIP at June 30 was $ 1,690 million, falling by some $130 million during the fiscal year from its market value of $1,820 million at June 30, 2001. This decrease in market value reflects the addition of about $63 million to the EIP in the form of new contributions from donors, offset by the impact of the decline in the domestic and international equity markets, which began in the spring of 2000.

All the major asset classes with the exception of fixed income investments and absolute return strategies posted declines for the fiscal year. The negative returns of domestic and non-U.S. equity managers were the primary drivers of the EIP’s performance in FY 2002. During the fiscal year the S&P 500 U.S. stock benchmark declined 18.0%, and MSCI EAFE international stock index declined 9.5%. U.S. equity markets have been battered by corporate scandals and accounting irregularities, poor earnings reports and geopolitical tensions in the Middle East. The fixed income benchmark of Lehman Government/Corporate Index had a positive return of 8.2% reflecting falling interest rates and rising bond prices resulting from a flight to quality by equity investors reallocating to safer fixed income assets.

With this backdrop of a meltdown in global financial markets, the EIP generated a negative return of –6.2% for the fiscal year ended June 30, 2002. The performance of the EIP relative to major stock and bond indices highlights the importance of broad diversification within and among major asset classes. Combined, the domestic equity managers had a return of –12.2%, significantly outperforming the S&P 500 Index return of –18.0%. The non-U.S. equity managers had a return of –8.6% again, outperforming their MSCI EAFE benchmark return of –9.5%. The fixed income mangers as a group had a return of 8.5% outperforming their Lehman Government/Corporate Index benchmark return of 8.2%.

Importantly, the alternative marketable investment program in absolute return strategies generated a return of 3.7%. This program invests in various hedge fund strategies with an objective of earning equity-like returns with lower vola-tility than equity returns and low correlation with those returns. The objective was clearly met in fiscal year 2002, as it has been since incep-tion of the program in fiscal year 2000. The venture capital and private equity investment program was the hardest hit with a return of –31.0%. This is mainly attributable to venture capital and buyout partnerships writing down the value of their investments relative to previous year valuations. While the performance of this asset class was by far the worst, its relatively small share of the EIP significantly dampened its negative impact on the total return of the pool.

The EIP asset allocation for 2001 and 2002 fiscal years is shown in the accompanying table. There is no significant change in the allocations to any of the asset classes. In a continuing effort to increase the share of endowment assets allocated to private equity and buyout funds, the University committed an additional $35 million to four limited partnerships in fiscal year 2002. Despite a large decline in the valuations of venture capital partnership investments, the Committee on Investments will continue to make investments in this asset class in a very deliberative style with very high-quality partnerships.

As noted above, fiscal year 2002 presented a very difficult environment for the financial markets. The turmoil in the markets followed on the heels of a difficult 2001 for both domestic and international equities. For the two fiscal years combined the S&P 500 has declined by 30.2%, and the MSCI EAFE Index has declined by 30.9%. The Lehman Government/Credit Index had a return of 20.2% for the same period. For the two years, the endowment pool had a return of –7.2%. Viewed in this context, the EIP has performed well in a turbulent environment, reflecting again the benefits of broad diversification.