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March 20, 2003

Changes made in Pitt's endowment allocation

Pitt’s endowment increased in value by 4.3 percent during fall 2002, the last quarter for which numbers have been tabulated.

But even with the fourth-quarter upsurge, the endowment’s value fell by 8.43 percent during calendar year 2002, to $1.07 billion.

That was down from a market value of $1.15 billion as of last June 30, the final day of the 2001-02 fiscal year — a year during which the University’s endowment performed comparatively well, based on the latest survey by the National Association of College and University Business Officers (NACUBO).

NACUBO found that, for the second consecutive year, the average college and university endowment lost value during the fiscal year 2001-02 amid investment market declines and a poor economy.

Among 556 surveyed institutions with a fiscal year ending on June 30, 2002, the average endowment fell in value by 6 percent. Among public universities only, the decline was 6.4 percent.

Pitt’s endowment gained in value by 4.6 percent during FY 2001-02, but that’s because the University’s investment losses were exceeded by transfers of gifts and quasi-endowment funds into the endowment, according to Pitt’s Office of Budget and Controller.

(NACUBO’s annual survey measures an endowment’s change in market value during a fiscal year. Such factors as growth from gifts, reductions due to expenditures and withdrawals — not only investment returns — determine an endowment’s end-of-the-year market value.)

Larger endowments performed better than smaller ones during FY 2001-02, NACUBO found. Endowments exceeding $1 billion, including Pitt’s, showed an average loss of 3.8 percent compared with losses of 6.6 percent for endowments of less than $25 million.

The primary reason that “bigger is better” among endowments is that larger holdings tend to be more diversified, according to NACUBO.

“During the 1990s, college and university endowments experienced increased return rates and reduced investment volatility through excellent asset diversification and a soaring economy,” said NACUBO president James E. Morley Jr. “The asset allocations that served endowments well in the recent past allow endowments to achieve continued investment returns above market norms.”

To further diversify Pitt’s endowment portfolio and as a hedge against inflation, the Board of Trustees’ investment committee voted this month to increase University holdings in “inflation assets” — U.S. Treasury inflation-indexed bonds, real estate, natural resources (oil and gas, timber and other commodities) and other assets whose income stream and/or market value rises with inflation.

Pitt endowment managers now are targeting to invest 10 percent of the University’s endowment in inflation assets, up from the previous target of 5 percent.

The change comes at the expense of Pitt investments in “core fixed income” — highly rated, fixed income investments such as U.S. Treasury bonds. The new plan is to keep 15 percent of Pitt’s endowment in core fixed income investments, down from the previous target of 20 percent.

“The reason for making this change,” said Pitt Vice Chancellor for Budget and Controller Arthur G. Ramicone, “is a combination of increasing our diversification, lowering our overall risk and the volatility of the endowment, and just the opportunities we’re seeing in inflation assets these days.”

—Bruce Steele

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