Baylor Endowment 2012 Overview

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1 Baylor Endowment 2012 Overview

2 Executive Summary Baylor University s Endowment has grown to approximately $1 billion in size, and is consistently providing over $50 million a year to fund scholarships, professorships and other important initiatives of the University. In 2012, 3,500 students and 1,100 academic programs received support from the Endowment. The President s Scholarship Initiative, launched in 2010 by Baylor President Ken Starr, is promoting increased growth of the Endowment that will benefit a growing number of deserving students in years to come. Endowment Value (in millions) Endowment distributions (in millions) Introduction Thanks to donations from numerous alumni and friends, Baylor s Endowment has been growing in size over the last 40 years and has become an important source of funding for scholarships, professorships, academic programs and the general operations of the University. The President s Scholarship Initiative, launched in 2010 by Baylor President Ken Starr, is intended to increase the rate of growth of the Endowment and the magnitude of support it will provide to deserving students for years to come. The Endowment portfolio is comprised of a blend of public and private equity, credit and real assets. Returns on this diverse investment portfolio support the steadily growing distributions that are being made to the University. Endowment assets are managed by a team of investment professionals led by Dr. Brian Webb, a former Managing Director of UBS Global Asset Management. Dr. Webb has over 20 years of experience in developing investment strategies for multi-asset class portfolios; and in originating and managing investment portfolios for institutional investors. The senior staff of the Office of Investments is a seasoned team of five professionals that collectively span all the capabilities needed to manage such a diverse portfolio. The 2012 Endowment Overview describes the market conditions within which the Baylor Endowment operates, the investment strategies employed by the Office of Investments, and the recent performance of the portfolio. Current or potential donors who would like a more indepth description of the Endowment are encouraged to go to the Office of Investments web site at or contact the Office directly. Scholarship donors and recipients meet together each year to establish a personal connection between donor and student The Baylor Endowment is designed to ensure donor contributions maintain their real (adjusted for inflation) value into perpetuity, while providing a consistent 5% of the underlying value to fund the designated purpose of the gifts each year. The university s Office of Investments, under the direction of The Board of Regents and the Baylor Executive Investment Committee, maintains a well diversified portfolio of investments to satisfy an 8% return objective (given the current inflation rate) currently required to meet this goal. Endowment distributions by designated purpose SCHOLARSHIPS & AID 40% OTHER 6% OTHER ACADEMIC PROGRAMS & SUPPORT 19% GENERAL OPERATIONS 24% CHAIRS & PROFESSORSHIPS 12%

3 Alternative (Hedge-fund TYPE) investments Endowment portfolio Performance comparison Endowment portfolio Diversification Endowment Portfolio The Office of Investments measures its performance against established objectives and in comparison to peer university endowments. Over the past 10 years Baylor s Endowment has outperformed its return objective by 50 basis points, its benchmark by 20 basis points, and the average of U.S. university endowments (as measured by the National Association of College and University Business Officers NACUBO) by over 250 basis points. The Endowment portfolio consists of publicly traded stock, bond and alternative investments along with investments in private equity and real assets. The diversity of this portfolio, along with broad access to non-traditional investments, has proven to provide significantly better returns than a traditional stock and bond portfolio. Stocks and bonds continue to be important parts of the Endowment portfolio. Bonds and other fixed income investments assure there is sufficient liquidity in the portfolio to cover all obligations of the Endowment. Our stock portfolio is well-diversified and focused on quality Investments in some of our private investment funds Park Avenue Plaza Oakland Harbor companies across the globe that serve growing and enduring markets. Alternative investments (largely Hedge Funds) provide access to markets and strategies that often exhibit low correlations with traditional stock and bond investments. Transparency and liquidity are two things we require from all our alternative investment managers. These investments span credit- and equitytype investments and provide flexibility to enhance returns or mitigate risks in the portfolio. Private Equity investments provide opportunities to access different areas of economic activity than possible just through publicly-traded stocks. The illiquidity premium that can be captured with these investments generally allows higher returns to be achieved. Real Assets provide access to investments that provide inflation protection and diversity to the portfolio. Real assets include commercial real estate, oil and gas, and infrastructure investments such as ports and power generation plants. Oil and Gas production Earth Fare (Private Grocery Business) Our stock portfolio is well-diversified and focused on quality companies across the globe that serve growing and/or enduring markets. Corporate stocks among those in our portfolio

4 S&P 500 Index Global Middle Class (GLOBAL POPULATION IN BILLIONS) 10-year Treasury RateS Market Outlook Financial markets have been choppy for the past few years following the financial crisis and ensuing global recession. Economies and financial markets are pressured by burdensome debt levels, geopolitical concerns and changing regulatory environments. But investments now reflect lower pricing that accounts for slower and more volatile growth. Opportunities are being created as capital dislocations occur. The Endowment portfolio is constantly being repositioned to take advantage of opportunities as they are created and to mitigate the ongoing challenges presented by the financial markets. Demographic trends across the globe, along with the eventual reversal of the long-term decline in U.S. interest rates, are two macro forces that are important to consider when making investment decisions. Global population is expected to increase to 8 billion by 2030, while the proportion of the population that is middle class is expected to increase from less than 25% in 2000 to more than 50% in Much of this growth in the middle class will occur in developing nations such as China, India and Brazil. Investments that benefit from this pervasive trend, whether located within those countries or serving them from abroad, are likely to perform better over the long-run. Transitioning to investments that perform better in a generally rising inflation and interest rate environment should also enhance performance over the long term. Conclusion A growing Baylor Endowment is essential to the University in its ability to compete with toptier academic institutions while keeping tuition at an affordable level. Growth is dependent on the success of efforts like The President s Scholarship Initiative and through skilled investment management and strong investment performance. Over the past 10 years Baylor s Endowment has outperformed the return objective established by the Baylor Board of Regents, its benchmark with a similar risk profile, and the average of Endowments at other Universities by a wide margin. The Endowment s diversified portfolio is well positioned to take advantage of future investment opportunities as they present themselves. Establishing and contributing to an endowed fund at Baylor is something that benefits the University today and leaves a legacy long into the future.

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