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ingful efforts to diversify the endowment’s portfolioand produce a more stable earnings stream over time.Graph 3 shows how our assets were invested asof December 31, 2004. While our transition to absolute3. INVESTMENT PORTFOLIO AS OF DECEMBER 31, 2004Fixed Income17.6%return strategies is now complete, we have not yetachieved our investment objectives in real estate. Givenmarket conditions and limited opportunities to investquickly in this segment, we are being patient in enteringthis market, although we remain committed to thelong-term advantages of investing in this asset class.Because of the strong performance of our investmentportfolio in the past two years, and our continuedDomestic Equities44.9%Cash/Temporary Investments1.1%International Equities18.5%Private Equities8.6%Absolute Return Strategies9.3%discipline in managing our administrative expenses,we expect to increase total grants in 2005 by13.4 percent, to approximately $61 million. However,it is important to recognize that, for the Foundation’sendowment, returns in the near future will likely notmatch the strong returns of 2003 and 2004. As supportfor this cautionary note, through May 2005, theFixed Income18%2. NEW STRATEGIC ASSET ALLOCATIONInternational Equities16%financial markets were essentially flat for the year,producing no return at all. As a result, we remaincautious in managing our expectations.The Foundation’s investment program is designedto maximize our financial resources in support ofour mission to expand opportunity for the people ofCalifornia. These annual updates offer an opportunityto reflect on our progress, to communicate recentdevelopments in our investment program, and, mostimportantly, to demonstrate our ongoing commitmentto transparency in all aspects of the Foundation’soperations.Domestic Equities38%Private Equities10%Private Real Estate10%Absolute Return Strategies8%John R. Jenks, CFAChief Investment Officer and TreasurerJuly 200539