Finance and Administration - Board of Trustees - The University of ...

Finance and Administration Committee - V. Annual Report of the Treasurer, 2011 - Informationinvestment pool described in the investment policies above,the university places no limit on the amount the universitymay invest in any one issuer. At June 30, 2011, there was nosingle issuer with whom the university had more than fivepercent of its invested funds.FOREIGN CURRENCY RISKForeign currency risk is the risk that changes in exchangerates will adversely affect the fair value of a deposit orinvestment. The university has $1,267,196.84 invested inforeign corporate equities and $305,520.00 invested inforeign corporate bonds at June 30, 2011.ALTERNATIVE INVESTMENTSIn its Consolidated Investment Pool, as part of itsendowment assets, the university has investments in eightysixlimited partnerships, limited companies, corporations,and limited liability corporations (LLCs).These investments include 42 private equity funds, four realestate funds, eighteen natural resource funds, and twentytwohedge funds. The estimated fair value of these assets is$361,231,003.85 at June 30, 2011.Total capital contributions less returns of capital equal$344,693,140.62 at June 30, 2011.The university believes that the carrying amount of itsalternative investments is a reasonable estimate of fairvalue as of June 30, 2011. Because these investmentsare not readily marketable, the estimated value is subjectto uncertainty and, therefore, may differ from the valuethat would have been used had a ready market for theinvestments existed, and such differences could be material.These investments are made in accordance with theuniversity’s investment policy that approves the allocationof funds to various asset classes in order to ensure theproper level of diversification within the endowmentpool. These investments (private equity, real estate assets,natural resources, and hedge funds) are designed to enhancediversification and provide reductions in overall portfoliovolatility. These fair values are estimated by the generalpartner of each limited partnership or manager of eachcorporate entity using various valuation techniques.The methods and assumptions used in estimating fair valuevaries based upon the asset class, but uniformly all startwith the latest audited financial statements for the funds.Most funds issue audited financial statements on a calendaryear basis. Using those audited fair values as a beginningpoint, valuations are adjusted for net capital activity andmarketplace considerations to ascertain the reasonablenessof estimated fair values provided by the fund managers.Marketplace activity includes subsequent independentappraisals for real estate assets, subsequent rounds of capitalfinancings that include new investors for private/ventureequity, and asset confirmations from brokers and fundadministrators for hedge funds.Note 3: Endowment, Annuity,and Life Income AgreementsThere are two categories of university assets which are subjectto long-term investment: endowments and amounts held in trustunder annuity and life income agreements. The investment ofthese funds is governed by the gift instrument and the investmentpolicies established by the Board of Trustees.Effective July 1, 1954, the university adopted the policy ofinvesting endowment assets over which it had full investmentdiscretion (and on which the donor or governing gift instrumentdoes not require separate investment) in a ConsolidatedInvestment Pool. This pooling of investments affords closersupervision of the investment portfolio and provides, regardlessof size, the advantages of participation in a well-diversifiedportfolio of domestic and international equities, private equity,bonds, real estate, and hedge funds. All contributing endowmentsparticipate in the income and capital appreciation of the Poolon a per-share basis commensurate with its contribution to thePool. New endowments purchase shares in the Pool at the end ofeach month at the then current fair value per share, determinedby valuing the Pool at month end fair value and dividing by thenumber of pool units outstanding.If a donor has not provided specific instructions, state law permitsthe university to authorize for spending the net appreciation(realized and unrealized) of the investments of endowment funds.When administering its power to spend net appreciation, theuniversity is required to consider the university’s long-term andshort-term needs, present and anticipated financial requirements,expected total return on its investments, price-level trends, andgeneral economic conditions. Any net appreciation that is spentis required to be spent for the purposes for which the endowmentwas established.The university chooses to spend only a portion of the investmentincome (including changes in the value of investments) eachyear. Under the spending plan established by the university,five percent of a three-year moving average of the fair value ofendowment investments has been authorized for expenditure.The remaining amount, if any, is retained to be used infuture years when the amount computed using the spendingplan exceeds the investment income. At June 30, 2011, netappreciation of $122,264,592.80 is available to be spent, of which$119,700,974.54 is restricted for scholarships and fellowships,libraries, instructional department uses, academic support,and other purposes. The per unit fair value for participatingendowments was $3.276602 at June 30, 2011. Income distributedwas $.17112 per share in 2011, or $32,006,067.50.The university’s consolidated investment pool is invested tomaximize total return rather than current income consistent withprovisions of the Uniform Prudent Management of InstitutionalFunds Act adopted by the State of Tennessee in 2007. The totalreturn for fiscal year 2011 and the three and five years then endedwas 20.6%, 1.2%, and 3.1%, respectively.31648