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Investment Return and Market Commentary
 The PUF posted a positive investment return (net of management fees) of 12.0% for the year ended August 31, 2003. Returns in the year were driven by very strong absolute and relative performance in the absolute return hedge funds, inflation hedge, and domestic and international active equity management asset categories. The absolute return hedge funds enjoyed a 21.3% return for the year, significantly beyond the 5.5% benchmark return for the asset category. Inflation hedge assets also turned in an outstanding performance of 22.2% versus a benchmark return of 13.6%.
Fiscal 2003 will be remembered as a year of two remarkably contrasting periods. The first was the period leading up to the conclusion of the major conflict in Iraq, during which uncertainty and global market weakness prevailed. The second was the subsequent months following the market low registered on March 11, during which risk taking around the world was financially rewarded. Figure E outlines the dramatic contrast in results between these two periods.
Navigating these two disparate investment environments proved challenging. However, by maintaining a diversified asset exposure - including a meaningful allocation to absolute return strategies (hedge funds) - the PUF was able to preserve capital during the dramatic negative results of the first six months. During the expansion period of the last six months, UTIMCO's selection of a growing stable of high quality active managers was a strong contributing factor as those active managers earned high value-added returns. In addition, UTIMCO's decisions to tactically reallocate capital during the spring and summer months away from defensive assets, including fixed income, towards more economically sensitive instruments, such as small cap and emerging markets equities, enabled the PUF to participate in the financial markets' advance in anticipation of a strong global recovery.
For the year, UTIMCO's allocation to emerging markets provided a 26.8% return versus the benchmark results of 12.2%. Likewise, the allocation to small capitalization domestic companies produced a 22.9% result, well ahead of the 14.9% benchmark results. In total, the marketable endowment assets enjoyed a return of 15.1% for the fiscal year, well ahead of the 11.6% benchmark, resulting in a net value-added to the PUF of more than $186.7 million.
Figure F reports the PUF's investments results by asset class compared to each respective benchmark.
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