ENDOWMENT FUNDS

Net Asset Value of Endowment Funds Chart

EF Feature Story Did you know.... a new lecture series is drawing large crowds to the Marine Science Institute in Port Aransas, Texas, an extension of The University of Texas at Austin's College of Natural Sciences? Thanks to the Laura Randall Schweppe Endowed Lecture Series in Marine Science, this new lecture series at the Marine Science Institute is intended to increase public awareness of the marine sciences while raising the profile of the Institute. H. Irving Schweppe, M.D., with his daughters, Anne Schweppe Ashmun and Jane Schweppe, funded the series in honor of his late wife. Lecture series presenters have included "the Shark Lady," Dr. Eugenie Clark, a world-renowned authority on sharks, and Dr. Les Watling, whose work on habitat destruction caused by commercial fishing activities was featured in the movie The Perfect Storm. Dr. Schweppe hopes that the attraction of star researchers will raise the Institute's scientific profile by fostering a high-powered academic environment for faculty development. At the same time, the visiting scholars can contribute to the center's academic mission by spending several days in workshops with students and staff. The Marine Science Institute is the oldest marine laboratory on the Texas Gulf coast and began in 1946 as a series of modest wooden structures. The University of Texas at Austin has since invested steadily in the facility, including major modern steel and concrete laboratory expansions in 1961, 1973, and 1974. The latest building complex was completed in 1983 and includes an auditorium, library, and visitor's center. Permanent University Fund bonds provided approximately $3.8 million for these structures. The Institute's annual research support is $4.4 million per year. Through the PUF academic excellence program, the Institute receives approximately $500,000 per year for research support. In addition to PUF support, the Institute receives funding of approximately $325,000 per year from fourteen endowments invested in The University of Texas System Long Term Fund. These endowments have a combined value of $7.7 million as of August 31, 2001. The Marine Science Institute is also funded through general budget funding, sponsored-project funding, and state-appropriated funds. Since 1946, this institute has trained students and top-flight researchers in marine biology. Every year, thousands of people visit the center's 72-acre beachfront complex to explore the abundance of Texas marine life through their aquariums, displays, and field excursions. As the premier research center for Gulf Coast marine sciences, the Marine Science Institute has a strong impact on Texas. In addition to education, it contributes to the fishing and tourism industries, works on environmental problems, and conducts a wide range of marine research that benefits the citizens of Texas and the nation. The Marine Science Institute is truly a Texas treasure.

Overview

As of August 31, 2001, the UT Board was the fiduciary for four major endowment fund groups with a combined value equal to $11,447.4 million. Effective March 1, 2001, two of the fund groups, the Permanent Health Fund (PHF) and the Long Term Fund (LTF), contributed their investments to the General Endowment Fund (GEF) in exchange for unit ownership in the GEF. The creation of the GEF will produce increased efficiencies in managing investments, reduce costs, and streamline reporting. The GEF is not included in assets under management since its investment value is included in the net asset value of the PHF and the LTF. However, since the GEF is the investment vehicle for the PHF and the LTF, the GEF's investment strategy and results are integral parts in evaluating the PHF's and the LTF's investment performance. A section of this report has been devoted to the GEF.

The UT System and other institutional beneficiaries of the endowment funds managed by UTIMCO provide educational and health care services for the State of Texas. The ability of these institutions to provide quality services throughout the next century will depend on the maintenance of long-term financial equilibrium by these institutions. Maintenance of such equilibrium requires, among other financial objectives, the preservation of endowment purchasing power. Endowment funds are permanent funds by their nature with the result that endowment purchasing power must be preserved in perpetuity. The endowment must provide future generations the same level of economic support for scholarships, teaching, research, and other educational programs as it provides today.

Investment Objectives

Measured quantitatively, the preservation of endowment purchasing power requires the simultaneous achievement of two contradictory objectives:

• increase the amount of annual distributions to endowment beneficiaries at a rate at least equal to the average rate of inflation, and
• increase the market value of the endowment fund (after annual distributions) at a rate at least equal to the average rate of inflation.

These objectives are contradictory because higher rates of annual distributions require larger annual withdrawals from the endowment fund. Larger withdrawals reduce the endowment fund's ability to grow over time.

Factors Affecting an Endowment Fund's Purchasing Power

The maintenance of endowment purchasing power is affected by four major factors: a) fund investment return, b) fund expenses, c) the rate of inflation, and d) fund distributions. UTIMCO attempts to preserve endowment purchasing power by distributing from the endowment no more than the average expected annual investment return after expenses and inflation.

a) Fund Investment Return

The investment returns and accompanying risk generated by the endowment funds are determined largely by the allocation of fund assets to different classes of investments. The Endowment Policy Portfolio is an efficient optimized mix of the multiple asset classes that produces the highest return with the lowest risk profile. The Endowment Policy Portfolio return is the index or benchmark return for endowment funds. This return is the sum of the weighted benchmark returns for each asset class comprising the Endowment Policy Portfolio. For fiscal year 2001 the Endowment Policy Portfolio posted a negative return of 5.71%. The expected average annual return of the Endowment Policy Portfolio is 9.35% with an associated expected risk of 10.44% (as measured by standard deviation). This is interpreted by stating that 66.7% of the time the endowment return in any given year is expected to be within a range of (1.09)% to 19.79%. For fiscal year 2001, the endowment fund returns were outside the range, posting negative returns of 8.6%, 9.2%, and 8.8% for the PUF, PHF, and LTF, respectively.

The neutral asset allocation underlying the Endowment Policy Portfolio as of August 31, 2001, was the following:
Endowment Policy Portfolio Neutral Asset Allocation Chart

The actual average annual investment return of the current Endowment Policy Portfolio over the last 10 fiscal years is 10.78% and was quite volatile as presented below:
Endowment Policy Portfolio Returns (Benchmark) Chart

b) Fund Expenses

The endowment funds incur expenses associated with strategy and analysis, portfolio management, custody and safekeeping, accounting, and other investment related functions. These expenses are allocated to the endowment funds in proportion to their asset values and certain activity levels. Fund expenses are paid from fund assets and are not netted against the distributions.

c) Rate of Inflation

Inflation erodes the value of endowment funds by reducing fund purchasing power over time. Investors have no control over the rate of inflation. UTIMCO must invest fund assets so as to maximize the risk adjusted real return on investment. Inflation is cyclical resulting in periods of increasing and decreasing fund purchasing power. The long-term average annual rate of inflation since 1926 is approximately 3.2% with a range of (10.3%) to 18.1%.

d) Fund Distributions (Spending)

Annual distribution, or spending, from endowment funds (except for the Separately Invested Funds) is controlled by a spending policy (as approved by the UT Board). The key to preservation of endowment purchasing power over the long-term is control of spending through a target distribution rate. This target rate should not exceed the endowment's average annual investment return after fund expenses and inflation. The target distribution rate for endowments managed to the Endowment Policy Portfolio is currently 4.5% of the fund's asset value. The Long Term Fund and Permanent Health Fund distributions are increased annually at an average rate of inflation provided that the distribution rate remains within a range of 3.5% to 5.5% of fund asset value. Annual Permanent University Fund distributions to the Available University Fund are currently based on 4.5% of the Permanent University Fund's average net investment value. Beginning September 1, 2002, the Permanent University Fund distributions will be based on 4.75% of the Permanent University Fund's average net investment value.

Actual investment returns for any given year may vary significantly from the expected average annual investment return. Therefore, the endowment distribution policies use a smoothing formula to reduce annual volatility in spending and to maintain spending on a sustainable basis. The historical distribution rates for the Permanent University Fund and Long Term Fund are presented below:
Endowment Funds Average Historical Distribution Rates Chart

Combining these four factors, the higher the fund investment return and the lower the rates of fund expenses, inflation, and spending, the greater the ability to increase the purchasing power of the endowment assets and the spending stream over time. Preservation of endowment purchasing power over the long run is currently targeted by UTIMCO using the following expected long-term annual rates for the Endowment Policy Portfolio:
Preservation of Endowment Purchasing Power Chart

Permanent University Fund

Permanent University Fund (PUF) Highlights Chart

PUF Beneficiaries

The University of Texas System

UT Arlington
UT Austin
UT Dallas
UT El Paso
UT Permian Basin
UT San Antonio
UT Tyler
UT Southwestern Medical Center at Dallas
UT Medical Branch at Galveston
UT Health Science Center at Houston
UT Health Science Center at San Antonio
UT M. D. Anderson Cancer Center
UT Health Center at Tyler

The Texas A&M University System

Prairie View A&M University
Tarleton State University
Texas A&M University
    Texas A&M at Galveston
The Texas A&M University Health Science Center
Texas Agriculture Experiment Station
Texas Agricultural Extension Service
Texas Engineering Experiment Station
Texas Engineering Extension Service
Texas Forest Service
Texas Transportation Institute

PUF Feature Story Did you know.... up to ten percent of all diagnosed cases of Amyotrophic Lateral Sclerosis (ALS), also known as "Lou Gehrig's disease," may be inherited? Offspring in families with a history of ALS have a 50 percent chance of inheriting the gene mutation that causes the disorder. Dr. John Hart, Ph.D., Assistant Professor of Biochemistry at the UT Health Science Center at San Antonio (UTHSCSA), is edging closer to discovering the cause of the inherited form of ALS. His research has been facilitated by the UTHSCSA's utilization of $7 million of PUF bond proceeds to construct core research facilities. These core research facilities greatly assist scientists, such as Dr. Hart, in their research. ALS was first diagnosed in 1869 and is frequently referred to as "Lou Gehrig's disease" in memory of the famous baseball player who died of ALS in 1941. ALS is a degenerative disease of the nervous system, affecting the brain cells (motor neurons) that carry impulses from the brain and spinal cord to the muscles. This progressive, fatal, neurodegenerative disorder affects an estimated 30,000 Americans. The two forms of ALS are the "sporadic" version, which may affect anyone at any time, and the inherited form. In his research of the inherited form of ALS, Dr. Hart is looking at mutations in a protein called copper-zinc superoxide dismutase (CuZnSOD) that may contribute to the death of motor neurons. Using X-ray crystallography (a process to determine accurate molecular structure) and analytical ultracentrifugation (solution state analyses of macromolecules), Dr. Hart's group hopes to view 60 different mutant CuZnSOD structures and compare them to the normal structure. The desired result of Dr. Hart's research will be a drug therapy that interacts with the chemistry of the mutated proteins to prevent or slow the degeneration of motor neurons in ALS patients. Dr. Hart's efforts have received grant support from the ALS Association and the National Institutes of Health (NIH).

Overview

The Permanent University Fund (PUF) is a public endowment contributing to the support of 18 institutions and 6 agencies in The University of Texas System (UT System) and The Texas A&M University System (TAMU System). The Texas Constitution of 1876 established the PUF through the appropriation of land grants previously designated to The University of Texas, as well as an additional one million acres. Another state grant of one million acres was made in 1883.

PUF Lands, which today consist of more than 2.1 million acres in 24 counties primarily in West Texas, are managed by the UT System under the direction of its Board of Regents. In administrating PUF Lands, the UT System's mission is to generate income and apply intensive conservation measures to maintain and/or improve the productivity of the lands for the benefit of the PUF. In keeping with this purpose, the lands are managed to produce two streams of income: one from oil, gas, and mineral interests, and the other from surface interests such as grazing.

Surface acreage of the sparsely populated PUF Lands has been leased primarily for grazing and easements for power lines and pipelines. As mandated by the Constitution, all surface lease income is deposited in the Available University Fund (AUF). Mineral income generated by PUF Lands consists primarily of bonuses and rentals from the periodic sale of mineral leases and royalties on gross revenues from oil, gas, and sulpher production. The Constitution requires that all income from the sale of PUF Lands and leasing of mineral interests be retained within the PUF and invested in PUF Investments.

PUF Investments ($7,540.1 million)

PUF Investments are invested in a diversified portfolio of broadly defined equity, fixed income, and absolute return investments. Distributions from PUF Investments to the AUF are allocated two-thirds for the benefit of eligible institutions of the UT System and one-third for the benefit of eligible institutions of the TAMU System. PUF distributions paid to the AUF are expended by each university system to fund two major programs as follows:

Debt Service on PUF Bonds Issued to Fund Capital Expenditures

The Constitution authorizes the UT Board and the A&M Board to issue bonds (PUF bonds) payable from their respective interests in PUF distributions. PUF bonds are issued to finance construction and renovation projects, major library acquisitions, and educational and research equipment at the 18 eligible campuses and six agencies of the UT and TAMU Systems. The UT Board and the A&M Board are constitutionally authorized to issue bonds secured by each system's interest in PUF distributions in an amount not to exceed 20% and 10%, respectively, of the book value of PUF assets at the time of issuance. The $977.3 million of outstanding PUF bonds were rated AAA, Aaa and AAA by Fitch IBCA, Moody's Investors Service, Inc., and Standard & Poor's Inc., respectively, as of fiscal year end.

Academic Excellence Programs

PUF distributions, after payment of debt service on PUF bonds, are used to fund academic excellence programs at UT Austin, Texas A&M University, and Prairie View A&M University. Expenditures for excellence programs encompass library enhancements, specialized science and engineering equipment, student counseling services, graduate student fellowships, and National Merit and other scholarships.

PUF Distributions to the AUF

Since 1923, a cumulative $5,670.4 million, or approximately 57.8% of the $9,811.8 million of cumulative investment return generated on PUF Investments, has been distributed to the AUF in support of the UT System and the TAMU System.
PUF's Growth Since Inception Chart

With the amendment of the Constitution through Proposition 17 in 1999, distributions to the AUF are from the "total return" on PUF Investments, including income return as well as capital gains (realized and unrealized). Proposition 17 directed the UT Board to establish a distribution policy that provides stable, inflation-adjusted distributions to the AUF and preserves the real value of the PUF Investments over the long term. To achieve this, the annual distribution was established at 4.5% of the prior 12 quarters' average net asset value of the PUF Investments, as determined each February 28 for the following fiscal year. The distribution percentage for the year ending August 31, 2002, will remain at 4.5%. The UT Board has increased the distribution rate to 4.75% for the year ending August 31, 2003.

The distributions to the Available University Fund are subject to the following overriding conditions:

1. A minimum amount equal to the amount needed to pay debt service on PUF Bonds;
   
2. No increase from the preceding year (except as necessary to pay debt service on PUF bonds) unless the purchasing power of PUF Investments for any rolling 10-year period has been preserved;
   
3. A maximum amount equal to 7 percent of the average net fair market value of PUF Investments in any fiscal year, except as necessary to pay debt service on PUF Bonds.

Distributions from the PUF to the AUF increased by 6.6% from $297.6 million in fiscal year 2000 to $317.1 million in fiscal year 2001.

Contributions

Fiscal year 2001 contributions of PUF Lands mineral income to PUF Investments increased by 39.1% from $83.1 million to $115.6 million and represented 1.48% of the average value of PUF Investments during the year. Although the contributions from PUF Lands increased in 2001, growth of the PUF through PUF Lands' contributions will not sustain the distributions needed to fund the many important programs earmarked by the institutions and agencies of UT System and TAMU System. Today, preservation of PUF endowment purchasing power is critically dependent on retained investment return as evidenced by examining the components of growth in the value of PUF Investments since 1976.
Growth of PUF Investments 1976-2001 Chart

PUF Feature Story Did you know.... construction has already begun on the cornerstone structure of The Texas Medical Center Research Campus, an integrated research campus fostering collaboration among multiple Texas medical centers including The University of Texas M. D. Anderson Cancer Center, The University of Texas Health Science Center at Houston, and Baylor University? Thanks in part to the Permanent University Fund, The University of Texas M. D. Anderson Cancer Center is constructing a major new biomedical research facility, the George and Cynthia Mitchell Basic Sciences Research Building. The $174 million project is being funded by $30 million of PUF bond proceeds, $75 million in private philanthropy, and the remainder from other institutional sources. The building was named after George and Cynthia Mitchell whose generous donation of $20 million was the third largest single donation in UT M. D. Anderson's 60-year history. Within 505,000 square feet, the George and Cynthia Mitchell Basic Sciences Research Building will contain six floors of modern laboratories. It will also contain a vivarium, or quarters for small animal research, an auditorium, conference facilities, and classroom space for the UT Graduate School of Biomedical Sciences, a shared program of UT M. D. Anderson Cancer Center and UT Health Science Center at Houston. The innovative and modern design of The University of Texas M. D. Anderson Cancer Center's new biomedical research facility contains movable walls to allow lab spaces to be reconfigured in a matter of hours. This design contains interstitial space, hollow building layers sandwiched between lab floors to house plumbing, air circulation, wiring and flexible areas for any over-sized equipment needed for today's intricate research endeavors. Because of the interstitial space, as future needs dictate, labs can be customized without interrupting neighboring projects. Completion is anticipated in late summer 2003.

Investment Return

The PUF posted a net negative return of 8.6% (net of investment management fees) for the year ended August 31, 2001, underperforming its benchmark by 2.9%. The chart below presents the PUF's performance versus the Endowment Policy Portfolio benchmark. The attribution column in the chart reports which asset classes contributed to the PUF's outperformance or underperformance relative to its benchmark return of negative 5.7%. The PUF's relative underperformance of 2.9% is a result of outperformance of 1.0% for total marketable assets and underperformance of 3.9% for nonmarketable alternative assets. Although nonmarketable alternative assets, or private investments, experienced a decline of 11.0% during the year, the internal rate of return for this asset class since inception has been 16.7% compared to its benchmark return of 17.0%.
PUF Investment Performance Chart

Investment Expenses

Total expenses related to the management of PUF Investments were $13.1 million during 2001 versus $12.0 million in 2000, an increase of 9.2%. The increase was primarily associated with the addition of external investment managers to the PUF to convert the fund's asset mix to the Endowment Policy Portfolio. Although the conversion to the Endowment Policy Portfolio began in fiscal year 2000, the year ended August 31, 2001, reflects a full year of expenses associated with a more complex asset structure. PUF expenses represent .17% and .15% of PUF's average net asset value during the years ended August 31, 2001 and 2000, respectively.

Preservation of PUF Investments Purchasing Power

Preserving PUF Investments purchasing power over time is dependent on the PUF's ability to meet its distribution policy objectives. These objectives, which are somewhat contradictory, are generally optimized through a total return investment and distribution approach exemplified by the Endowment Policy Portfolio.

PUF distribution policy objectives are to:

• Provide a predictable, stable stream of distributions over time

  For the preceding five-year period, starting with the fiscal year ended August 1997, the rate of change in the PUF's annual distribution was 4.6%, (2.0%), 1.5%, 12.8%, and 6.6%, respectively.

• Ensure that the inflation adjusted value of distributions is maintained over the long-term

  The UT Board has established a distribution policy that provides stable, inflation adjusted annual distributions to the AUF and preserves the real value of the PUF Investments over the long-term. To achieve this, the annual distribution was established at 4.5% of the prior twelve quarters' average net asset value of the PUF determined each February 28th for the following fiscal year. The rate has been increased by the UT Board to 4.75% for the fiscal year beginning September 1, 2002.

• Ensure that the inflation adjusted value of PUF Investments after distributions is maintained over the long-term

  Maintaining purchasing power of PUF Investments should be viewed over long-term investment cycles. Despite investment losses for fiscal year 2001 and years of overweighting the PUF in lower returning fixed income investments, the purchasing power of PUF Investments for the five and ten-year periods ending August 31, 2001, increased by an average of 3.68% and 2.84%, respectively.

  Preservation of PUF Purchasing Power Chart

PUF Feature Story Did you know.... seventy-two emergency response professionals trained at the Texas Engineering Extension Service were called to help in searching for survivors of the September 11, 2001 World Trade Center disaster? As the tragic events of September 11, 2001, unfolded, Texas Task Force 1 (TX-TF1) was mobilized to respond. On September 19, one-half of TX-TF1 dug into a twelve-hour shift at the World Trade Center site at 7:00 p.m. The second half replaced them at 7:00 a.m. The round-the-clock mission would continue until Tuesday, September 25. During each twelve-hour shift, team members would search "voids": uncovered openings within the rubble. Telescoping microphones and cameras would inspect the void, as highly trained Urban Search and Rescue dogs tracked a multitude of scents. Once an area was determined to be stable, team members would then inspect the openings and tunnel-in as far they could, looking for survivors. It was TX-TF1 that first discovered parts of an airplane, including landing gear, wiring, seats, and the fuselage. On another day, work at the site stopped and was replaced by applause from others on site, as the team completed the difficult task of using high-angle rescue techniques to safely scale a large, unstable mass of metal and cut it into pieces with a blowtorch for removal. TX-TF1 is one of only 28 Federal Emergency Management Agency Urban Search and Rescue teams in the country. Team members are experts in locating and extricating victims trapped in collapsed structures and confined spaces. TX-TF1 also is one of six national Weapons of Mass Destruction teams trained to work in chemical, biological and/or radiological environments, carrying specialized equipment. The Texas Engineering Extension Service (TEEX), a member of Texas A&M University System, is training today's emergency responder to be prepared. PUF allocations provided $2 million in support toward the Emergency Operations Training Center, a 14,000 square- foot state of the art education and communication technology center. The Emergency Operations Training Center complements the training received in the outdoor classroom at "Disaster City". "Disaster City" is a sixty-acre outdoor classroom where emergency responders are trained through a multitude of realistic, hands-on scenarios. Collapsed buildings, overturned rail cars, and mock hazardous material containers are just a few of the tools used to practice vital emergency response techniques. New York and Washington D.C. have demonstrated that emergency responders face challenges unlike any they have seen in America's history, and they have to be properly trained and prepared. Even after the headlines fade, the threat of similar events continues to permeate our daily lives. "TEEX is committed to delivering the best training possible, in the finest facilities available anywhere," says G. Kemble Bennett, Director, TEEX. "PUF allocations have helped enable us to do just that."

Permanent Health Fund ($881.4 million)

Ownership of Permanent Health Fund Chart

PHF Beneficiaries

UT El Paso
UT Health Science Center at Houston
UT Health Center at Tyler
UT Southwestern Medical Center at Dallas
UT Medical Branch at Galveston
UT Health Science Center at San Antonio
UT M. D. Anderson Cancer Center
Regional Academic Health Center
Texas A&M University Health Science Center
University of North Texas Health Science Center at Fort Worth
Texas Tech University Health Science Centers
Baylor College of Medicine
Higher Education Nursing, Allied Health, and Other Health-Related Programs
Minority Health Research & Education Programs

Overview

The Permanent Health Fund (PHF) celebrated its two-year anniversary on August 31, 2001. The UT Board of Regents established the PHF in August 1999 as the internal fund for the pooled investment of state endowment funds for health-related institutions of higher education, created with proceeds from state tobacco litigation.

The PHF's roots began in 1996 when the Attorney General filed a lawsuit on behalf of the State of Texas against the tobacco industry. The lawsuit sought damages, including, but not limited to, recovery of public health expenditures by the state. The lawsuit also sought that the tobacco industry be enjoined from using marketing or advertising campaigns that encourage minors to purchase and consume tobacco products.

In 1998, the tobacco industry and the State of Texas entered into the Texas Settlement Agreement. In 1999, the state received a first year settlement payment of $1,091 million and projected the receipt of an additional $691 million over the 2000-2001 biennium. Consistent with the long-term educational and public health motives underlying the lawsuit, the 76th Legislature appropriated $1,015 million of these proceeds to establish three permanent funds and thirteen higher education endowments.

• The Permanent Health Fund for Higher Education - $350 million

  The distributions from this endowment finance programs that benefit medical research, health education, and treatment programs at 10 health-related institutions of higher education.

• The Permanent Fund for Higher Education Nursing, Allied Health, and Other Health Related Programs - $45 million

  The distributions from this endowment finance grants to public institutions of higher education that offer upper-level academic instruction and training in the fields of nursing, allied health, or other health-related education.

• The Permanent Fund for Minority Health Research and Education - $25 million

  The distributions from this endowment finance grants to institutions of higher education, (including Centers for Teacher Education), that conduct research or educational programs that address minority health issues or form partnerships with minority organizations, colleges, or universities to conduct research and educational programs that address minority health issues.

• Permanent Funds for Health Related Institutions - $595 million

  The distributions from these thirteen higher education endowments fund research and other programs at thirteen Texas institutions of higher education that benefit public health.

The 76th Legislature also designated the State Comptroller, the Board of Regents of the UT System or the governing boards of the beneficiary institutions of the higher education endowments as the administrators of these funds. Pursuant to investment management services agreements between the UT Board, the State Comptroller, and certain other institutions of higher education, UTIMCO was designated as the investment manager for the three permanent funds and ten of the thirteen higher education endowments. During the fiscal year 2000 the University of North Texas Science Center at Fort Worth contributed $25 million to the PHF, increasing UTIMCO's management of the higher education endowments from ten to eleven.

As of March 1, 2001, the PHF purchased units in the newly created General Endowment Fund (GEF). Prior to March 1, 2001, the PHF's investments were managed separately. The initial number of units purchased was based on the PHF's contribution of its investment assets as of February 28, 2001. To understand the details of the PHF's investment results for the year, the GEF section of this report should also be consulted.
PHF Financial Highlights Chart

Contributions

The PHF did not receive any new contributions during the year.

Investment Return

The PHF posted a negative investment return of 9.2% (net of investment management fees) for the year ended August 31, 2001, underperforming its benchmark by 3.5%. Beginning with the purchase of General Endowment Fund (GEF) units on March 1, 2001, the PHF no longer invests in individual securities except for the GEF units and a negligible amount of cash. Therefore, the PHF's investment return is dependent on the GEF return. The GEF invests in a broad mix of investments and is actively managed to the Endowment Policy Portfolio.

The chart at the top of the next page presents the PHF's performance versus the Endowment Policy Portfolio benchmark. The attribution column in the chart reports which asset classes contributed to the PHF's outperformance or underperformance relative to its benchmark return of negative 5.7%. The PHF's relative underperformance of 3.5% is the result of outperformance of .1% for total marketable assets and underperformance of 3.6% for nonmarketable alternative assets. Although nonmarketable alternative assets, or private investments, experienced a decline of 6.8% during the year, the internal rate of return for this asset class since inception (refers to the GEF's investment and the time period when originally acquired by the PHF and LTF) has been 14.6%.
PHF Investment Performance Chart

Expenses

Expenses incurred by the PHF include UTIMCO's management fee, external manager investment fees, consulting fees, custodial fees, and various other expenses. The PHF expenses were paid directly from PHF assets during the first six months of the year. Beginning March 1, 2001, with the PHF's investment in the GEF, external manager fees, consulting fees, custodial and other operating expenses were paid by the GEF. The PHF continues to pay the UTIMCO management fee and other operating expenses directly attributed to its separate management costs. The PHF expenses for the year, including its share of the GEF expenses, were $1.9 million, or .20% of the PHF's average net asset value. During fiscal year 2000, the PHF's fees totaled $1.9 million, and represented 0.20% of the PHF's average net asset value.

Distributions

Consistent with the UT Board's endowment spending policy for the Endowment Policy Portfolio, the long-term target distribution rate for the PHF is 4.5% of the PHF's net asset value. The distribution rate for the PHF was $.046 and $.045 per unit for the years ending August 31, 2001 and 2000, respectively. The initial distribution rate of $.045, or 4.5% of initial market value, was adjusted for the rate of inflation to $.046 per unit for fiscal year 2001. The distribution rate has been increased by the UT Board to $.047 per unit for fiscal year 2002.

Preservation of Purchasing Power

Preserving the PHF's purchasing power over time is dependent on the PHF's ability to meet its distribution policy objectives.

PHF distribution policy objectives are to:

• Provide a predictable, stable stream of distributions over time

  For the year ended August 31, 2001, the increase in the PHF's distribution rate per unit was 2.2%.

• Ensure that the inflation adjusted value of distributions is maintained over the long-term

  The PHF's distribution rate was increased by 2.2% on a nominal basis and declined by .5% on an inflation-adjusted basis over the one year period ended August 31, 2001.

• Ensure that the inflation adjusted value of PHF assets after distributions is maintained over the long-term

  As reflected in the chart below, the PHF's purchasing power over the two-year period has not been maintained and is negative at 4.83%. Equity markets may produce negative returns in any given year, but long term have provided better inflation adjusted returns when compared to fixed income investments. As such, preservation of the PHF's purchasing power should be viewed over longer-term investment cycles.

  Preservation of PHF Purchasing Power Chart

Long Term Fund ($2,843.3 million)

Ownership of Long Term Fund Chart

LTF Beneficiaries

UT Arlington
UT Austin
UT Brownsville
UT Dallas
UT El Paso
UT Pan American
UT Permian Basin
UT San Antonio
UT Health Science Center at Houston
UT Tyler
UT Health Center at Tyler
UT Southwestern Medical Center at Dallas
UT Medical Branch at Galveston
UT Health Science Center at San Antonio
UT M. D. Anderson Cancer Center
UT System

Overview

The University of Texas System Long Term Fund (LTF) is an internal UT System mutual fund for the pooled investment of 5,658 privately raised endowments and other long-term funds of the 15 component institutions of the UT System. The LTF is structured as a mutual fund in which each endowment or account purchases units at the LTF's market value per unit. Cash distributions are paid quarterly, on a per unit basis, directly to the UT System institution of record. Distributions from the LTF fund scholarships, teaching, research, and medical liability insurance programs across the UT System.

On March 1, 2001, the LTF purchased units in the newly created General Endowment Fund (GEF). The initial number of units purchased was based on the contributed value of the LTF's investment assets as of February 28, 2001. Future LTF contributions will be invested in the GEF on a quarterly basis. These contributions will purchase additional GEF units at the prevailing market value price per unit. To understand the details of the LTF's investment results for the year, the GEF section of this report should also be consulted.
LTF 2001 Financial Highlights Chart

The chart below illustrates the substantial growth in the LTF's net asset value. New contributions and investment return (after expenses and distributions) produced five-year asset growth of 39.0% and 61.0%, respectively.
LTF Long Term Fund Growth 1978-2001 Chart

Contributions

Contributions to the LTF increased by 3.2 % during fiscal year 2001, reflecting the continued generosity of donors to the UT System institutions. Fiscal year 2001 contributions of $113.2 million represented 3.8% of the average value of LTF net assets during the year.

Investment Return

The LTF posted a negative investment return of 8.8% (net of investment management fees) for the year ended August 31, 2001, underperforming its negative benchmark return by 3.1%. The chart below presents the LTF's performance versus the Endowment Policy Portfolio benchmark. Beginning with the purchase of General Endowment Fund (GEF) units on March 1, 2001, the LTF no longer invests in individual securities except for the GEF units and a negligible amount of cash. Therefore, the LTF's investment return is dependent on the GEF return. The GEF invests in a broad mix of investments and is actively managed to the Endowment Policy Portfolio.

The attribution column in the chart reports which asset classes contributed to the LTF's outperformance or underperformance relative to its benchmark return of negative 5.7%. The LTF's relative underperformance of 3.1% is the result of outperformance of .4% for total marketable assets and underperformance of 3.5% for nonmarketable alternative assets. Although nonmarketable alternative assets, or private investments, experienced a decline of 9.4% during the year, the internal rate of return for this asset class since inception (refers to the GEF's investment and the time period when originally acquired by the PHF and LTF) has been 14.6%.
LTF Investment Performance Chart

LTF Feature Story Did you know.... because snakes are asocial beings, the female snake has to emit a chemical to attract the male? The fact that snakes are loners made their mating behavior an intriguing topic of research for Dr. Neil Ford, a University of Texas at Tyler biology professor who has gained international recognition for his research in herpetology, authorship of scientific papers and presentations at conferences across the globe. Dr. Ford began studying snake reproduction as an undergraduate student at the University of Kansas and much of his early research focused on pheromones, a chemical secreted by the female snake to attract the male. Dr. Ford continues to study the strategies that snakes use to control reproductive traits and hopes that the information he gains in understanding the energetic control of reproduction in snakes may be able to help other researchers. Dr. Ford's studies determine how variation in energy intake effects snake fertility. Snakes' reproduction is strongly influenced by variation in food intake and snakes are good models for this type of study because they eat their food whole. Dr. Ford can easily measure the calories consumed, and can better regulate the food intake and see how it effects reproduction. In his research, the snakes are divided into a low caloric diet group and a high caloric diet group. Low caloric diet groups are fed the minimum amount to maintain weight to survive. High caloric diet groups are fed the maximum amount that the body can consume. This allows Dr. Ford to imitate the many conditions that exist for snakes in the wild. Interestingly, female snakes will still reproduce on the low caloric diet and will not become overweight from the overfeeding. Instead, this overfeeding allows the female to produce more or larger young, or reproduce more often in the year, depending on the species of snake. Most snakes reproduce usually just once a year, but with more food, some can reproduce several times a year. Dr. Ford conducts his studies in the Ophidian Research Colony at UT Tyler, a snake laboratory that he made an official research lab in 1989, allowing it to become self-sustaining. The Ophidian Research Colony snake lab was established after several years of scientific research on reproduction in snakes, a result of which was a surplus of animals. The Ophidian Research Colony now supplies captive-raised snakes to other scientists around the country and these scientists explore a variety of concerns affecting humans, including spatial learning, environmental toxins, retinal damage by lasers and embryological development. In 2001, Dr. Ford with funds from donors established the Ophidian Research Colony Endowment Fund endowment with a $10,000 gift. The endowment is invested in the LTF. Distributions from the endowments will be used to help cover some of the costs to operate the lab, which has about 400 snakes of a dozen species.

Expenses

Expenses incurred by the fund include UTIMCO's management fee, investment management and consulting fees from external managers, custodial fees, and various other expenses. The LTF expenses were paid directly from LTF assets during the first six months of the year. Beginning March 1, 2001, with the LTF's investment in the GEF, external manager fees, custodial and other operating expenses were paid by the GEF. The LTF will continue to pay the UTIMCO management fee and other operating expenses directly attributed to its separate management costs. The LTF's expense ratio which includes its share of the GEF's expenses is presented in the chart to the right. The LTF's total expense ratio of .23% for fiscal year 2001 is less than the average estimate of .35%.
LTF Expense Ratios Chart

Distributions

Consistent with the spending policy for the Endowment Policy Portfolio, the long-term target distribution rate for the LTF is 4.5% of the LTF's net asset value. Distributions are increased annually at the average rate of inflation provided that the distribution rate remains within a range of 3.5% to 5.5% of LTF net asset value. UTIMCO smoothes annual spending by calculating LTF net asset value for distribution purposes as the average value for the trailing twelve quarters. As of August 31, 2001, the distribution rate was 4.12% of the twelve-quarter average.

The LTF's average annual distribution rate per unit was increased by 6.5% from $0.230 per unit to $0.245 per unit during the year 2001. This rate increase, approved by the UT Board in May of 2000, was greater than the rate of inflation and reflected the above average price appreciation experienced by the LTF in previous years. The fiscal 2001 distributions, at $0.245 per unit, represented 4.4% of the LTF's five-quarter average market value during the year.
LTF Term Fund Average Distributions Rate Per Unit Chart

Preservation of Purchasing Power

Preserving LTF's purchasing power over time is dependent on the LTF's ability to meet its distribution policy objectives.

LTF distribution policy objectives are to:

• Provide a predictable, stable stream of distributions over time

  For the preceding five-year period, starting with the fiscal year ended August 31, 1997, the rate of increase in the LTF's distribution rate per unit was 0.0%, 11.4%, 7.7%, 9.5% and 6.5%.

• Ensure that the inflation adjusted value of distributions is maintained over the long-term

  The LTF distribution rate per unit was unchanged from the period August 31, 1992, through August 31, 1997. The level of distributions was held constant in order to ensure long term financial equilibrium and to bring the LTF's distribution rate to within the average of other colleges and universities. The LTF's distribution rate per unit increased from $0.175 to $0.245 per unit or by 40% on a nominal basis and by 30% on an inflation-adjusted basis over the four-year period ended August 31, 2001.

• Ensure that the inflation adjusted value of LTF assets after distributions is maintained over the long-term

  The LTF's net assets have increased in purchasing power by 4.58% and 3.53% for the five and ten-year periods ended August 31, 2001, respectively. Fiscal year 2001 saw a reversal in equity market returns and the LTF experienced a loss in purchasing power of 15.94%. However, the LTF's distribution rate was controlled in previous years when the LTF experienced above average asset growth during periods of low inflation. As a result, the LTF is positioned to meet its targeted distribution rate in the future.

  Preservation of LTF Purchasing Power Chart

General Endowment Fund ($3,723.9 million)

General Endowment Fund Ownership Chart

Overview

The University of Texas System General Endowment Fund (GEF) is a new fund, established March 1, 2001, by the UT Board. Its creation provides a pooled investment vehicle for the Permanent Health Fund (PHF) and the Long Term Fund (LTF). The GEF's creation allows the PHF and LTF to benefit from their identical investment objectives by providing greater efficiencies and cost savings than was possible when the investments of the PHF and LTF were managed separately. The GEF is organized as a mutual fund in which the PHF and LTF purchase and redeem units quarterly at the GEF's market value price per unit. The GEF does not represent any additional funds under UTIMCO's management.

The PHF and the LTF initially purchased units in the newly created endowment fund on March 1, 2001, in exchange for the contribution of their investment assets. The following GEF section provides information on various investment details of the PHF's and the LTF's ownership interests in the GEF.

Financial Highlights

The chart below represents the highlights of the GEF since its funding on March 1, 2001.

GEF Financial Highlights Chart

Contributions

The GEF received net contributions of $3,818.2 million during the period from its inception through August 31, 2001. On March 1, 2001, the GEF received initial contributions of investment assets of $922.3 and $2,917.4 million from the PHF and the LTF, respectively. Subsequent to the initial contribution of $3,839.7 million, the PHF and LTF have redeemed and purchased GEF units resulting in a net reduction in contributions of $21.5 million during the year.

Investment Return

The GEF posted a net negative return of 2.1% (net of investment management fees) since its inception (March 1, 2001), to August 31, 2001, underperforming its benchmark by .8%. The chart below presents the GEF's performance versus the Endowment Policy Portfolio benchmark. The attribution column in the chart reports which asset classes contributed to the GEF's outperformance or underperformance relative to its negative benchmark return of 1.3%. The GEF's relative underperformance of .8% is the result of outperformance of 1.2% for all marketable assets and underperformance of 2.0% for nonmarketable alternative assets. Although nonmarketable alternative assets, or private investments, experienced a decline of 7.0% during the year, the internal rate of return for this asset class since inception (refers to time period when originally acquired by the PHF and LTF) has been 14.6%.
GEF Investment Performance Chart

Expenses

For the first six months of operation, the GEF incurred total expenses of $3.4 million. The expenses are paid from GEF assets and include external investment management fees, custody and safekeeping fees, and other fees related to its operations. The GEF does not incur a fee for UTIMCO's management services. UTIMCO's management fee is assessed directly to the Permanent Health Fund and the Long Term Fund.

Distributions

The GEF distributes its net investment income and realized gain or loss to the PHF and LTF monthly based on their ownership of GEF units at month end. The distributed amounts are reinvested as contributions. Since the distribution is proportional to the percentage ownership by the PHF and LTF, no additional units are purchased.

Preservation of Purchasing Power

The General Endowment Fund is expected to maintain purchasing power of its investments over a rolling time period of ten years at 5.50%, as determined in the chart below.
Preservation of GEF Purchasing Power Chart

Separately Invested Funds ($182.6 million)

Overview

The UT System Separately Invested Funds (SIF) consist of privately raised endowments and over 40 charitable remainder trusts. The nature of the underlying asset or donor restrictions preclude the SIF's investment in the Long Term Fund.

Distributions from separately invested endowments support a variety of academic and health programs at UT System institutions.

The charitable remainder trusts are separate legal entities established according to statutory and regulatory requirements. The UT Board is trustee for these trusts, which have a combined market value of $32.3 million as of August 31, 2001. UTIMCO provides investment management and all accounting and tax reporting services. Personnel of the Office of Estates and Trusts of UT System, acting as trust officers, provide all other services including review of trust instruments, coordination of gift receipts, and response to donor and beneficiary questions. Upon termination of a charitable remainder trust, the remaining value of the trust is distributed to the named institution in accordance with the terms of the trust instrument.

UTIMCO invests the trust assets in both fixed income securities and fixed income and equity mutual funds. The allocation between fixed income and equity depends on various factors including the type of trust, the payout percentage, and the age of the beneficiaries or term of the trust. The fixed income asset allocation for most trusts is between 40% and 60% and the remainder is allocated to equities. This allocation is intended to provide a balanced investment mix emphasizing reasonable growth of principal for the remainder beneficiaries.

Currently, expenses associated with the charitable remainder trusts are minimal custody fees (less that $20 per trust per year at this time). The investment management fees of the mutual fund investments used by the trusts range from .56% to 1.1% of the mutual funds' net asset value.

SIF Beneficiaries

UT Arlington
UT Austin
UT Brownsville
UT Dallas
UT El Paso
UT Pan American
UT Permian Basin
UT San Antonio
UT Health Science Center at Houston
UT Tyler
UT Health Center at Tyler
UT Southwestern Medical Center at Dallas
UT Medical Branch at Galveston
UT Health Science Center at San Antonio
UT M. D. Anderson Cancer Center
UT System

SIF Feature Story Did you know.... fifty million dollars in gifts donated to UT Southwestern Medical Center at Dallas are enabling the institution to recruit five of the world's most promising new medical investigators to Dallas every year? Concentrating on the kind of cutting-edge research for which UT Southwestern is internationally acclaimed, five outstanding young medical investigators will be selected each year by the medical center and provided $600,000 over four years to be used solely for research support and expenses. UT Southwestern believes that a generous start-up package allows investigators to launch their careers, creates new scientific leaders and strengthens the future of scientific discovery. The distributions for this promising program, UT Southwestern's Endowed Program for Scholars, will be in addition to the medical center's funding for salary and laboratory space. The $600,000 distribution per investigator is funded from the $50 million in gifts used to create three endowment funds. In 1998 a small but remarkable group of individuals and foundations responded to an extraordinary challenge: to match an anonymous donor's gift of $25 million, thereby creating a special $50 million endowment program to support research projects of gifted medical scientists specifically recruited to UT Southwestern under the program's sponsorship. The anonymous donor's challenge gift endowment of $25 million was invested in the separately invested funds. The matching funds contributed are held in an endowment invested in the LTF and an endowment held by Southwestern Medical Foundation. The program's objective is to assure a successful beginning of the research careers of an ever-growing cadre of outstanding young investigators at UT Southwestern. After four years, scholars compete with senior investigators for other sources of funding. As of August 31, 2001, the anonymous donor's challenge gift endowment, invested in the separately invested funds, had a market value of $26.2 million. Three million dollars in distributions from the original corpus of $50 million, including the funds held by the LTF and Southwestern Medical Foundation, are used to fund the program each year.

OPERATING FUNDS

Operating Funds Ownership Chart

Overview

The operating funds of the 15 institutions that comprise the UT System were valued at approximately $2.7 billion at fiscal year end. These funds are used primarily to fund the institutions' operating cycle and long term institutional needs associated with capital programs, financial reserves, and endowment matching funds. UTIMCO offers UT System institutions three investment funds that allow the institutions to match the particular time horizon of their operating funds with the time horizon of each investment fund.

Short Term Fund ($843.2 million)

STF Weighted Average Maturity Chart

Overview

The UT System Short Term Fund (STF) is an institutional money market mutual fund consisting of the UT System institutions' working capital and other operating fund balances with an investment horizon less than one year. Withdrawals from the STF are used by the UT System institutions for day-to-day operating purposes and in the management of cash. The STF is invested in the Dreyfus Institutional Preferred Money Market Fund (Dreyfus Fund). The STF's investment objective is to maximize current income consistent with the absolute preservation of capital and maintenance of adequate STF liquidity. The STF maintains a degree of liquidity and safety of principal by investing in short-term money market obligations, including securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, U.S. dollar denominated time deposits, certificates of deposits, banker's acceptances and other short-term obligations issued by domestic and foreign banks, repurchase agreements, asset-backed securities, and high quality domestic and foreign commercial paper and other short-term corporate obligations, including those with floating or variable rates of interest. The Dreyfus Institutional Preferred Money Market Fund was rated AAAm by Standard and Poor's Inc., the highest credit rating that a money market fund may receive from the firm.

Financial Highlights

For the year ended August 31, 2001, STF balances invested in the Dreyfus Fund increased from $810.6 million to $843.2 million. Endowment and other operating funds (PUF, PHF, LTF, GEF, SIF and SITF) also invested in the Dreyfus Fund increased from $1,633.4 million to $1,870.7 million, resulting in a combined UT System total balance of $2,713.9 million. As of August 31, 2001, total UT System balances represented 30.3% of the Dreyfus Fund.

Performance

The chart below presents the performance of the STF compared to the 90 Day Treasury Bill rate and the iMoneyNet, Inc. Money Market Funds average return for money market funds. The STF outperformed both benchmarks for the year ended August 31, 2001.

STF Investment Performance Chart

Short Intermediate Term Fund ($1,704.6 million)

Commentary from the Short Intermediate Term Fund's Investment Manager - Russ Kampfe The Short Intermediate Term Fund (SITF) entered the fiscal year with a bullish outlook and an effective duration longer than its benchmark. The U.S. was entering an economic slowdown/recession that has endured through the present time despite an especially aggressive Federal Reserve easing pace and the first significant federal tax cut in many years. As a significant amount of easing became embedded in shorter-term yields during the first calendar quarter of 2001, the SITF dropped to a neutral and then bearish stance toward the bond market. Due to the persistent economic slowdown, in conjunction with a further drop in yields and early positioning at a significantly lower effective duration, the SITF underperformed the benchmark for the year. As of late September 2001, the SITF has a bearish outlook with an effective duration of approximately 0.75. U.S. Treasury rates have been dropping along most of the yield curve, especially after the tragic events of mid-September. The market has already discounted a further Federal Reserve easing of .75-1.00%; however, long bond yields, which tend to lead the market at turns, have not followed the rest of the yield curve to lower levels. This divergence by the longest maturity bonds needs to be confirmed by a turn upward in equities, joining other leading fundamental indicators or the market will grind down to lower yields. Previous easings, the recent federal tax rebate, and proposed new federal stimulus should hasten the rebound in the economy before March 2002. If this bottom can be established, the SITF will likely continue to reduce duration to a policy minimum of approximately 0.50, as the U.S. economy cannot endure moderate to strong (2-3.5%) growth at this cyclical stage without puncturing the current flight-to-safety treasury rally and accumulating some future inflationary imbalances. The bond market is currently highly overvalued, and the SITF will focus on capital preservation, not reinvestment risk.

Overview

The Short Intermediate Term Fund (SITF) commenced operations on March 1, 1993. The SITF is an internal UT System mutual fund for the pooled investment of UT System institutional operating funds with an investment horizon greater than one year. The SITF also serves as the source of a $350 million self-liquidity facility for the Board of Regents of The University of Texas System Revenue Financing System Notes program. During the year ended August 31, 2001, the SITF entered into an additional commitment in connection with the Board of Regents of The University of Texas System Revenue Financing System Bonds, Series 2001A, committing the SITF to a maximum purchase commitment of $83.2 million in the event of a failed remarketing of the Series 2001A bonds.

The SITF is structured as a mutual fund in which institutions can purchase or sell units at market value weekly on Wednesdays and the first business day of each month. The SITF's income is either reinvested or distributed to the institutions monthly at their election. Distributions from the SITF are used by UT System institutions for intermediate term cash management associated with capital projects and other general institutional purposes.

The SITF's primary investment objective is two-fold: to provide both (1) income and (2) capital appreciation when consistent with income generation, reasonable preservation of capital and the maintenance of adequate SITF liquidity.

The SITF emphasizes moderate liquidity and safety of principal through investment in high grade fixed income and floating rate obligations. The SITF's investments are diversified among eligible asset classes and issuers (excluding the U.S. Government) as defined in the SITF's investment policy. The SITF carries an AAAf credit rating and a bond volatility risk rating of S2 from Standard & Poor's Inc. AAA is the highest quality rating issued by S&P. An S2 rating indicates low to moderate market risk exposure.

Financial Highlights

The SITF's net assets were $1,704.6 million at August 31, 2001. The chart below summarizes the components of growth in the SITF's net assets for the past five years.

SITF Financial Highlights Chart

Investment Return

The SITF's net return for the year was 8.96%. The chart below compares the Short Intermediate Term Fund's performance against its policy portfolio benchmark. The policy portfolio benchmark is a composite index consisting of Government Federal Agencies, Government Treasuries and Treasury bills.

SITF Investment Performance Chart

The SITF investment policy mitigates interest rate risk by limiting the portfolio's duration to a range of 0.5 years to 4 years. Duration estimates the impact small changes in interest rates will have on the value of the portfolio. At August 31, 2001, the option adjusted duration of the portfolio was .80 compared to 1.73 for its policy portfolio. Simplistically, if there is a 1.00% increase (decrease) in yields, the value of the portfolio would (decrease) increase by .80%.

SITF Option Adjusted Duration Chart

Institutional Index Funds ($145.2 million)

Overview

The vast majority of UT System institutional funds are expected to be expended within five years. Nevertheless, a significant portion of funds classified as institutional funds represents long-term capital reserves such as depreciation reserves. For such funds where achievement of replacement cost and preservation of purchasing power are significant objectives, UTIMCO created the Institutional Index Funds. These funds consist of a U.S. debt index fund and a U.S. equity index fund and are designed to offer higher expected returns than those available with the Short Term Fund and the Short Intermediate Term Fund.

Debt Index Fund ($46.1 million)

The debt index fund is a U.S. debt index fund managed by Barclays Global Investors to replicate the return of the Lehman Brothers Aggregate Bond Index. The debt index fund invests and reinvests primarily in a portfolio of debt securities with the objective of approximating as closely as practicable the total rate of return of the market for debt securities as defined by the medium term bonds that comprise the Lehman Brothers Aggregate Bond Index.

The primary risk of the debt index fund is interest rate risk associated with a modified adjusted duration of roughly 4.6. Credit or default risk is a secondary risk which is mitigated in part by the diversification of the debt index fund among 1,000 individual bonds. The total return of the Lehman Brothers Aggregate Bond Index for the fiscal year ended August 31, 2001, was 12.35%.

Equity Index Fund ($99.1 million)

The equity index fund is an equity index fund managed by Barclays Global Investors to replicate the S&P 500 Index. The equity index fund invests and reinvests in a portfolio of common stocks with the objective of approximating as closely as practicable the capitalization weighted total rate of return of that segment of the United States stock market represented by the S&P 500 Index.

The primary risk of the equity index fund is the potential loss in fund value associated with corporate, industry, and economic factors affecting the value of the portfolio's underlying securities. This risk is partially mitigated by the inherent diversification of investing in 500 individual stocks. The total return of the S&P 500 Index for the fiscal year ended August 31, 2001, was negative at 24.38%.

The University of Texas System
Board of Regents
As of December 10, 2001

OFFICERS

Charles Miller	Chairman
Rita C. Clements	Vice-Chairman
A. W. "Dub" Riter, Jr.	Vice-Chairman
Woody L. Hunt	Vice-Chairman
Francie A. Frederick	Counsel & Secretary to the Board

MEMBERS

Terms Expire February 1, 2003

Terms Expire February 1, 2005

Terms Expire February 1, 2007

The UT System
Administration
As of December 10, 2001

EXECUTIVE OFFICERS

R. D. Burck	Chancellor
James C. Guckian, M. D.	Acting Executive Vice Chancellor for Health Affairs
Kerry L. Kennedy	Executive Vice Chancellor for Business Affairs
Edwin R. Sharpe	Executive Vice Chancellor for Academic Affairs
Cullen M. Godfrey	Vice Chancellor & General Counsel
Tom A. Scott	Vice Chancellor for Governmental Relations
Shirley Bird Perry	Vice Chancellor for Development & External Relations
William H. Shute	Vice Chancellor for Federal Relations
Armando Diaz	Vice Chancellor for Community Relations
Dale E. Klein	Vice Chancellor for Special Engineering Programs
Kathleen Pantalion	Executive Associate to the Chancellor
Lewis W. Wright III	Associate Vice Chancellor for Business Affairs and Assistant Vice Chancellor for Governmental Relations
Cathy Iberg	Interim President & Chief Executive Officier, UTIMCO
Francie A. Frederick	Counsel & Secretary to the Board of Regents

UTIMCO
Representatives
As of August 31, 2001

UTIMCO OFFICERS

Robert H. Allen	Chairman of the Board
A. W. "Dub" Riter, Jr.	Vice-Chairman of the Board
Cathy A. Iberg	Interim President & Chief Executive Officer

LEGAL COUNSEL

Vinson & Elkins, LLP

Austin, Texas

INDEPENDENT AUDITORS

Deloitte & Touche, LLP

Houston, Texas

The University of Texas Investment Management Company
Board of Directors
As of August 31, 2001

Robert H. Allen (Chairman)

Managing Partner	Challenge Investment Partners
Chairman of the Board	Gulf Indonesia Resources, Ltd.
Trustee	Baylor College of Medicine
Chairman	Audit Committee
Member	Executive Committee
Chairman of Audit Committee	Brown Foundation
Member of Advisory Board	George Bush School of Government & Public Service
Member	Texas A&M University College of Business Development Foundation Council

A. W. "Dub" Riter, Jr. (Vice-Chairman)

Chairman	UTIMCO Audit & Ethics Committee
Vice-Chairman of Board of Regents	The University of Texas System
Managing Partner	Pinstripe Investments
Director	Texas Growth Fund
Director	Texas Taxpayers & Research Association
Member	Governor's Business Council
Member	Executive Committee of the Chancellor's Council of The University of Texas System
Chairman	The University of Texas Health Center at Tyler Development Board
Chairman	The University of Texas at Tyler Development Board
Life Member of Advisory Board	The Salvation Army of Tyler & Smith County

R. D. Burck

Chancellor	The University of Texas System
Director	Adorno/Rogers Technology, Inc.
Director	infiNET Solutions

Susan M. Byrne

Member	UTIMCO Audit & Ethics Committee
Founder, President & Chief Executive Officer	Westwood Management Corporation
President	Westwood Funds
Director	Dallas Theater Center
Vice-Chairman	City of Dallas Employee Retirement Fund
Trustee	Southwestern Medical Foundation
Member of Finance Committee	Southwestern Medical Foundation
Trustee	First Presbyterian Church of Dallas Foundation
Chairman of Investment Committee	First Presbyterian Church of Dallas Foundation
Member	Governor's Business Council

Rita C. Clements

Vice-Chairman of Board of Regents	The University of Texas System
Chairman	Salvation Army Dallas Metroplex Advisory Board
Life Board Member	Hockaday School
Board Member	Center for Human Nutrition
Past President	Charter 100
Advisory Council Member	Communities Foundation of Texas
Advisory Board Member	Crystal Charity Ball
Past President	Dallas Historical Society
Honorary Life Chairman	Friends of the Governor's Mansion Foundation
Director	O'Donnell Foundation
Director	The Robert & Nancy Dedman Foundation

Woody L. Hunt

Member	UTIMCO Audit & Ethics Committee
Chairman/CEO	Hunt Building Corporation
Regent	The University of Texas System
President	The Cimarron Foundation
Director	Chase Bank of Texas, N.A., Houston
Director	Chase Bank of Texas, N.A., El Paso
Member	El Paso Leadership & Research Council
Member	Governor's Business Council
Member	Greater El Paso Chamber of Commerce Foundation Board

J. Luther King, Jr.

Chairman	UTIMCO Compensation Committee
Principal	Luther King Capital Management
Owner & Director	4K Land & Cattle Company
Co-Owner	Reyrosa Ranch
Trustee	Texas Christian University
Director & Treasurer	Texas & Southwestern Cattle Raisers Foundation
Director	Cross Timbers Oil Company
Director	1998 Southwestern Exposition & Livestock Show
Director	several privately held companies
Former Chair & Board Member	Investment Counsel Association of America
Member of Investment Advisory Committee	Board of Trustees of the Employees Retirement System of Texas
Chartered Financial Analyst

L. Lowry Mays

Member	UTIMCO Compensation Committee
Chairman/CEO	Clear Channel Communications, Inc.
Regent	The Texas A&M University System
Exective Committee	United Way of San Antonio & Bexar County
Director	San Antonio Y.M.C.A.
Director	San Antonio Zoo
Board of Visitors	M. D. Anderson Cancer Center

John D. McStay

Managing Director	John McStay Investment Counsel
General Partner	Morning Star L.P.
President	Pegasus, Inc.
Elder	Highland Park Presbyterian Church
Director	numerous private companies
Member & Past Director	AIMR (Association for Investment Management & Research
Member	Investment Counsel Association of America
Advisor	The MBA Investment Fund, L.L.C. (The University of Texas)
Chartered Financial Analyst