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The Endowment

Investment Performance for the Year Ending June 30, 2004

Rochester's net return for the fiscal year ending June 30, 2004 was approximately 17.4%, substantially above the 8.0% goal contained in the University's financial plan. It is, however, below the benchmark return of 18.9% (comprised of 60% Wilshire 5000, 20% Lehman Aggregate and 20% EAFE). Underperformance relative to the benchmark is to be expected when domestic equity returns are unusually robust, as Rochester's domestic equity exposure is just one-half the benchmark weight.

The endowment value at the end of the fiscal year was approximately $1.26 billion, roughly $156 million above the reported value at the beginning of the year. The change in endowment value was attributable to investment returns of $185 million, gifts and additions of $43 million and spending of $72 million. Rochester's five-year average annual return through June 30, 2004 is 7.0% vs. 0.8% for the benchmark. The ten-year average annual return through June 30, 2004 is 11.3% vs. 9.4% for the benchmark.

Major asset classes generated the following performances in fiscal year 2004:

Domestic equity managers returned 21.5% compared to 21.2% for the domestic equity benchmark (Wilshire 5000). Selection of active and "index agnostic" investment firms, using fundamental valuation models, helped domestic equity performance in 2004.

Domestic fixed income returned 1.8%, exceeding the 0.3% return for the benchmark (Lehman Aggregate). Duration on the University's fixed income portfolio increased slightly to 4.3 years in fiscal 2004, reflecting increased opportunities to lock in higher interest rates, mostly on intermediate bonds. Inclusion of short-term investments lowered the effective duration to 2.8 years. In early 2003 the University reduced its fixed income allocation from 18% to the current level of 8%, reflecting ongoing concern over increasing interest rates.

International equities returned 30.9% compared to 32.4% for the benchmark (EAFE).

The alternative investment program generated a net return of 13.5%. Hedge funds (including managers of distressed securities) returned 14.8%, private equity returned 8.9% and real estate, oil & gas and timber returned 22.9%.

The investment office continues to monitor peer endowments and expects that this effort will continue to produce similar asset allocation and investment approaches for Rochester's endowment. The release of fiscal 2004 peer asset allocation data, expected in November, will assist in the discussions and strategic planning at the Investment Committee's March, 2005 annual review. Early reports from Rochester's peers suggest that returns achieved by large endowments in fiscal year 2004 will range from 15% to approximately 20%. It is important to note, too, that the return was generated through the efforts of many talented advisors, investment committee members, consultants and investment office staff. It is the consensus of these groups that, over time, the University of Rochester's target return of 8.0% is achievable.


Sincerely,

Robert M Osieski signature        Douglas W. Phillips signature
Robert M. Osieski
Trustee, Chairman of the
Investment Committee
       Douglas W. Phillips
Senior Vice President for
Institutional Resources