<p>Some of you probably received this but it's nicely honest and candid. Thi sdoes not include the other dedicated UW support foundations of WARF and the UW System. WARF may have been more aggressive and taken more losses but that's just my guess. WARF had about $2 Billion while the UW System held anout $400 Million for Madison at the beginning of the year.</p>
<p>"The end of the year is the perfect time to reflect on the past and look forward to new challenges that lie ahead. It's a good time to review our decisions and performance, both good and bad, and to use this wisdom to capture new opportunities. As we look at our financial stewardship, we'd like to share our thoughts, decisions and financial performance with you. Our success is not achieved in a vacuum. It's only accomplished through the remarkable relationship we have with you. Therefore, as your partner, we want to bring you up to date on this year and offer a glimpse into the coming year.</p>
<p>It goes without saying that 2008 has been a challenging year. What started as a subprime mortgage and housing problem in 2007 grew into a global financial and economic crisis by mid-2008. This crisis affects all areas of our financial lives. Stock portfolios have declined nearly in half, home values have decreased, access to credit is becoming more and more limited and there is much concern over job security. And now, according to the National Bureau of Economic Research, it's official. We have been in an economic recession since December 2007.</p>
<p>Making the news almost daily is the fate of non-profit entities such as endowments and foundations. There have been a number of stories of university endowments that are seeing their portfolios decline precipitously and who are struggling to provide liquidity to meet their commitments. While we've not been immune to similar events over the last year, we do have good news. We are a careful steward of your gifts and for that reason want to dispel any concerns you may have regarding the performance of the Foundation's portfolios, our exposure to toxic investments, our ability to meet our commitments or raise funds and the stability of the organization.</p>
<p>Portfolio Performance
Through the end of October, the stock market, as measured by the S&P 500 index, declined more than 32 percent year-to-date. This is not the first time we've seen this happen. Other stock market tumbles have included the technology bubble burst of 2000-2002, the Long Term Capital debacle of 1998 and Black Monday in 1987, all of which experienced similar declines. This current cycle has been so difficult because of the extremely negative performance of less risky asset classes such as investment grade bonds, mortgages and even cash instruments. November and December provided no relief and, as of December 2, the S&P 500 index had declined more than 43 percent year-to-date.</p>
<p>The UW Foundation manages two portfolios that contain gifts for the University of Wisconsin-Madison. Short-term gifts—or expendable funds—that support near-term expenditures (such as a building project) have been invested similarly to a money market fund. These gifts are safe and earning a competitive interest rate. Long-term gifts—or endowments—for scholarships, professorships and other similar purposes are invested in our endowment portfolio.</p>
<p>The goal of the Foundation's $1.5 billion endowment portfolio is to achieve a total return of roughly 10 percent per year over a market cycle to meet our spending needs, keep pace with inflation and cover management expenses. At the end of 2007, the endowment portfolio had grown 15 percent on average over the last five years, well above our targeted goals. This year, from January through October 31, the endowment has declined approximately 20 percent. Although we are not pleased with this result, we are encouraged to have saved a significant amount of value when compared to the stock market and many other equity-related portfolios.</p>
<p>Exposure to "Toxic" Investments
Recently, there have been a number of reports in the media describing how various institutions have faced significant troubles in certain investment strategies. They can generally be categorized as high-risk derivatives strategies, highly leveraged strategies and overexposure to illiquid asset classes. None of these strategies are harmful by definition, but problems have occurred when some institutions realized that the exposure to these strategies was greater than originally planned. Today, many derivatives strategies have been wiped out, leverage (essentially borrowing money to invest) is being paid down and institutions are attempting to sell their illiquid assets at fire sale prices.</p>
<p>The endowment portfolio is exposed to a number of these strategies, but in a manageable way. In fact, the philosophy of the endowment portfolio over the last two years has been to reduce risk in the portfolio, raise our level of cash and opportunistically invest in assets at depressed prices. Derivatives vehicles have been used, but used successfully to hedge our exposure to credit markets rather than enhance our returns. The Foundation has never used leverage at the portfolio level. By managing our exposure to illiquid asset classes, we are not a forced seller of our assets, but actually are in a position to be an opportunistic buyer.</p>
<p>Meeting Our Commitments
Through your gifts and investment in the University, the Foundation is able to support students and faculty in many ways. For our short-term portfolio, dollars are available for purposes for which they are intended. For endowment gifts, the Foundation's Board of Directors has determined a spending plan that approximates 4.75 percent per year (paid quarterly). However, rather than simply spend 4.75 percent each and every year, the spending plan averages the endowment's value over the previous 12 quarters and spends 4.75 percent of this averaged amount. The effect of this plan is to spend a little less in good times and spend a little more in bad times on a percentage basis. In 2009, this plan will not be affected. The end result will be that the spending dollars will decline as the endowment declines in value, but at a much slower pace. This smoothing effect should assist the University as it plans for the upcoming year. However, we are ensuring our campus partners are aware of the current environment to allow them to plan appropriately for what may well be a lower level of support in the near future.</p>
<p>Raising Funds for the University
Although much of this letter is devoted to the subject of our investments, we want to emphasize that our main goal is to find those opportunities on campus that meet your passions. This is accomplished not only by monetary gifts, but by the time and expertise you so generously share. In the past during difficult periods, Badgers have consistently come through for their university. This can be seen during 2000-2002, when our ability to raise support continued at a record pace. However, we fully expect that 2009 will be a very difficult year. We are seeing the number of donors decline on a year-over-year basis, and the number of appreciated stock gifts is understandably down.</p>
<p>That said, knowing us as you do, you will not be surprised to hear that we continue to be excited about the future. The Wisconsin Idea does not pause during difficult times. We plan to continue our conversations with you, to find opportunities for your involvement and to help you discover new passions at the University. We know that many will continue to provide support for students. These times magnify the need for scholarship support. However, we understand that this may be a year that will be difficult for many to make a gift. With that in mind, we'd like to engage you in a campaign of ideas and in building relationships that will be realized when good times return. Please continue to share your ideas, your passions and your time with us as we reach out to you in the near future.</p>
<p>The UW Foundation
We hope this report has given you a new level of comfort in the stability of the UW Foundation. Although the investment markets affect us, our strategies have saved a significant amount of value, our commitments are in place and our purpose to support the University remains unchanged. We continue to evaluate our processes to determine where we can reduce expenses and become more efficient. We are grateful that reducing staff or limiting our ability to meet with you is not something we must entertain at the present time.</p>
<p>As a separate organization from the University, we cannot speculate on the near-term future of the University. However, it's probable that all revenue sources for the University will be stressed, including private support, state funding and the reduced ability to raise tuition. The University is currently looking across all areas for ways to reduce spending. Against that challenging backdrop, we are pleased to state that the UW Foundation is on solid ground and prepared to move forward with our mission to advance the University. We look forward to continuing our partnership with you in 2009</p>