Rice Management Company

Hot Topics in Endowment Investing

Allison ThackerChief Investment Officer, Rice University

Rice Management Company

The Rice Endowment made Rice the university it is today.

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In 1904, William Marsh Rice left $4.6 million to found The Rice Institute.

Rice was tuition-free from 1912 to 1965.

Today 62% of students receive financial aid and Rice’s tuition is still significantly lower than peers.

Even after building a campus, funding decades of free tuition, financial aid and operating funds, the Rice Endowment remains one of the largest among private universities.

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Private Universities Ranked by June 30, 2012 Endowment Market Value

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$Billions1 Harvard 30.42 Yale 19.33 Stanford 17.04 Princeton 17.05 MIT 10.16 Columbia 7.77 Northwestern 7.18 Pennsylvania 6.89 Chicago 6.610 Notre Dame 6.311 Duke 5.612 Emory 5.513 Washington 5.214 Cornell 4.915 Rice 4.416 USC 3.517 Dartmouth 3.518 Vanderbilt 3.419 New York 2.820 Johns Hopkins 2.6

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Rank InstitutionNumber of

FTE StudentsEndowment Assets ($) per FTE Student

1 Princeton 7,770 $ 2,181,998

2 Yale 11,785 1,641,563

3 Harvard 20,161 1,509,616

4 Stanford 15,155 1,124,105

5 MIT 10,762 943,093

6 Rice 6,001 736,310

7 Dartmouth 6,179 564,231

8 Notre Dame 11,867 533,401

9 Washington 12,694 411,690

10 Northwestern 18,030 394,819

Private Universities Ranked by Endowment Assets per Full-Time Equivalent (FTE) Student – FY 2012

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CONFIDENTIAL

Population: Private Schools with endowment market values > $2.0 B. Notables not reporting: Columbia, Cornell

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HarvardDartmouth

ChicagoYale

Johns HopkinsRice

DukePenn

MITNorthwestern

USCPrincetonStanford

VanderbiltEmory

Wash UBrown

5.5%

5.4%5.2%

5.2%5.1%

4.9%4.9%

4.9%4.9%

4.8%4.6%

4.4%

4.4%4.4%

4.4%

4.3%4.3%

FY12 Endowment Spending as a % of the 7/1/11 Market Value

Source: Cambridge Associates (preliminary flash report of FY2012 data)

Figures are self reported

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Endowment Spending – Fiscal Year 2012Percent of Operating Budget Funded from Endowment Distribution

High Rice Average Median

44% 42%

14%9%

38 reporting institutionswith endowments > $1 Billion

Source: Cambridge Associates Annual Analysis of College and University Investment Pool Returns 2012-12

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Endowment Values Compared to Purchasing Power Target

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$0.0

$500,000,000.0

$1,000,000,000.0

$1,500,000,000.0

$2,000,000,000.0

$2,500,000,000.0

$3,000,000,000.0

$3,500,000,000.0

$4,000,000,000.0

$4,500,000,000.0

$5,000,000,000.0

Actual Endowment Value

1962 Endowment Value Inflated by CPI and New Gifts (Purchasing Power Target)

1962 Endowment Value Inflated by CPI

$4.4

$0.8

$2.1

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Endowment/Foundation Goals: Achieve Investment Returns in Excess of Spending and Inflation

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Return - Inflation - Spending > 0

8% - 2.5% - 5.5% > 0

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1 Year 5 Years 10 Years 20 Years-2%

0%

2%

4%

6%

8%

10%

12%

3.6%3.1%

8.5%

10.5%

-0.5%

1.2%

7.0%

9.0%

-1.2%

1.2%

6.7%

7.5%

Endowment Returns as of June 30, 2012

Rice EndowmentCambridge Associates Mean35% / 35% / 30% Passive Stock / Bond Index *

* 35% Russell 3000 / 35% ACWI ex US / 30% Barclays Capital Aggregate Bond Index

How Have We Been Doing?- Passive portfolios have not kept up with spending and inflation

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Historical Returns Make the 8% Hurdle Seem Reasonable

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Forecasted Returns Make Earning 5.5% real or 8% after inflation difficult

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Modern Portfolio Theory Argues for Adding Uncorrelated Asset Classes To Improve Return or Diminish Risk

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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Rice Has Moved from Stocks and Bonds Towards Alternatives

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US Stocks

International Stocks

Fixed Income & Cash

Hedge Funds

Venture Capital & Private Equity

Real Assets

Opportunistic

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Hedge Funds Are No Longer An “Undiscovered” Asset Class

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As Hedge Fund AUM Has Grown, Correlation with the S&P Has Risen

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Private Equity Funds Are Also Proliferating

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Clearly we live in interesting times…..so what is a long-term investor to do?

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Equities Outperform Bonds Over Long Time Periods

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Market Timing Is a Losing Game – Create a Plan and Stick To It

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Fees Matter To Wealth Creation

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The Rice Endowment believes a long-term portfolio should be:

• Equity-oriented• Diversified • Invested in real assets (real estate/natural

resources)• Value focused and valuation sensitive• Fee sensitive• Partnered with managers who have a real

investment edge

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