The finance committee undertook further changes in the allocation of the endowment among asset classes during the year, principally increasing the overall equities allocation and establishing an additional inflation hedge through Treasury Inflation-Protected Securities (TIPS). The salient features of the Fund's current investment strategy are summarized in the accompanying figure. Key among these are an overall target commitment of 80 percent of the portfolio to equities (publicly traded and private) and 20 percent to fixed income securities; a 35 percent commitment to publicly traded U.S. equities, paired with a 15 percent commitment to international equities, including a 5 percent allocation to emerging markets; allocation of approximately 10 percent of the endowment to a passive S&P 500 index fund, to help control investment costs and assure adequate tracking of the market; satellite U.S. active large and small capitalization value and growth stock managers, with mandates to outperform their respective market bogeys; assignment of responsibility for 10 percent of the endowment to marketable alternative equity (hedge fund) managers; a 10 percent commitment to non-marketable alternative equities (venture capital and private equities); and a 10 percent allocation to inflation hedges, including real estate, oil and gas, and TIPS.

The finance committee periodically reviews asset class allocation targets and the permissible ranges of variation around them; except in very unusual circumstances, the portfolio is rebalanced when market forces or manager performance cause an allocation to diverge substantially from its target.

As shown in the table, the Fund's investment managers as a group outperformed the overall portfolio market benchmark and the median balanced U.S. manager over the three- and five-year periods ending June 30, 2003. For the last 10 years and over the almost 22 years since the foundation adopted a multiple manager system, the portfolio's average annual return has exceeded that of the median U.S. balanced manager but fallen just short of the weighted benchmark index return.

Three considerations determine the Fund's annual spending policy: the aim of providing a reliable flow of funds for programs and planning; the objective of preserving the real (inflation-adjusted) value of the endowment and funds for programs; and the need to meet the Internal Revenue Service requirement of distributing at least 5 percent of the endowment for charitable purposes each year. While the Fund's endowment has performed comparatively well in the severe equities bear market that began in early 2000, the average annual return on the endowment during this downturn has been 1.2 percent annually. At the same time, the foundation's spending rate has exceeded 5.5 percent annually, and inflation has taken an additional 2.2 percent from the endowment's purchasing power each year. Most market seers predict continued low average investment returns for at least the next five years, as the market corrects for the excesses that occurred in the final stages of the 1982-2000 bull market in stocks.