Endowment and Trust Investment Pool

With the assistance of the Finance Committee, I am responsible for the prudent management of the endowment and trust fund portfolio. The goal of the endowment is to provide stable support for the NAS General Fund, NAS Trust and Award activities, and the Presidents' initiatives within the NRC program. To achieve this goal, the NAS Council, acting on the recommendation of the Finance Committee, has adopted a spending limitation designed to maintain the purchasing power of the endowment over time by reinvesting a portion of the annual total investment return. The spending limitation caps annual spending at 5 percent of the three-year average market value of the participating funds in the investment pool.


Each year, the investment performance of the NAS portfolio is compared to a composite market benchmark portfolio for the year. The benchmark portfolio is a composite index consisting of the Standard and Poor's 500 Index (35 percent), the Russell 2000 Index (15 percent), the EAFE Index (15 percent), the Emerging Markets Index (5 percent), the Lehman Aggregate (25 percent), and the Non U.S. dollar Fixed Income Index (5 percent), and was developed to reflect the target asset allocation within the NAS portfolio.


Market values of the Endowment and Trust Investment Pool, after withdrawals, for the years ended December 31, 2006 and 2005, are displayed in the following chart:

 

(Dollars in thousands)

2006

2005

Cash and Fixed-Income Securities

$

52,291

$

56,661

Equity Securities

 

353,265

 

294,900

Total

$

405,556

$

351,561

At the beginning of 2006, the NAS Endowment consisted of $351.6 million in assets. During the year, the Endowment received contributions of $4.4 million, withdrew funds for programs of $15.5 million, and earned an investment gain of $65.1 million, resulting in an ending asset balance of $405.6 million. For the year, the portfolio returned 19.0%, compared with a benchmark return of 15.5%. In 2005, the portfolio returned 10.7% versus 6.9% for the benchmark. A significant portion of the exceptional results for 2006 were realized in the fourth quarter, during which the NAS portfolio returned 8.3% versus 6.5% for the benchmark. While the benchmark results speak to a strong performance in the securities markets in general, the Academy’s superior performance is attributable to several factors. Two investments had very strong performances in 2006: Berkshire Hathaway returned 24.3% for the year and one of the hedge funds returned 21% for the year. The commercial real estate investments continued to perform well with returns of 25% for the year. The NAS portfolio in general is overweight in non-US equities, which proved to be beneficial as the emerging market segment had a very strong year.


NAS’ portfolio has consistently outperformed the market benchmarks over a long period. For the five years ending 12/31/06, the NAS return is 11.2%, compared to the market composite benchmark of 9.3% and for the ten years ending 12/31/06, the NAS return is 9.3%, compared with the market composite benchmark of 8.8%.


The next chart presents the investment structure adopted by the NAS Finance Committee in 1995 for its asset allocation strategy and compares this target to the portfolio allocation at December 31, 2006.

Overview of Current Investment Structure

 

 

Target

Percent of Portfolio

Fixed-Income:

U.S. Fixed

25.0%

4.2%

 

U.S. High Yield

0.0%

1.3%

 

Non-U.S. Fixed

5.0%

2.6%

Equities:

U.S. Large Cap Funds

30.0%

22.9%

 

U.S. Small-Mid Cap Funds

15.0%

11.2%

 

Non-U.S.Stocks — Developed

15.0%

19.2%

 

Non-U.S. Stocks — Emerging

5.0%

8.9%

 

Hedge Funds

0.0%

17.1%

 

Private Placements

5.0%

3.4%

Real Estate

0.0%

4.4%

Cash Equivalents

0.0%

4.8%

Total

100.0%

100.0%

  • See Schedule 2-A on page 21 for details of investments by asset class.

  • Included in the $405.6 million total market value of the Endowment and Trust Investment Pool as of December 31, 2006, are the amounts of $64.5 million, $23.0 million, and $8.3 million for the IOM, The National Academies Corporation (TNAC), and Woods Hole Endowment Funds, respectively.



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