Endowment and Foundation News

Minnesota Boosts Private Capital, Natural Resources
October 26, 2006

The University of Minnesota has increased its target allocations to natural resources and private capital--private equity, venture capital and distressed
debt--to 20% each from 12%. The moves should hedge against inflation and increase returns. CIO Stuart Mason expects to seek managers and fill the
allocations over the next 18 months. The school will cut its public equity portfolio to 40% from 50% and will pare back other investments in publicly traded
securities to fund new investments. Manager inquiries should be directed to Cambridge Associates.

Within natural resources, the school is interested in timber, real estate, oil and gas. "That's commodities stuff that gives us inflation-adjusted returns over
time and that's a good thing," Mason said.

Mason is confident that private capital investments will deliver better returns than the public markets over the long haul. "Our hope is that they will do a lot
better, but our expectation is they will do somewhat better," he said. The school hired specialist consultant Alex Bangash at Rumson a year ago to advise
on venture capital and he is now helping the school search for private equity buyout firms in Europe and Asia.

Minnesota has done away with alternatives as an asset class and is instead concentrating on the liquidity of its investments. "Alternatives is a phrase that
now encompasses so much of the different investments we've actually made that it doesn't mean anything," Mason said. The school's 11% allocation to
hedge funds, which was once grouped in with its alternatives exposure, has been re-classified--long/short hedge funds sit within public equity, while
arbitrage strategies are part of the school's fixed-income portfolio. The fund's 20% allocation to fixed income is unchanged, with half designated as liquid
investments, which means that it must take "30 days or less to get our hands on the cash," he explained.

"The issue of liquidity has been one of the central themes in our reconfiguring the portfolio allocation targets," Mason continued. "We basically believe that
publicly traded securities are priced at a premium to other similar assets because of the liquidity option." This liquidity makes returns more volatile, he
added. "We approach every investment with a value orientation so as a result we have chosen not to own premium-priced, highly liquid, more volatile
assets unless we have to." The school has a modest annual liquidity requirement of 4.5-5%.

Mason credited Cambridge Associates with helping map out the new asset allocation and praised the board of regents for approving it. "We asked for a lot
and they were good to give us the flexibility to carry it out," he said. "They've seen good performance and it has brought credibility for investing in
alternative asset classes." The portfolio returned 13.51% for the fiscal year ending June 30 and has a 17.2% return over the past three years, during which
time Mason has increased its alternative investments to 35% from 2%.
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