The year 2006 was a time of continuity and progress for the global economy and for the Khyentse Foundation investment portfolio. The global economy continued to grow at an impressive pace, with a broader geographical spread, and the conditions of the financial markets remained optimistic. The environment was still free of economic crises—a situation that is likely to change in the coming years.

Once again, the Khyentse Foundation Investment Committee was able to surpass our investment goal, returning 18.2% in 2006. At year end, assets composing the Endowment for Monastic Education, the Scholarship Fund, and the Publications Fund totaled US$5.6 million, divided among the following asset classes: 59% equities, 25% bonds, 13% cash, and 3% gold.

Since the Endowment for Monastic Education was launched in July 2002, we have consistently returned more than our goal of 5% per annum. We have also consistently surpassed our benchmark, a mix of the most important indices weighted according to our maximum exposure per asset class. In 2002 we started accumulating funds. In 2003 our return was 11%; in 2004, 11% again; in 2005, 9.5%; and in 2006, our gains were 18.2%.

This year the largest contributor to the portfolio’s performance was our international equity fund, which made up 20% of the portfolio and yielded a 25% return. China made up 11% of the portfolio, with returns as high as 114%. India was 4% of the portfolio, with a 38% gain. The major detractors were a loss incurred in our energy trust investments due to changes in tax regulations in Canada and the poor performance of Japan in general, especially compared to the other markets.

Currency diversification is still an important topic to the Investment Committee. As of the end of 2006 we have 45% exposure to US dollars, 14% to euros, 13% to Chinese RMB, 10% to yen, and 7% to Indian rupees. Please keep in mind that more than half of the Foundation’s grants go to beneficiaries whose currencies are not based on the US dollar.

We are proud to say that we continue to present a low expense ratio: 0.3% for 2006, even lower than in 2005. The turnover ratio was 3.5%, a mirror image of our long-term investment style and a reflection of acquisitions as donations came in throughout the year.

Fixed Income

Overall, our bonds portfolio returned 6.3%, with the emerging markets bonds returning 10%. Our US bonds portfolio performance has finally caught up with our expectations, returning 5.8% (up from 4.3%), above our benchmark and above the Lehman Bros. Aggregate Bond Index. The United States has long dominated the world’s bond market, but globalization and other factors have brought significant changes to the global bond mix. Bonds issued in the United States now account for less than half of the global bond market, and the growth of the international bond market brings a wealth of new opportunities for diversification that cannot be ignored, particularly in light of the decline in the US dollar. In other words, avoiding non-US bonds is no longer an option because it limits us to only half of the available universe of bonds. International bonds are currently around 40% of our bonds portfolio, and we will continue to pursue new opportunities while conforming to our investment guidelines.

Variable Income

Our variable income position, composed of investments in equities (directly or through funds), energy trusts, alternative energy, indices, and exchange-traded funds, returned an average of 21% in 2006. The equity investments in the United States are made through a mutual fund that returned 17.2%, above both the S&P 13.6% and the Dow Jones 16.3%. This mutual fund represents 10% of our total assets and 16% of our total equity position. We also hold an international mutual fund that returned 25.4%. Together, and weighted, these funds returned 22.4%, with an average expense ratio of 0.5%, which is included in our total portfolio expense ratio.

Other main positions in our portfolio include China and India. In China, one of our investments returned 114%. India, with only 3.5% of our total assets and 5% of our equity positions, returned 38%. Latin America returned 10% in less than two months. Some of our positions have gained more than 170% in the last two or three years, and we still believe there is growth in China and India, as well as in some other emerging economies, so our asset allocation will continue to reflect that premise.

The energy trusts that we hold in Canada, for currency diversification purposes, suffered from a change in tax laws and were down -5.7%. Unfortunately, the market is discounting a change in regulation that will happen four years from now. Because we see this investment as a hedge against a potential increase in oil, besides being in Canadian dollars, we decided to hold on to it, benefiting from the almost 10% yearly dividend payout. This position is only 4% of our variable income portfolio and 2.8% of our total portfolio. Japan had a meager 6% return in 2006. We are revisiting our investments there, which currently account for about 9% of our equity portfolio. On the other hand, our 3% position in gold was a good one. The metal was up 23% this year.

Finally, we are building a long-term position in alternative energy and water investments. These are not only interesting investments from the perspective of return, but are also extremely beneficial from the aspect of a more sustainable global economy. The arguments for investing in water and alternative energy are fairly straightforward. About two-thirds of “you” is water. You need to replace 2.5 quarts of it every day just to live, and a quart of bottled water costs more than a quart of gas at the pump. The Environmental Protection Agency projects that the United States will spend $500 billion over the coming two decades to refurbish public water supplies. And the rest of the world will need to spend vastly more. After almost five years, we continue to value the trust that Rinpoche and our donors have placed in us. Every morning we feel the challenge of carrying on the investments in a way that is responsible yet responsive to the world’s economic changes. But we find strength in seeing how much Dzongsar Khyentse Rinpoche’s activities have already benefited beings in such a short time. We would also like to thank the advisers to the Khyentse Foundation Investment Committee for their suggestions and recommendations over the past year.

For a complete look at the financial report, download the PDF of the Annual Report.

Khyentse Foundation Investment Committee
Isabel Pedrosa, Chair
Amelia Chow
Valerie Chou
Marco Noailles
Angie Tsai