Additional background
Distributions from the U-M endowment increased for the ninth straight year, despite a slight decline in the total value of the endowment to $7.7 billion for the fiscal year that ended June 30.
Distributions in fiscal year 2012 totaled $270 million, up from $266 million the previous year. Total distributions over the last five years have reached nearly $1.3 billion to support U-M operations.
The overall value of the endowment was down from $7.8 billion at the end of FY 2011, reflecting a nearly flat investment return of -0.5 percent and distributions from the endowment, partially offset by new endowment gifts and transfers.
Erik Lundberg, the university’s chief investment officer, said he was disappointed with the year-end results, but not surprised.
“While an occasional loss from year to year is to be expected, the small loss last year is disappointing even though the endowment’s investment return last year exceeded that of the average college and university endowment,” he said.
Lundberg presented his annual report on university investments to the Board of Regents during a meeting Oct. 19 on the UM-Flint campus.
One year ago, when Lundberg reported a 24.3 percent investment return for the endowment, he cautioned that years of high rates of return often are followed by periods of low return.
In his report he noted that the 9.6 percent annualized rate of investment return over the last decade is “consistent with the aim of the university’s long-term diversified investment strategy.” That strategy is designed to generate “a level of return sufficient to provide dependable support for operations, while at the same time protect and grow the (endowment) corpus in real terms.”
“Such strong performance over a long period of time places the university in the upper end of the top quartile of investment returns among other endowments,” added Timothy P. Slottow, executive vice president and chief financial officer.
U-M’s endowment is the seventh largest in the country among institutions of higher learning and the second largest among public universities. The university’s endowment per student ranks 112th, which is lower than many private peers with much smaller enrollments.
The endowment actually is a collection of about 7,600 separate endowment funds that provide support for specific purposes such as scholarships, educational programs or professorships. A significant portion of these funds is provided by donors. About one quarter of the endowment is restricted for use by the U-M Health System with one fifth earmarked for student scholarships and fellowships.
To ensure continuing support for future generations, the funds themselves are invested so part of the annual distribution can provide a steady flow of dollars each year.
U-M annually distributes a portion of the endowment’s average market value calculated over the last seven years for operating purposes. In 2010 the Board of Regents voted to gradually reduce the portion distributed from 5 percent to 4.5 percent in order to better preserve and grow the endowment over time. The reduction is expected to be fully implemented in the 2013 fiscal year.
Basing the spending on a trailing average market value instead of the current market value allows the university to stabilize endowment distributions year-over-year so operating budgets are insulated from the volatility in financial markets and receive dependable support over time.
