Demonstrations and calls for divestment on college campuses across the country have put a spotlight on university endowments and raised questions about what exactly these funds are, how they operate and who manages them. The following explains the University of Michigan’s endowment.
What is the university’s position on divestment from companies linked to Israel?
The Board of Regents in March 2024 stated that it had listened carefully to multiple calls for divestment from companies linked to Israel, decided not to divest and instead reaffirmed its longstanding position. The university has no direct investment in any Israeli company. Instead, the university has investments in funds that may include companies based in Israel. Those funds invest in a diverse array of companies across many geographic regions, including companies specializing in life sciences, digital health-care applications, consumer products, software solutions and other sectors. It is not possible for the university to divest from a single position in such a fund.
Those indirect investments in companies based in Israel are estimated to be less than 0.1% of the endowment, or less than $15 million. Claims that the university has $6 billion, or roughly one-third, of its endowment invested in Israeli companies are false.
What is the endowment?
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The U-M endowment supports the university’s mission and is meant to do so for generations to come. Endowed gifts are structured so that the principal amount donated is never spent and instead remains preserved and permanently invested. The earnings generated from the original gift support a specific purpose chosen by the donor, whether that is a professorship, scholarship or other objective. This structure is the fundamental characteristic of any endowment.
The endowment is essential because, in times of both economic growth and contraction, it provides a guaranteed source of income to support the university’s mission and priorities.
At U-M, the endowment includes more than 12,700 separate funds, the majority of which are restricted for purposes specified by individual donors and are maintained in a unitized pool. Annual distributions from the endowment support university functions, but must be made judiciously, so that the endowment’s principal remains protected and untouched, and is invested in a way that allows it to grow. This cautious approach ensures that the endowment can support the university in perpetuity.
What does the endowment support?
Annual spending rate distributions from the endowment totaled about $470 million in 2023 and are anticipated to exceed $500 million in 2024. Of 2023 annual spending rate distributions, approximately $134 million supported student financial aid and $188 million went to research and patient care at Michigan Medicine. Nearly all of the remaining $148 million went to instruction, academic programs and other efforts.
What are the university’s endowment policies?
The university’s governing board and officers have a fiduciary and legal responsibility to protect the university’s assets for the long term, so that they “may leave to succeeding generations a University at least as strong as the one with which (they) have been entrusted,” according to a 2005 statement on investment policy. The primary purpose of the endowment therefore is to generate the greatest possible income, subject to an appropriate amount of risk, in support of the university’s mission of teaching, research and service.
To accomplish this goal, it is important that the university maintain an investment portfolio diversified across a full range of legally recognized entities. To do otherwise would be to increase risk and decrease investment returns — perhaps significantly so. For this reason, U-M’s longstanding policy is to shield the endowment from political pressures and to base investment decisions solely on financial factors such as risk and return.
Are there exceptions to this policy?
The university has recognized that there may be unusual instances in which exceptions to this policy may be considered. The threshold for such an exception has intentionally been set extremely high. In 1978, the Board of Regents adopted a resolution stating that if “a particular issue involves serious moral or ethical questions which are of concern to many members of the University community” an ad hoc advisory committee will be appointed.
The resolution did not provide details about what rises to the level of “serious moral or ethical questions” or what will constitute “many members of the University community.” However, a faculty committee that year wrote that the university “should act only when a general consensus on a significant moral question has emerged within the University community.” The committee went on to say that the university “must make strenuous efforts to avoid making commitments, as a corporate body, to political positions that may intimidate its members, produce an atmosphere of distrust and suspicion, or create obstacles to free inquiry.”
What is divestment? Has the university divested before?
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Divestment is a decision to dispose of and fully exit investments for political or non-financial reasons. The authority over divestment decisions firmly resides with the Board of Regents. U-M has divested twice: Apartheid in 1983 and tobacco in 2000.
The Board of Regents in April 1983 voted to divest from companies operating in South Africa, with the exception of corporations headquartered in Michigan. This occurred after the Michigan Legislature passed Act 512 in 1982, which mandated that Michigan public colleges and universities divest from companies doing business in South Africa.
In June 2000, the Board of Regents voted to divest from investments in tobacco companies, which represented less than 0.25% of the university’s then total holdings. The university took the stance that tobacco was antithetical to the university’s mission of research, teaching and service.
Were the university’s decisions regarding Russia and climate change divestments?
U-M in recent years made changes to its investment approach related to Russia and climate change. Neither was a divestment, which is defined as a decision to dispose of and fully exit investments for political or non-financial reasons. Instead, these decisions were made for financial reasons and to protect the value of the endowment.
The action related to Ukraine in 2022 was taken as a result of U.S. government sanctions on Russia. Most Western institutional investors, including the university, moved swiftly at the time to reduce their exposure to Russia and Russia-domiciled investments to comply with the law and to mitigate the impact on their portfolios.
In 2021, the university shifted its natural resources investments to focus more on positive climate impact. The Board of Regents approved certain climate change-related policies, including investment restrictions and proactive initiatives, for the specific purpose of reducing the impact of climate change-related risk on the university’s investment portfolio.
How is the endowment invested?
Like other higher education institutions, the university’s endowment is managed by professional fund managers who invest mostly in equity (i.e stocks) and equity-like investments that represent private ownership.
Equities are investments in shares of companies held through commonly available market-traded stocks, whether on major stock exchanges like the New York Stock Exchange, Nasdaq or other exchanges. Equity-like investments are investments in private companies, which are not publicly traded. This could include technology startups, venture capital and private equity firms, real estate companies and others. The evaluation of investments is done with an eye to the entire investment portfolio. By investing in a mix of public stocks and private companies across different sectors, the endowment aims to achieve diversification.
Who are the fund managers and how are they selected?
U-M selects outside fund managers based on their overall strategy and performance. These managers are professional investment firms, including small and relatively newer boutique groups and larger, well-established firms. This approach allows the endowment to benefit from a range of investment styles and philosophies. Pursuant to federal guidance and regulations, the university does not direct or influence the managers’ specific investments. This passive investment approach is typical for institutional investors and is a key component of the overall investment strategy aimed at achieving successful long-term performance. Contractual obligations that are standard in the industry prevent the public disclosure of specific fund performance data and investment details related to the portfolios managed by external fund managers. These confidentiality obligations are designed to protect proprietary investment strategies and preserve the fund managers’ competitive advantages.
How are investment decisions made?
The university’s investment decisions are guided by a rigorous process overseen by its investment office, led by the chief investment officer. Investment guidelines established by the university’s Board of Regents, including establishing strategic asset allocation, performance goals and spending, direct this work. The investment team selects professionally managed funds across various asset classes and investment strategies. These investment recommendations are made by the university’s investment office, and the executive vice president and chief financial officer, with final approval by the university’s Board of Regents. This multilayered approach ensures that investment decisions are made prudently, aligning with the university’s long-term investment goals and adhering to established risk management principles.
How does the university determine how much of the endowment should fund operations?
The university strikes a balance between generating a predictable stream of annual support for current needs and preserving the purchasing power of the endowment for the future. The endowment spending rule sets the annual distribution rate at 4.5% of the one-quarter lagged seven-year moving average of the fair value of shares held in the University Endowment Fund.
How do endowment distributions fit into the larger university budget?
Distributions from the endowment were 4% of revenues for operating activities in 2023. Other significant sources of funding come from the state, the federal government, tuition and auxiliary services such as patient care, student housing and dining.
How big is the university’s endowment?
The university’s endowment was valued at $17.9 billion on June 30, 2023, making it one of the top 10 largest endowments in the nation and the third among public universities. While sizable in absolute terms, the U-M endowment supports an expansive enterprise and broad mission. On a per-student basis, it ranks 79th nationally.
Why does the endowment keep growing in value?
Donors provide endowed gifts to support U-M in perpetuity. As noted above, gifts are structured so the principal is never spent. The university has an obligation to invest in ways that ensure the value of a gift increases and the spending power of earnings is not eroded by inflation. Growth in endowment value is a sign of a responsible balance of spending and reinvestment. New gifts also drive the growth of the endowment.
New gifts typically support new initiatives. The university has a responsibility to invest the endowment to ensure that existing scholarships and professorships that do not receive additional funding also keep up with inflation and spending so they can continue to support the donor’s original intent.
Where can I learn more about university investments?
Each year, the Investment Office releases a comprehensive report on the endowment. Additionally, the U-M Public Affairs website includes an annual snapshot of investment performance, an endowment Q&A, and a link to the most recent University Record articles on endowment and investments.
Carol Roughton
The fact that investments in Israeli businesses only account for 0.1% of the endowment should in no way dissuade the Board from choosing to divest from the fund(s) in which they are positioned.
$15 million may seem inconsequential to those who work with such figures, but the impact of the board’s decision is much greater than can be quantified by a percentage of the endowment.
The decision not to divest is a political position that intimidates all University members by ignoring our agreement that the current genocide rises to the level of “serious moral or ethical questions”.
Judah Perillo
If it’s such a small percentage, why not divest it? The estimate of the endowment invested in Israeli companies is only 0.1%, so why the resistance to divesting? If tobacco – then 0.25% of the endowment in 2000 – is “antithetical to research, teaching, and service”, is war – all war, not just Israel’s genocide of Palestinians, but all war – not antithetical to research, teaching, and service? (Here’s the answer: it is!)
It is also particularly noteworthy that the UM regents only voted to divest from South Africa in 1983 because of Michigan State law, and not for any moral reason, and certainly not because of student movements on campus that the UM loves to brag about now.
Also, I would recommend everyone read TAHRIR’s endowment guide: https://tahrirumich.org/why-divest
Imad Bakkar
The policies of the state of Israel are far more genocidal than the apartheid policies of 1950’s 60’s and 70’s South Africa. The indiscriminate killing of over 35,000 and injuring close to 80,000 human beings, the large majority of them are women and children, the destruction of public universities and hospitals and almost every housing unit in Gaza are crimes against humanity. The size of investment is irrelevant, even if the investment in Israeli businesses is only $1, the University of Michigan as a leading educational institution in the world, by taking a moral stand on this issue, will show the type of commitment to human rights we as a University of Michigan family represent. Our moral stand will resonate throughout the public institutions around the U.S.A. I urge the Board of regents to divest now.
Karthik Ganapathy
Sheesh seems like the Administration has really gotten bad at their propaganda after Rick Fitzgerald left.
BTW the article currently states “The Board of Regents in March 2023 stated that it had listened carefully to multiple calls for divestment”; it was March 2024. If the Record staff cannot even fix basic typos, are you merely regurgitating the Administration’s propaganda without fact checking them?
Wyatt Childress
With all of that being said, and the precedent established being clear for all to see, what does the University define as “antithetical to research, teaching, and service” then?
Even within the own text, the author goes to say how there is no governing body, and no basis for what that encompasses. Aside from the established history of divesting from Tobacco and Apartheid, is there truly anything more befitting such a description than state sponsored genocide?
I think you would be correct to assume that, like others have already said, war is antithetical to the University’s mission. Without an established committee to hold hearings and logically analyse the Israel Divestment movement, this is all reactionary. This University is rapidly turning into a self-serving, self-righteous hedge fund. There is no clear interest from the administration at undertaking and holding true to the original reasoning for Divestment.
One would argue that this is the most pressing and clear issue within the student and faculty body, yet no such as hoc committee has been created. I would say that we have absolutely reached the point of “…a general consensus on a significant moral question has emerged within the University community.”
Yet, inactivity, excuses, and stalling. A future in politics awaits them.
Noah Weaverdyck
There’s lots of additional information about how the endowment “works” in the multiple articles from the Detroit Free Press investigations into the UM endowment a few years ago, e.g. “University of Michigan pours billions into funds run by contributors’ firms” and the links therein, detailing some pretty shading dealings:
https://www.freep.com/story/news/local/michigan/2018/02/01/university-michigan-endowment-donor-funds/1066143001/
Malik Mossa-Basha
If the University had to be compelled to divest from apartheid South Africa and Russia following aggression against Ukraine, perhaps they could try to be on the right side of history this time instead of being dragged to take an ethical stand that later proves to be obvious.
Karthik Ganapathy
Okay, I see that you guys quietly changed the year. Here is another sign of bad propaganda from the article:
“Claims that the university has $6 billion, or roughly one-third, of its endowment invested in Israeli companies are false.”
Okay… but who made these claims? At least in all written sources I could find, the Tahrir coalition has been precise in stating that the “University commits over $6 billion to investment managers who have profited from investments in Israeli companies and/or military contractors .” I traced back this claim to the March Regents meeting where Michael Behm pulled this statement out of thin air and proceeded to smugly debunk it. Would it be okay if I wrote an article and said “Claims that the Regents smuggle ancient artifacts into US soil are false.” when no one has claimed such a thing?
As I mentioned, all of this can be fixed if you guys bring Rick Fitzgerald out of retirement. His skills at craftily pushing Admin propaganda are unparalleled. If Rick doesn’t agree to come out of retirement, the only option is to divest from genocide and apartheid.