October 15, 2015
The University of Michigan's long-term investment strategy continues to provide the university with a steady stream of endowment funding, with fiscal year 2015 distributions increasing to $294.5 million as the total value of the endowment rose to $10 billion.
The return on investment for the university's endowment was 3.5 percent in FY '15, increasing the overall value of the endowment to $10 billion as of June 30, 2015, up from $9.7 billion the previous year.
The change in market value from the prior year was primarily due to investment gains and new endowment gifts. The university is in the midst of its Victors for Michigan fundraising campaign, which has a goal of raising $4 billion.
With a 10-year annualized return of 8.4 percent, U-M sits in the top quartile for long-term investment performance among university endowments. The U-M endowment is ranked the ninth largest among all U.S. universities and third among public universities after two university systems. On a per-student basis, U-M's endowment is the 88th largest endowment.
The figures are among those included in the university's annual investment report, presented Thursday to the Board of Regents during a meeting on the UM-Flint campus. That report also notes that the university's total cash and investments as of June 30 stood at $11.7 billion.
"The 3.5 percent investment return, despite last year's headwinds, is down from the strong 18.8 percent investment return in fiscal year 2014, but still near the top quartile when compared with all college and university endowments," explains Chief Investment Officer L. Erik Lundberg. Longer-term performance, he says, "is more than sufficient to sustain and grow the endowment in real terms net of spending."
Last year Lundberg cautioned that lower rates of return could lie ahead, noting that periods of high returns "usually beget lower future returns as markets often get ahead of underlying fundamentals."
Lundberg, who has led the U-M investment office since it was formed in 1999, said the FY '15 investment performance was tempered by sharply lower energy prices, which affected the performance from the university's relatively large allocation to natural resources; an appreciating U.S dollar that eroded the returns of the often-well-performing non-U.S based investments; and high starting valuations, which dampened returns from equity and fixed-income investments.
Distributions from the endowment that help fund university operations totaled $294.5 million in fiscal year 2015, up from $284.4 million the previous year, says Kevin Hegarty, the university's executive vice president and chief financial officer. During the last 15 years, distributions from the endowment have exceeded $3.2 billion.
"Because of our long-term approach to investments and a conservative approach to distributions, the university's endowment is able to provide increased funding for university operations through the up and downs of the market over time," Hegarty explains. "Donors appreciate this approach and have confidence the university will invest their donations appropriately."
The university's endowment actually is a collection of about 9,100 separate endowment funds that provide support for specific purposes such as scholarships, educational programs or professorships.
For example, roughly $2 billion, or 21 percent of the endowment, is restricted for use by the U-M Health System. Another $2 billion is earmarked for student scholarships and fellowships.
To ensure continuing support for future generations, the endowment funds are invested so part of the annual distribution can provide a steady flow of dollars each year. This long-term approach also is designed to protect and grow the endowment corpus in real terms, Hegarty says.
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. This reduction was fully implemented during FY '14.
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.