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Updated 5:00 PM October 25, 2005
 

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University investments post strong gains in FY 2005

The University's endowment grew by $700 million to $4.9 billion in the fiscal year that ended June 30, benefiting from private gifts and a 19.1 percent investment return, David Brandon, chair of the Finance, Audit and Investment Committee of the Board of Regents, told the board Oct. 21.

Brandon highlighted the annual Report of Investments that showed the total value of the University's investments grew by $900 million to $7 billion.

"This report shows again that our long-term diversified approach continues to allow us to generate superior returns by adding value in strong markets and limiting losses during challenging markets," said Timothy P. Slottow, executive vice president and chief financial officer.

U-M's endowment, the largest element of the University's investment program, is the 11th largest in the country and the 4th largest among public universities.

The University adheres to a spending rule for endowment earnings in order to preserve their value over the long term, while also providing stable financial support for academic programs, research and patient care, Slottow said.

Each year, University departments are able to spend endowment distributions of 5 percent of the average three-year market value. Most of these expenditures are directed to programs that have been designated by the donors of the endowment funds.

The endowment is invested primarily in a diversified set of equity-oriented investments, including common stocks, absolute return strategies, real estate, venture capital, private equity and energy assets. The endowment's investment mix has grown more complex over time as markets have become more specialized, and the University's larger pool of capital has permitted greater diversification and the implementation of more sophisticated strategies. "These trends are expected to continue," Slottow said.

Erik Lundberg, chief investment officer, said last year's performance was high by historical standards and was driven by broad investment gains made across the portfolio as most equity-oriented investments responded favorably to strong global economic growth and a low interest rate environment.

Lundberg said that while strong returns are welcome, he cautioned that the economic underpinnings that allowed for such high returns likely are not permanent. As recently as FY2002, the University experienced a negative investment return, and the average rate of return over a five-year period is 6.5 percent.

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