U-M's endowment grows in a challenging year

The University endowment grew to $7.6 billion at the end of fiscal year 2008 from $7.1 billion in fiscal year 2007, according to the annual Report on Investments presented by Katherine White, chair of the Finance, Audit and Investment Committee, at the Board of Regents meeting Oct. 23.

The endowment, which supports core operating expenses at the University, benefited from the generosity of alumni and other donors as well as from investment gains. The endowment's positive 6.4 percent investment return for the year ending June 30 compares with a loss of 13 percent by the Standard & Poor's 500 stock index during the same period and also compares well with the average endowment in the United States, which lost value last year.

Through the end of fiscal year 2008, the University has generated annualized returns of 17.5 percent in its endowment over the last five years, which places the University at the upper end of the top quartile of all endowments, as reported by Cambridge Associates, an investment consulting firm that serves colleges, universities and large institutional investors.

Erik Lundberg, chief investment officer, said U-M's investment strategy performed well last year in a challenging environment for investments and noted that the long- term strategy also has helped limit losses in challenging markets in the past. "We are coming off a long period of historically high returns, and typically periods of high returns are followed by periods of lower returns," Lundberg said with a nod to the current markets.

"Our overall goal is to ensure continuing support at predictable levels for the University's activities in the face of inflation and the inevitable swings in financial markets similar to what we are experiencing now," said Tim Slottow, executive vice president and chief financial officer.

"Endowments are important because they provide a permanent stream of funds to support financial aid, key educational programs and innovative research," Slottow said. "The generosity of our donors and the success of our investment strategies are key to fulfilling our mission in society now and for future generations."

The University's $7.6 billion endowment is the eighth largest in the country among institutions of higher learning and second largest among public universities. About 20 percent of our total endowment, or $1.5 billion, has been designated by donors for student aid.

U-M's endowment is a collection of about 6,500 separate funds, each of which has been donated to provide permanent support for specific University needs, such as scholarships, educational programs or professorships. Institutions legally are bound to spend these funds only for the purpose designated. To ensure continuing support for future generations, the funds themselves are not spent, but invested so that part of the annual payout can provide a steady flow of dollars each year.

The U-M distributes 5 percent of the endowment's average market value calculated over the last seven years for operating purposes each year. Distributions are limited to 5.3 percent of current fair value. Basing the spending on a trailing average market value instead of the current market value allows U-M to stabilize endowment distribution year-over-year so operating budgets are insulated from the volatility in financial markets and receive dependable support over time.

Endowment distribution supporting operations totaled $227 million in FY 2008 for a total of $950 million in the past five years.