The University Record, September 26, 1994

Endowment Fund tops $1 billion mark

By Mary Jo Frank

The University’s Endowment Fund has topped the $1 billion mark for the first time in the U-M’s 176-year history.

“It is a milestone we should all be proud of,” Farris W. Womack, executive vice president and chief financial officer, told the Regents at their September meeting.

“We need to extend our appreciation to a large number of people,” Womack said, including deans and development staff members across the campus for their successful fund-raising efforts.

“The work that we have done in diversifying our portfolio also has paid dividends,” Womack added.

The Endowment Fund is made up of funds that donors have given with the intent of providing perpetual programs, explains Elizabeth S. Hokada, associate investment officer. The University invests the gifts and spends only the income from the investment.

The $1 billion, up from $160.6 million a decade ago, includes true endowment as described by Hokada and quasi endowment—funds functioning as endowment. Funds functioning as endowment include gifts donors have said can be spent or used as endowment.

The University has thousands of endowments. Hokada describes the Endowment Fund as a big mutual fund with each endowment owning a certain number of shares.

The recent bull market, gifts to the Campaign for Michigan and accumulated surpluses that are being invested all have contributed to the Endowment Fund’s recent growth, explain Hokada and Norman G. Herbert, treasurer and investment officer.

The University is meeting its goal of looking for long-term investments that provide increased amounts of distribution and protect against inflation, Herbert says.

Distributions over the last 10 years have approached 6 percent annually, providing funds for the University’s current operations.

In addition, the Fund has grown by 2.6 percentage points per year above inflation, Herbert notes. The 2.6 percent is “added value” above the gift and the growth that is needed to keep up with inflation, he adds.

Herbert attributes the University’s recent success to long-term investments in international and distressed markets.

The Endowment Fund is becoming an increasingly important source of revenue to support research, teaching, scholarships and fellowships, says Hokada, although proceeds from the Endowment Fund are still a small part of the operating fund compared with state support and student fees.

A strong, growing Endowment Fund also helps the University maintain its high bond rating so it costs less for the University to borrow money.

Moody’s Investors Service raised the rating of the U-M’s debt to Aa1 from Aa on March 17, marking the first time Moody’s had assigned a rating higher than Aa to a public university.

In announcing the new rating, a Moody’s spokesperson said, “The University’s financial condition is very strong, as successful fund-raising campaigns and conservative fiscal practices have contributed to the accumulation of a large endowment, as well as other funds that offer great financial flexibility.”

The U-M’s Endowment Fund is the largest of any single public university in the nation, according to the National Association of College and University Business Offices.

The U-M ranked 19th nationally among private and public colleges and universities in 1993 market value of endowment assets. Three public university systems had larger endowments—the University of Texas System, Texas A&M University System and Foundations, and the University of California system.

The top five institutions in terms of endowment in 1993 were Harvard University, the University of Texas System, Princeton University, Yale University and Stanford University.