The University Record, October 15, 1997

Endowment hits $2 billion

By Jane R. Elgass

Gifts to the Campaign for Michigan, a strong market and the results of changes in investment strategy begun 10 years ago moved the University's endowment fund to a valuation of $2 billion as of June 30, the highest it's ever been.

Income from the endowment fund provides ongoing support for a number of campus activities and programs, including such things as endowed professorships. The high valuation is particularly important as the University seeks to diversify its bases of su pport in light of level or declining support from the state, federal government and student tuition and fees.

In fall 1986, the Regents approved a shift in overall investment policy that emphasized equities and diversification of the investment management. The new program began in January 1987.

The portfolio went from less than 50 percent equities to 70 percent equities after the change. Today it is 80 percent equities, "a significant change," according to Norman G. Herbert, associate vice president and treasurer.

"We're shifting more and more to equities, which provide a higher rate of return," he says. "And we've adopted a broadly diversified approach to equity investing by including such areas as real estate, venture capital, energy and distressed debt.

"We've also tried to be more opportunistic in recent years," Herbert explains. "For example, with the Regents' support, we were able to invest $50 million in emerging market bonds shortly after the devaluation of the Mexican peso in late 1995 devasta ted the value of Latin American bonds. Having generated from 50-60 percent returns, we took $65 million out and redirected it primarily to emerging market stocks. In the months ahead, we will probably take more out of the $76 million remaining in the st rategy."

Herbert notes that the University started its venture capital portfolio in the early 1990s, "when venture capital was regarded with disfavor. That is why we are now able to benefit from the development of companies such as Netscape, Ciena and Amazon. com. Last month, a venture fund in which we had invested $5 million distributed to us $12 million in Ciena stock alone.

"We continue to take a buy low/sell high approach, but don't 'jump on the bandwagon' just because others do," Herbert adds. "We hope to identify the investment possibilities in advance, before they become popular. And then we monitor performance clo sely to decide when we get off."

The University retains a number of firms to help handle investments, each with special areas of expertise‹publicly traded equities, tactical asset allocation and fixed income management. However, it is not so much the firm the University retains as i t is the individual investment manager.

"Until recently," Herbert explains, "we had retained Qualivest, a manager of small cap value equities. The individual we'd worked with left the company and set up his own firm. Because of his good record, we went with him. This represents a change over the past few years, and everyone is now more comfortable with this type of management of the portfolio."

Higher rates of return have come about also based on a decision by the Regents in 1994 to take a long-term approach to funds in the University Investment Pool (UIP). "We decided that 30 percent of the portfolio should be a liquidity pool, quickly ava ilable if necessary. The other 70 percent could be exposed to a long-term strategy. Without the change, the UIP would have earned about 6.6 percent. By shifting to the long-term strategy, we got returns of about 11 percent. The bottom line‹$40 millio n to $50 million added value to the University."

Herbert notes that at the start of the Campaign for Michigan, the University was working to create a "four-legged stool." Three legs already were in place, with income of about $300 million for each‹research funding, student fees, state support. The fourth leg would be private giving from the Campaign as well as support from the investment portfolios.

The Campaign added $158 million to the budget in 1996­97, Herbert explains. Add to that $76.4 million of endowment income and about $70 million from funds distributed from working capital, and you get about $306 million, making that leg on the stool about equal to the others.

"Ten years ago, support from the endowment fund was about $14 million," Herbert says. "Today it stands at $76.4 million, better than five times more."

Based on 1996 figures from The Chronicle of Higher Education, the latest available, the U-M ranks fourth among public universities in endowment value. On June 30, 1996, the U-M portfolio was valued at $1.624 billion, compared with the University of T exas system at $5.697 billion and the University of California at $2.572 billion. The U-M ranked 17th overall, with Harvard topping the list at $8.811 billion.

The U-M also has had good overall returns over the past three fiscal years: 12.4 percent in 1994­95, 17.5 percent in 1995­96 and 18 percent in 1996­97.