Office of the Vice President for Global Communications

Friday, October 16, 2009

U-M earns 9 percent annual investment return for decade

The Investment Office, which marks its 10th anniversary this year, has a lot to celebrate. Despite a negative 23 percent return on investment in Fiscal Year 2009, the university’s 10-year annual investment return through FY 2009 was 9 percent. The S&P 500, in contrast, lost on average 2.2 percent per year for the same period, and the average university endowment returned 4.2 percent.

In the past five years, the university’s long-term investment strategy and spending policies generated $1 billion in endowment distributions to support U-M operations, reported Regent Katherine White, chair of the Finance, Audit and Investment Committee. She presented the annual Report of Investments at the Board of Regents meeting Oct. 15.

Even with last year’s notable decline, U-M’s investment performance puts it in the upper end of the top quartile of all endowments for both the past five- and 10-year periods, as reported by Cambridge Associates, an investment consulting firm that serves colleges, universities and large institutional investors.

U-M’s endowment, $6 billion as of June 30, is down 21 percent from an all-time high of $7.6 billion in FY 2008. However, new gifts from alumni and other donors have helped offset investment losses and allowed the U-M to distribute $244 million from the endowment to support operations in FY 2009.

“Despite the significant volatility of investment returns, the university’s long-term diversified investment strategy continues to provide predictable support for university operations,” says Tim Slottow, executive vice president and chief financial officer.

“Our goal is to generate sufficient returns to sustain spending and grow the endowment in real terms so it can provide a steady stream of distributions to support university operations over the long run,” Slottow says.

Erik Lundberg, chief investment officer, says, “Our investment model has worked well for the past decade, and we think it will continue to work well.”

High unemployment and excessive debt continue to be a drag on the U.S. economy, Lundberg says. However, he foresees the investment environment returning to a healthier state during the next year.

“Other parts of the world are growing more rapidly, which should help,” he says.

Although U-M’s endowment loss for FY 2009 is similar to those experienced by other schools with large endowments, the university’s aggressive cost cutting and prudent fiscal policies have allowed it to avoid the severe cash shortages and the resulting dramatic cuts reported at many other top institutions.

“We have been trimming our expenses for the past six years because of declines in the state appropriation, and we manage our liquidity very carefully,” Slottow says. More information can be found at “We have not had to issue debt to support operations or make emergency cuts.”

The university continues to maintain the highest credit ratings from both Standard & Poor’s (AAA) and Moody’s Investor Services (Aaa), an indicator of U-M’s strong financial health and outlook.

U-M’s endowment is the seventh-largest in the country among institutions of higher learning and the second-largest among public universities. The endowment is a collection of about 7,000 separate funds, each of which has been donated to provide permanent support for specific purposes such as scholarships, educational programs or professorships. 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.

Twenty-four percent of the endowment is restricted for use by the Health System.

Approximately one-fifth of U-M’s endowment — $1.15 billion — is earmarked for student scholarships and fellowships. Donors to the recent fundraising campaign contributed $545 million for student support, including 2,045 new endowed scholarships valued at $260 million, generating $13.2 million for students in fiscal year 2009. The endowment and generous donor support help U-M maintain its commitment to meet the full demonstrated financial need of all undergraduate students from Michigan.

U-M annually distributes 5 percent of the endowment’s average market value calculated over the last seven years for operating purposes. 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.

Distributions from all investments represent about 6 percent of the university’s $5.1 billion total operating budget. Endowment distributions alone make up 5 percent of the total operating budget.

In February 1999 U-M announced it would create a new position of chief investment officer, reporting directly to the executive vice president and chief financial officer. The regents established the position of chief investment officer and appointed Lundberg in September 1999.