Office of the Vice President for Global Communications

Friday, October 15, 2010

U-M earns 6.2 percent annual investment return for the decade, beats S&P 500

The Investment Office has reported a 6.2 percent average annual return on investments for the last decade. That compares with a 3.9 percent average annual return for all college and university endowments and an average loss of 1.6 percent for the S&P 500 for the same period.

U-M reported a 12.3 percent return on investment for fiscal year 2010, which ended June 30, as the financial markets recovered broadly. The one-year gain matched the average return for college and university endowments for the period.

U-M’s investment performance for both the past five- and 10-year periods puts it in 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.

In the past five years, the university’s long-term investment strategy and spending policies generated $1.1 billion in endowment distributions to support U-M operations, reported Regent Katherine White, chair of the Finance, Audit and Investment Committee, who presented the annual Report of Investments at the Board of Regents meeting Thursday.

U-M’s endowment, valued at $6.6 billion as of June 30, is up from $6 billion a year ago. The university distributed $255.6 million from the endowment to support operations in FY 2010. That is up from $244 million in FY 2009.

“Michigan’s investment model has outperformed the average endowment for the past decade and we think it will continue to work well,” said Erik Lundberg, chief investment officer.

The investment environment remains challenging, Lundberg said. The steps required to work off the excesses that led to the financial crisis likely will lead to lower investment returns. And uncertainty over whether the economy will continue to recover or will slide back into recession is causing high volatility in financial markets.

“We continue to have confidence in our long-term, diversified investment strategy and the endowment’s ability to continue to help support the university’s mission,” said Tim Slottow, executive vice president and chief financial officer.

“Uncertainty over the U.S. and other developed markets underscores the importance of having a distribution policy that provides for a stable and growing stream of distributions from the endowment,” Slottow said. “We feel that the university’s adjustments to the distribution policy in recent years ensure support for university operations over the long run.”


Click here for more information on cost-cutting measures at U-M.

The university’s prudent fiscal policies and aggressive cost cutting have allowed it to avoid the severe cash shortages and the resulting dramatic cuts reported at many other top institutions. The university has trimmed expenses each of the past seven years. Because of this approach, the university has not had to make emergency cuts or issue debt to support operations.

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 university’s endowment per student ranks 108th, which is lower than many private peers with much smaller enrollments.

The endowment is a collection of about 7,000 separate funds, the vast majority of which have 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 are invested so 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 U-M Health System. Approximately one-fifth of U-M’s endowment is earmarked for student scholarships and fellowships. 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 a portion of the endowment’s average market value calculated over the last seven years for operating purposes. The Board of Regents this year voted to reduce the portion distributed, from 5 percent to 4.5 percent, in order to better preserve and grow the endowment over time.  The reduction will be implemented gradually over several years.

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.