Office of the Vice President for Global Communications

Friday, October 14, 2011

U-M endowment grows to $7.8 billion with 24.3 percent annual return

The university’s endowment grew to its highest level ever — $7.8 billion — at the end of fiscal year 2011, fueled by a 24.3 percent investment return for the year ended June 30.

 

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The strong return on investment was among the highest of all college and university endowments in a worldwide investment environment that remains volatile. It follows a 12.3 percent return for FY 2010.

The endowment report was presented to the Board of Regents on Thursday. Regent Katherine White, chair of the board’s Finance, Audit and Investment Committee, called the return on investment “very good news.”

She noted that over the last five years the university’s rate of return on its long-term investments has averaged 7.4 percent. That consistency has allowed the endowment to provide $1.2 billion in distributions in the last five years to support U-M operations.

“Last year’s solid gain adds to a long-term record of performance that places the university in the top level of investment returns among university endowments,” said Erik Lundberg, chief investment officer.

But Lundberg cautioned that high returns do not last forever. “While such high performance over a year is welcome, the extreme financial volatility since the end of the fiscal year is a pertinent reminder that high returns typically are followed by periods of low returns.”

U-M’s endowment, valued at $7.8 billion as of June 30, is up from $6.6 billion a year ago and $6.0 billion in 2009. The university distributed $266 million from the endowment to support operations in FY 2011, up from $255.6 million the year before.

“The 10 percent annualized return since the Investment Office was established a dozen years ago is consistent with the university’s goal of generating a rate of return sufficient to provide dependable support for operations while protecting and growing the endowment corpus,” explained Timothy P. Slottow, executive vice president and chief financial officer.

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 112th, which is lower than many private peers with much smaller enrollments.

The endowment actually is a collection of about 7,200 separate endowment funds that provide support for specific purposes such as scholarships, educational programs or professorships. Donors provide a significant portion of these funds. To ensure continuing support for future generations, the funds themselves are invested so part of the annual payout can provide a steady flow of dollars each year.

About one quarter of the endowment is restricted for use by the U-M Health System. One-fifth of U-M’s endowment is earmarked for student scholarships and fellowships, which provided $65 million in financial aid for FY 2011. 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 last 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 is being implemented gradually over several years.

Basing the spending on a trailing average market value instead of the current market value allows the university to stabilize endowment distribution year-over-year so operating budgets are insulated from the volatility in financial markets and receive dependable support over time.