Correction appended: A previous version of this story mistakenly reported in the second paragraph that the University’s endowment was valued at 1.6 billion dollars. The endowment’s value fell by 1.6 billion dollars in the last year, but is valued overall at 6 billion dollars.
The University’s endowment fell 21 percent last year, a significant drop but one on par with endowments of other schools around the country.
The endowment’s value fell approximately $1.6 billion over the last year, University officials reported yesterday.
Reporting at the University’s Board of Regents monthly meeting, Executive Vice President and Chief Financial Officer Timothy Slottow presented the regents with the annual report on investments. The endowment, which was valued at $7.6 billion in June 2008 fell to $6 billion in June 2009, Slottow said.
The report presented to the regents yesterday showed that only one area of the University’s investments saw a positive return last year — a 4.6-percent increase in fixed income.
All other categories — equities, absolute return, venture capital, private equity, real estate and energy — posted double-digit percentage losses. Among the largest was a 38.5-percent drop in real estate assets and a 30.5-percent decline in energy investments.
In a committee meeting before the regents meeting, Slottow and Chief Investment Officer Erik Lundberg reported the news to the regents and discussed how the University would be affected by the decline.
Reading a statement during the regents meeting yesterday, Regent Katherine White (D–Ann Arbor) said although the drop is significant, the University is in a much better spot than many other schools.
Many other institutions have lost larger shares of their endowments, including Harvard University, which lost 27 percent of its endowment, and Yale University, which lost 30 percent over the last year.
However, some institutions lost less than the University of Michigan, including the University of Virginia, which saw a 21-percent drop in its endowment.
“Even though the banking crisis in the short term created a challenging year … over the past 10 years, the University’s endowment has earned an annualized return of 9 percent,” White said.
White said the overall increase is evidence that the University’s long-term approach to investing is paying off.
“Although these numbers show a significant decline in one year, the endowment is invested for the long term,” White said. “The overall performance of the portfolio is consistent with our diversified strategy to provide an ample amount of return to support operations at the University, while protecting the corpus and fostering the endowment’s growth.”
At the end of her statement, White recognized Lundberg and thanked him for his oversight of the University’s investments.
In a letter presented to the regents, Slottow and Lundberg wrote that the unexpected spikes and drops in the market are normal.
“While a negative 23-percent return for the endowment was always possible, it was about as unlikely to occur as the positive 44-percent return generated in the first year of the Investment Office’s operation,” the two wrote. “These widely different investment results underscore the importance of having a spending rule that smoothes out the impact of the volatility in financial markets and provides a steady and growing level of distributions from the endowment to support University operations.”
The University calculates the overall value of the endowment by averaging the quarterly market value of the endowment over a seven-year timeframe. The seven-year average is by far one of the most conservative approaches among universities, since most schools use three- or five-year averaging systems.
In an interview after the meeting, University President Mary Sue Coleman said she’s proud of the University’s long-term investment strategy.
“They are long-term thinkers and that has served us extraordinarily well,” Coleman said of Lundberg and the Investment Office. “None of us know what the markets are going to do, but I have great faith in (Lundberg’s) team.”
Despite her confidence, Coleman said additional cuts to University spending would be needed to offset expected cuts in state funding.
“We’ll be tightening our belts,” she said. “We’ve already said we’ve got to cut this year, but our goal is to protect the experience students have and always make that better.”
Regent Denise Ilitch (D–Bingham Farms) said in an interview after the meeting that she recognizes the University will likely face hardships in the coming years.
“I think it’s too early to tell but I am concerned that we’re going to have a difficult year next year overall,” Ilitch said. “I think we will be impacted — to what degree, it’s hard to say.”
However, Ilitch said she is proud that the University has been able to outperform many other institutions.
“I’m pleased with the performance,” Ilitch said. “I think we’ve done much better than some of our peers.”
Despite the hit to the University’s financial backbone, University officials expect the overall investment payout to increase in the coming year, because of the University’s seven-year rolling average method of calculation.
-Managing News Editor Jacob Smilovitz contributed to this report.