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Endowment drops in value by $100 million

By Paige Pearcy, Daily News Editor
and Peter Shahin, Daily Staff Report
Published October 21, 2012

For the first time since 2009, the University’s endowment decreased in value from $7.8 billion to $7.7 billion during fiscal year 2012.

At the University’s Board of Regents meeting on Friday at the University’s Flint campus, Regent Katherine White (D–Ann Arbor) spoke about the University’s investment report, and explained that the endowment decrease can be attributed to spending patterns.

Additionally, the University’s equity investments, mostly stocks, declined 9.25 percent in value since last year. This negative trend contrasts with a general rise in the value of the Dow Jones Industrial Average by about 8 percent between June 2011 and June 2012.

The University’s Report of Investments notes that some of the spending “was partially offset by new endowment gifts and transfers.”

The endowment was valued at its highest ever in fiscal year 2011. The previous two fiscal years where the endowment decreased — 2002 and 2009 — have been attributed to the years of the dot-com industry boom and the most recent economic recession, respectively. This is the first time the data, which was first recorded starting in 1988, show the endowment decreased in a non-recession year.

Despite the endowment’s decrease, its long-term performance in a more than ten-year period has performed remarkably well, growing 9.61 percent on an annual basis. In a conclusion to the report, Timothy Slottow, the University’s executive vice president and chief financial officer, and L. Erik Lundberg, the University’s chief investment officer, wrote that the long-term growth places it within the upper quartile of highest performing college endowments.

“Financial markets continue to be challenging due to uncertainties tied to the lingering effects of the financial crisis and lower global growth prospects,” Slottow and Lundberg wrote. “Investments could remain volatile and low in coming years as a result.”

White pointed out the growth is particularly of interest because it outperforms the ten-year return of S&P 500 — an index of stock market prices based on major companies.

“The endowment’s annualized ten-year return … is 9.6 percent, and that is ahead of the custom benchmark by 2.1 percentage points and is well ahead of the well-known S&P stock index, which has gained 5.3 percent annualized over the same 10 year period,” White said.

The report indicated the biggest strong point in the otherwise mediocre performance of the portfolio was a 14.77 percent increase in fixed income payments to the University. Fixed income is mostly made up of bonds that are required to issue periodic returns to the borrower.

Slottow added that fixed income’s role is primarily as a “deflation hedge,” and has benefited from falling interest rates in global markets.

The University’s investments in venture capital, private equity and real estate also enjoyed modest gains. Investments in natural resources — mostly oil and gas — declined by 2.4 percent.