‘U’ estimates endowment losses of 20 to 30 percent since end of June

BY ANDY KROLL
Daily News Editor
Published December 7, 2008

The University’s endowment has lost an estimated 20 to 30 percent of its value since the start of the fiscal year that began July 1, a University spokeswoman said Friday.

That makes the University of Michigan the latest in a string of colleges to see billions of dollars in investment value disappear in a matter of months.

The decline means the University of Michigan’s endowment, valued at approximately $7.6 billion as of June 30, could have lost between $1.52 billion and $2.28 billion in value in a span of just over five months. The last time the endowment reported an annual loss in investment returns was the 2002 fiscal year, when the fund lost 6.59 percent of its value.

For the 2007 fiscal year, the University’s endowment ranked eighth among all American universities and second among public universities in total value, according to data from the National Association of College and University Business Officers. But the country’s economic downturn has hit most of these endowments hard in the last year.

Harvard University President Drew Faust announced last week that the university’s $36.9 billion endowment — the largest in the country — has lost 22 percent, or about $8 billion, since the end of the last fiscal year. And in November, the University of California system announced a $1 billion loss to its endowment in the four months since the end of the 2008 fiscal year.

University of Michigan spokeswoman Kelly Cunningham said that although the endowment’s estimated losses were similar to those seen at other colleges and universities, the effect of the losses on the endowment payout — or the percentage of the endowment that the University actually spends each year — would be less than other schools because the University’s policy for determining the payout uses a rolling seven-year average market value for the endowment. Such a rolling average payout policy helps compensate for volatility in the financial markets by taking into account a longer span of time and financial performance for the endowment.

Many other colleges and universities use more current market values for their endowments to determine payout amounts. The University endowment’s payout policy is currently 5 percent of the seven-year average market value.

The seven-year average helps stabilize the University's spending and shields it from swings in the market. Rather than paying out a percentage of the endowment’s total current value, the University instead pays out a percentage of the endowment’s average value over the last seven years. Since recent large spikes in the endowment's value weren't accompanied by large increases in spending from the endowment, the University won't have to make deep spending cuts to account for the endowment's decline.

Although the University’s endowment reported returns of 6.4 percent in the fiscal year that ended June 30, the full effect of the ongoing global financial crisis was not felt in full until the current fiscal year began, and especially in the past two to three months.

These losses, though, were not entirely unexpected for officials in charge of managing the University’s endowment.

In a September meeting of the Senate Advisory Committee on University Affairs, a University of Michigan faculty governance board, Chief Investment Officer Erik Lundberg said he predicted the next two to three years would be “rough” and “slow going” for the endowment.

Some of the losses suffered by the endowment have likely come from the fund’s stock holdings, which, as of June 30, made up just over 27 percent of the $7.8 billion endowment. Between July 1 and Dec. 1, the Dow Jones Industrial Average dropped from 11,382 to 8,149 points — a loss of about 28 percent. During the same period, the S&P 500 — an index of the values of 500 widely-held U.S. stocks — dropped by about 36 percent, from 1,284 to 816 points.

The endowment as a whole consists of more than 6,000 separate funds, including stock holdings. Investments in bonds, venture capital, private equity, real estate and energy also comprise the endowment’s overall portfolio, which is managed by Lundberg and Chief Financial Officer Tim Slottow.

The news of the endowment’s losses comes as officials try to cut expenditures throughout the University to deal with the difficult economic climate in the state and nationwide.

The University says it has cut expenditures in the general budget by nearly $120 million over the past five years and plans to increase that total to $135 million with cuts to the budget for the current fiscal year, according to a report released by the Office of the Provost.

Cost-cutting measures include renegotiating contracts with University suppliers to reach more favorable terms, new buildings that are more energy efficient, encouraging behaviors that save on energy costs, and the use of financial gifts to aid the University’s general fund.

Given the volatility of the current financial markets around the world, and the prediction that the ongoing financial crisis could stretch far into 2009, University President Mary Sue Coleman discussed in an October interview the idea of further lowering the endowment’s 5 percent payout.

“I’m not convinced we shouldn’t go lower,” she said. “If we’re gonna have super volatile times, would we be better off at four-and-a-half (percent)?”