The University of Michigan’s endowment, which is currently valued at $17 billion, rose by an estimated $4.7 billion in the 2021 financial year, a 40.6% return on investment. The increase was announced by Geoffrey Chatas, executive vice president and chief financial officer, at the Oct. 21 Board of Regents meeting.
This year, higher education institution endowments across the U.S. saw the strongest annual performance since 1986, with an increase of 27% on average. Many similarly endowed schools to the University announced eye-popping figures: Brown University announced a 51% return and Washington University in St. Louis broke records with a return of 65%.
Brian Smith, U-M associate vice president for finance, said the timeline for an endowment is not one year but “perpetuity,” leading him to remain cautious when speculating on future growth. Over a 20-year period, the endowment’s return averages around 9.5%.
“The endowment is here for the long haul and to provide consistent support or raw consistent income,” Smith said. “A 40% year is definitely an outlier. It’s not often that we have a year like that. In financial markets in particular, over time reversion to the mean typically proves out.”
The growth of endowments generally mirrors the health of the stock market, which has more than doubled its value in 2021 from its lowest level in March 2020. Soaring tech company stocks, various federal COVID-19 relief bills and interest rate cuts from the U.S. Federal Reserve all contributed to a booming stock market, despite the pandemic.
Smith said the bulk of the University’s endowment growth is due to the returns from venture capital and private equity funds, two asset classes that higher education institutions increasingly invest in.
However, those gains for venture capital and private equity funds are “unrealized,” meaning they are not liquid, according to Smith. Non-liquid assets are typically those that can’t be quickly converted into cash, like real estate properties or land.
“Venture capital and private equity are private transactions that aren’t publicly traded,” Smith said. “Typically the underlying investment agreements could be 10-plus year commitments where you’re not going to get your money for years down the road.”
Business junior Noah Maciulewicz, president of student investment group Wolverine Capital Investments, explained that the endowment benefited from dips in the stock market coinciding with the predetermined days when shares were purchased.
“Every time that the University has bought more shares has been when the market has been in the absolute best position, which is why the endowment’s been making so much money over the past year and a half,” Maciulewicz said. “The people managing the fund are making good stock picks and the time in which they’ve done investing has just happened to be absolutely perfect.”
John Burkhardt, clinical professor emeritus in the School of Education, said donors tend to give more money to schools with large existing endowments, and endowment growth relies on the long history of donations since the University’s founding in 1817.
“One of the functions for big endowments is how long has the institution been soliciting support from donors,” Burkhardt said. “Contributions made to these institutions that were founded in the 19th century have been earning interest for a very long time. This is just a statement of American society: If you have money, you make money.”
The rules of the endowment
Despite the high value of the endowment, much of the $17 billion is tied to more than 12,000 individual funds with legally binding agreements from donors on how the funds are used. These uses include paying for professorships, scholarships or buildings. Only the $5.6 billion “unrestricted” funds and investment returns can be used at the discretion of the administration.
In 2010, the Board of Regents set a minimum 4.5% distribution rate of the investment returns to be spent on University operations each year, a decrease from the previous 5%.
The University distributed 3.8%, or $404 million, from the endowment funds during the 2021 fiscal year, which ended on June 30, 2021. Undistributed returns are reinvested in the endowment to “preserve the fund’s long-term purchasing power against inflation and market volatility,” according to the University Public Affairs website.
While the University financial reports are publicly available, information regarding specific investments is not. This is due to a 2004 law passed by the Michigan legislature protecting higher education institutions from information requests for investments if they published an annual report listing the type, amount and performance of the endowment funds.
The Board of Regents and the Investment Advisory Committee are responsible for reviewing investment decisions. Smith outlined the investment process: The Office of Investments first identifies investment opportunities, then Chatas reviews the investment and finally it goes to the Board of Regents for approval.
The first rejection of an investment proposal by the Board of Regents in over two decades happened in Dec. 2019 after extensive protests by students. The proposal suggested investing in Vendera Resources, a manager investing in oil and gas production.
The regents have since voted to disinvest in fossil fuels and commit to net-zero endowment by 2050. This change marked the third time the endowment was divested due to a reason unrelated to investment returns. The first was in 1978 from corporations associated with apartheid in South Africa and the second in 2000 from tobacco companies.
Controversy in Investment Advisory Committee
The Investment Advisory Committee faced scrutiny following an investigation by the Detroit Free Press released in Feb. 2018. The investigation reported that $400 million, or roughly 2%, of the endowment was invested in funds managed by members of the Investment Advisory Committee or in companies led or owned by the members.
The investigation also found that an internal audit of the Investment Office in 2014 was unpublished, leading to concerns about a lack of oversight of the office’s activities. Search for an external auditor began in 2016 and had not been selected by the publication of the investigation.
In March 2018, University President Mark Schlissel said during an interview with the Detroit Free Press that he “dropped the ball” on hiring an external auditor. The University signed a contract with accounting firm PricewaterhouseCoopers in April 2018 and in August 2018 released a report of the audit in the investment process and gave recommendations to increase efficiency.
Following Schlissel’s interview, the University announced that it will require Investment Advisory Committee members to transition from verbal disclosure to written conflict-of-interest disclosure.
The University’s Office of Public Affairs published a website with their responses to the concerns raised by the Detroit Free Press investigation. University spokesperson Rick Fitzgerald recently reiterated in an email to The Michigan Daily these responses and said the Investment Advisory Committee makes no investment decisions.
“The university’s investment strategy is to maximize financial return with an appropriate level of risk,” Fitzgerald said. “The fact is, U-M alums are some of the top investment managers in the nation. The university would be foolish not to reach out to these alumni for their high-level advice and, when it fits with the university’s investment approach, to invest in well-managed funds with principals or founders who are university alumni.”
Fitzgerald noted that in addition to review by the Board of Regents, “the university’s Investment Conflicts Committee reviews investments for any potential conflicts of interest.”
Despite endowment growth, students and faculty remain frustrated with how the money is used
In June 2020, the Board of Regents first failed to approve and then passed a 1.9% tuition increase for the 2020-2021 school year, despite criticism from the student body, a lack of public comments at the second regents meeting and a widely circulated petition calling to lower tuition due to the recession and ongoing COVID-19 pandemic.
The 2021-2022 budget also included a tuition increase of 1.4% ($230 per year) for in-state students and 1.8% ($966 per year) for out-of-state students. Schlissel and Provost Susan Collins both said the tuition increase was below the rate of inflation and necessary to provide financial aid to students who need it.
Burkhardt attributed these rising costs to changing perceptions of what a college education provides.
“Higher education has become less of a universal public good and is perceived to be an individual benefit,” Burkhardt said. “Students and their families are paying a higher percentage of the cost.”
Burkhardt also said the tuition rate increase is in part due to a decrease in state financial support as a function of inflation and growth of the student population. In 2021, the state of Michigan gave the University $373 million, $31 million less than the amount of money disbursed from the endowment.
“States are investing a smaller share in higher education budgets than ever before,” Burkhardt said. “There’s been a behind-the-scenes tax shift so that state (higher education) institutions are expected to charge higher tuition than ever before. Legislatures are saying, ‘well, you can go raise money from your donors [because] if there’s support for what you do people will step up and cover the gap.’”
The responsibility to meet the financial needs of the University through philanthropy has been increasingly falling on University presidents. Law student Deborah Rookey, chair of the Central Student Government Ethics Committee, said she thinks the president’s role as fundraiser inherently conflicts with the educational purpose of the University.
“We have this issue where the president’s job is largely assessed by their ability to fundraise and grow the endowment,” Rookey said. “Improving student life, the quality of education, research are the basic premises of the University, but you’re essentially incentivizing the president to act against the purpose of the institution they’re supposed to serve.”
Rookey said the endowment should pay for the programs that address the basic needs of the student body. She said the CSG currently allocates a substantial portion of their legislative discretionary budget towards the Maize and Blue Cupboard and the Rackham Student Government’s Microgrant Program.
“It’s a huge percentage of our funding that we are being forced to give to students because student quality of life has decreased significantly,” Rookey said.
Rookey said she thinks the COVID-19 pandemic is the type of situation which calls for more endowment funds to be used.
“The basic purpose of an endowment is financial stability … (a) reserve for times of need,” Rookey said. “I don’t know when there’s been a time of need greater than the last year and a half.”
LSA sophomore Makiah Shipp, a senior policy adviser to CSG, said she thinks the endowment could also be used to increase equity on campus by supporting groups of students historically marginalized from higher education institutions. Shipp pointed to the low admissions and retention rates of Black students, Indigenous students and people of color on campus.
“Since they aren’t prioritizing (BIPOC students), then it’s revealed that their priority is a return on investment monetarily, rather than a return on investment in the way that their students are performing,” Shipp said.
Burkhardt echoed this sentiment and said the lack of student prioritization is evident in the amount of funds attributed to them.
“Do we owe something to today’s students to reverse the structural disadvantages that some individuals and groups experience?” Burkhardt said.
In addition to financial inequities, Burkhardt suggested the endowment could be used for incentivizing women to enter STEM fields or increasing Indigenous students’ representation on campus.
Students and faculty want more transparency and public accountability
Kentaro Toyama, School of Information professor and member of the Faculty Senate’s Financial Affairs Advisory Committee, said he wishes the University included the opinions of more community members when making decisions related to the endowment.
“There should be representation of students and faculty and staff and alumni as well the regents and the administration in determining how much of the endowment we spend in a given year as well as how that money is spent,” Toyama said.
Rookey said she is not satisfied with the excuse that funds are reserved for certain purposes.
“If you’re getting so much money that’s earmarked in ways that you just can’t use it, you’re doing something wrong in your fundraising,” Rookey said. “You’re not asking for money for students in that case.”
Toyama said he wished the administration’s primary concern wasn’t the endowment.
“I think it’s terrific that we’ve done so well with endowment, but I think the flip side of that is it’s very likely that the focus on growing the endowment is possibly happening at the expense of other values that we would care about at the University,” Toyama said.
Daily Staff Reporter Elissa Welle can be reached at elissajw@umich.edu.