FLINT — Though the University’s endowment continued to increase in fiscal year 2015, its return on investment decreased by 15.3 percent from 2014, University administrators announced at Thursday’s University’s Board of Regents meeting.

The endowment is a pool of funds, much of which are received from donors. The principal amount of the fund remains untouched, but is invested and grows with interest from year to year. The University does not spend all the resulting interest, resulting in a theoretically never-ending source of funding.

“You can think of it, in a way, as this giant bond … which pays out a certain amount of interest every year to the University,” said Rafael Castilla, director of investment risk management in the University’s investment office, said in a 2014 interview with The Michigan Daily.

The total value of the endowment increased to $10 billion this year from $9.7 billion in 2014, due to a 3.5-percent return on investment in fiscal year 2015. The distributions from the endowment, which represent the money the University spends from returns on the endowment, were $292.5 million this year. In 2014, the endowment had an 18.8-percent return on investment, and chose to distribute $284.4 million.

The University bases its distributions on a seven-year average of the endowment’s value, pulling a set percentage of that average value every year. In 2014, the University implemented a reduction to the set percentage, from 5 to 4.5 percent annually.

“Our investment team’s long-term performance continues to rank in the top quartile compared to the performance of other large university endowments,” Kevin Hegarty, executive vice president and chief financial officer, said Thursday.

Erik Lundberg, University chief investment officer, said the investment return is down due to lower energy prices — the University allocates a large number of its investments to natural resources — and the appreciation of the U.S. dollar, which resulted in lowered foreign investments. The endowment also suffered losses due to high initial estimated values for equity and fixed income investments that did not end up performing as well as expected.

However, in a press release, Lundberg said long-term performance “is more than sufficient to sustain and grow the endowment in real terms net of spending.”

The University’s endowment received a slightly lower ranking this year compared to other university endowments. National experts ranked the fiscal year 2015 endowment as the ninth largest in the nation, down from the seventh largest in 2014, according to U.S. News and World Report. It also went from being the top endowment of any public institution to being third.

When compared per student the University’s endowment rank actually increased this year. The funds per student are ranked at 88th in the nation, compared to 94th in fiscal year 2014.

Despite the large pool of money the endowment represents, the University is limited by how how the endowment can be spent. Some endowment funds are only used for specific purposes — such as scholarships, educational programs or professorships — and thus is not the University’s only source of funding.

Twenty-one percent of the total endowment distribution is also restricted for use by the University Health System, while another $2 billion goes toward student scholarships and fellowships.

In a press release Thursday, University spokesman Rick Fitzgerald said because of those limitations, the University still needs financial support from other areas to fund other operations, citing increases in tuition as one way to make up those costs.

The University’s Office of Public Affairs states on its website that funding from external and internal sources is critical for University functions:

“The endowment provides a margin of excellence for the University, but it does not replace the unrestricted funds coming from state support and student tuition dollars.”

Leave a comment

Your email address will not be published. Required fields are marked *