FLINT, Mich. — On Friday, Tim Slottow, the University’s executive vice president and chief financial officer, announced that the institution’s endowment reached an all-time high of $8.4 billion in fiscal year 2013, which ended on June 30.
The endowment grew from $7.7 billion to $8.4 billion over the fiscal year with an annualized investment return of 10.75 percent. Its highest value previously was $7.8 billion in fiscal year 2011.
The endowment is the second largest in the nation for public universities and the seventh largest among all universities in the U.S., according to findings by the National Association of College and University Business Officers and the Commonfund. Over the past 13 years, the endowment has increased from the fiscal year of 2000’s total of $3.5 billion — attributable to both significant fundraising efforts and investment strategy.
However, the University’s endowment on a per-student basis ranks 101st — lower than most top-tier private universities with much smaller student bodies than the university.
L. Erik Lundberg, the University’s chief investment officer, said in an interview he estimates that new donations to the endowment accounted for about $200 million of the increase in the 2013 fiscal year.
The University holds a 10-year annualized investment return of 10.2 percent. When the investment office was established 14 years ago, the endowment had an annualized rate of return of 9.6 percent. The University’s total cash and investments reached $10 billion for the first time as of June 30, according to the University’s annual investment report.
The distributions from the endowment help fund a host of programs, scholarships and professorships at the University — totaling $276 million in outlays for the 2013 fiscal year — a slight increase from the previous year’s $270 million spending. However, the vast majority of the endowment cannot be used for general fund and operational purposes since most of it is restricted by the donor’s original intention for their contribution.
The endowment earmarks nearly 25 percent of its funds for the University of Michigan Health System and another 20 percent for student support and financial aid. In a press release, Slottow said the 20 percent reserved for student aid has reached $1.7 billion.
In terms of what is actually withdrawn annually from the endowment’s total vaue, the University averages the value of the endowment over the past seven years then withdraws 4.5 percent of the average for use each year — allowing for more consistent cash flows and protecting the principal from market volatility. By basing its spending on the average market value instead of the current market value, the University can better stabilize distributions each year — ensuring that programs won’t have a windfall one year and nothing the next.
In an interview after the meeting, Lundberg said the endowment report reflects a changing financial climate, as the nation begins to inch out of the recession.
“Our changes tend to be gradual, but right now they tend to reflect that we’ve been recovering from the financial crisis and that the environment is normalizing,” Lundberg said.
The University’s endowment portfolio also includes a small program that invests in faculty entrepreneurs called Michigan Investment in New Technology. The program was first introduced by University President Mary Sue Coleman in October 2011.
“There’s been great reception by the entrepreneurs and we’re very excited about the ability to support our own businesses,” Lundberg said. By July of this year, the University had funded seven startups.
Lundberg said the initiative is in its early stages and the investments will take time to mature.
In a July interview, Rafael Castilla, the University’s investment risk management director, said the University will likely hold on to these investments for at least a decade.
“We have generally a very long-term horizon,” he said. “We hope there’s going to be a return, but we’re in no rush to sell as soon as possible.”
In their conclusion to the report, Lundberg and Slottow wrote that the University’s long-term investment strategy is sufficient for success in the future.
“Financial markets appear to be normalizing with greater distance from the financial crisis which should be rewarding for a globally diversified investment program,” Slottow and Lundberg wrote. “We remain confident in our investment strategy and the endowment’s ability to continue to provide support.”
The last decline in the University’s budget came in 2012, with the endowment’s total value falling by 0.5 percent — marking the first time the endowment decreased in value since 2009. The 2009 downturn was caused by the 2008 financial crisis and succeeding recession.
— Daily News Editor Peter Shahin contributed reporting.