University of Minnesota Foundation Investment Advisors
Professional oversight of U of M Foundation investments is managed by University of Minnesota Foundation Investment Advisors (UMFIA), a nonprofit subsidiary formed in 1998 to provide full-time, professional investment management to the U of M Foundation on a cost-effective basis. UMFIA has a staff of eight and its own UMFIA board of directors that includes representation from the UMF Board of Trustees as well as from UMF leadership.
Endowment investing: goals and challenges
UMFIA aims to achieve an appropriate risk-adjusted return on client assets by linking intelligent asset allocation with skillful investment implementation. The goal of this approach is to provide a reasonably stable and predictable flow of funds for clients' operating budgets and capital needs.
Endowment assets at the University of Minnesota Foundation are invested to achieve two conflicting goals:
- Maintain the purchasing power of the donors' gifts.
- Support a high and sustainable rate of current spending.
To meet the first goal, the portfolio's return must meet or exceed the spending rate plus the rate of inflation. Therefore the required return above inflation, called the required real return, is equal to the rate of spending--currently five percent, based on today's payout rate and cost of fund administration at UMF.
Although endowment gifts are expected to be permanent, they support spending in the present. Today's endowment funds are expected to continue to support their respective activities indefinitely, while newly endowed gifts expand rather than replenish the private support of the University. During long periods of down markets, the endowment may need to support current spending through a portion of its principle, thus jeopardizing investment earnings in the long run.
Efficiency through diversification
Diversifying the portfolio achieves the efficiency required to support a high real rate of return while reducing the risk of extended poor performance. Even good investments or asset classes are susceptible to long periods of poor returns. In a diversified portfolio, many asset classes must perform poorly concurrently for the entire portfolio to perform poorly.
The UMF endowment's asset allocation is intended to generate investment returns that compete with equity returns in the long run, but with much less variability. Historically, the UMF endowment portfolio has met or exceeded broad market equity returns. The portfolio's asset allocation and its diversification have been the primary driver of this successful outcome.
A natural consequence of a diversified portfolio is that it will never be the best performing portfolio over short periods or months or even years. As the economy experiences long-term cycles of expansion and recession, asset class leadership positions change. Over these longer periods of covering full economic cycles, the UMF endowment's diversified portfolio return is expected to be competitive with the best performing asset classes, including equities. The greater consistency in investment returns will result in more dollars available for use in a consistent fashion.
View the most recent UMF quarterly endowment report.