Endowment update

THE UNIVERSITY OF MINNESOTA FOUNDATION

Report for the periods ended June 30, 2018

Designated by the University of Minnesota’s Board of Regents as the central development office for the University, the U of M Foundation (UMF) plays a key role in supporting greatness across all five U of M campuses. UMF accomplishes this by raising gifts from individuals and organizations, investing funds for maximum impact, and stewarding gifts to ensure they are used as donors intended.

Donors who wish to leave a lasting legacy at the University of Minnesota may choose to make endowed gifts to create new funds or contribute to existing funds. These funds are pooled and invested together as the UMF endowment. UMF manages the investment and spending of approximately 6,000 endowed funds, each one representing a vision for improving lives and creating a better tomorrow.

Managing and investing the endowment

The endowment portfolio is invested by UMF Investment Advisors (UMFIA), a nonprofit subsidiary formed by UMF’s Board of Trustees in 1998 to provide dedicated, professional active portfolio management. UMFIA has a board of directors that includes representation from the UMF Board of Trustees as well as from UMF leadership.

Investment strategy

The UMF endowment portfolio is uniquely structured and managed to meet two goals: preserve the real purchasing power of endowed gifts for the long term while simultaneously supporting a meaningful and dependable rate of spending, currently 4.5% of a fund’s average market value over the previous 20 quarters.

The portfolio is highly diversified and actively managed and has much less reliance on traditional common stock exposure than what is found in a standard 65/35 equity/bond mix. The goal is to maintain stability and capture equity-like returns over the long term, while avoiding the effects of sharp and prolonged market declines. This means that, while on average, UMF’s returns will not experience the highest highs, they will also avoid the lowest lows.

This strategy is designed to create predictable and stable funding over the long term; however, year-to-year short-term results will often look different from those of our peers and the standardized 65/35 market benchmark.

Asset allocation

How has the UMF endowment performed over the long term?

The UMF endowment has performed well over the long term, making it possible for funds to provide predictable and stable funding to support their designated programs. The chart below shows the growth of $1 invested in the endowment in 1990 compared with the Foundation’s investment goal and a 65/35 market benchmark. Since the inception of UMFIA, our portfolio return has exceeded market benchmark returns by +2.4% annually, with less downside risk.

Growth of a dollar

Investment results

For the periods ended June 30. Total value of UMF endowment: $2.3 billion.

Year
Actual
Goal
Policy
Benchmark 1
65/35 Market
Benchmark 2
1-year 8.6% 8.0% 7.8% 7.2%
5-year 7.7% 6.6% 7.9% 7.0%
10-year 5.9% 6.8% 6.0% 5.3%
Since inception3 7.6% 8.0% 6.8% 5.2%

1The policy benchmark helps measure how well UMFIA is implementing its investment policy. Its components and asset class weightings are based on the portfolio’s asset allocation policy.
2The 65/35 market benchmark is a weighted blend of stock and bond indices (65% equities and 35% bonds).
3January 1999.

The investment goal is to achieve an annualized return of 5% in excess of inflation in order to cover the 4.5%spending rate as well as administrative fees. For the one‑year period ended June 30, 2018, the endowment pool returned 8.6%. This performance exceeded the one-year market benchmark return of 7.2%, due primarily to UMF’s long-term investment strategy, which relies much less on common stock exposure as compared to the market benchmark.

Administrative fees

The UMF Board of Trustees establishes fee policies with the objective of keeping fees low to reflect a strong commitment to administrative efficiency. The current annual fee on endowment funds is 1% of the fund’s market value. For quasi-endowments, the annual fee is 1.5% of the fund’s market value. These fee rates have not increased since 2008.

UMF performance compared to our peer group

The chart below illustrates UMF’s performance relative to our peer group: college and university endowments with assets greater than $1 billion.

UMF’s long-term investment strategy will frequently generate one-year returns that will be in the outer quartiles—either high or low—of the distribution of peer returns. More meaningful comparisons are found over the three- to five-year periods, when this variation declines.

Performance vs. peer group4

As of June 30, 2017. Updated results as of June 30, 2018, become available in spring 2019.

Peer to peer results

Spending the endowment

What is the endowment spending policy?

The UMF Board of Trustees establishes the endowment spending policy. The current spending rate is 4.5% of a fund’s trailing average market value over the previous 20 quarters (5 years). These dollars, called the fund’s “payout,” are transferred to a spending account and made available each year to support the fund’s designated program. Funds designated as quasi-endowments allow additional spending of up to 20% of fund value annually.

Honoring donor intent

One of UMF’s most critical responsibilities is to ensure that gifts are used in accordance with donor intent. Stringent controls are in place, and UMF staff work in partnership with the U of M units to monitor funds and optimize the utilization and impact of gifts for their designated purposes.

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