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 seven 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 dependable rate of current spending
To meet the first goal, the portfolio’s return must meet or exceed the total sum of spending, the cost of fund administration, and the rate of inflation. The required return above inflation, called the required real return, is currently five percent.
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. The primary market risk for endowments is prolonged periods of poor investment returns when a portion of its principal may be needed to support current spending. The use of principal for current spending reduces the earning potential of the remaining assets.
Benefits of diversification
Because every investment or asset class is susceptible to long periods of subpar returns, effective portfolio diversification is essential to achieving our return goal while reducing the risk of extended poor performance. In a diversified portfolio, many asset classes must perform poorly concurrently for the entire portfolio to suffer.
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. UMFIA’s focus on intelligent diversification through the portfolio’s asset allocation strategy has 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 even years. As the economy experiences cycles of expansion and recession, asset class leadership positions change. Over periods 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.