Managing the University of Rochester’s Endowment

by Douglas W. Phillips

SENIOR VICE PRESIDENT, INSTITUTIONAL RESOURCES

The Investment Committee of the University’s Board of Trustees works closely with the professional investment staff of the Office of Institutional Resources, and an external consultant, in the management of the University’s long term investment portfolio, which consists primarily of endowment.

Rochester’s portfolio is split nearly 50/50 between traditional publicly traded assets—stocks and bonds—and private investment partnerships, known in endowment management circles as “alternative investments.” Alternative investments include private equity, real assets and hedge funds. The portfolio is designed to provide attractive returns while maintaining moderate protection against the inevitable short-term downturns in publicly traded securities. It is highly diversified and managed by more than 85 firms throughout the world. Each firm follows a distinct strategy which results in minimal overlap or replication between the firms. In addition, Rochester does not make concentrated allocations on any single strategy, as was the case in the 1970s and 1980s.

Endowments are perpetual, intended to support charitable institutions forever. As a result, the University’s investment time horizon matches that infinite duration. The University’s allocations do not veer off course in response to short-term changes in the public marketplace or domestic economy. While at one time Rochester was one of the largest endowments in the country, its growth lagged in the 1970s and 1980s. As late as 1984, the University could still boast the eighth largest endowment. By 1991, Rochester’s endowment standing had fallen to 20th, the result of investment strategies and relatively weak philanthropic support in the ’70s and ’80s that limited its growth. It is currently ranked as the 39^th largest endowment. To help assure consistency in process, and to guard against further decline in relative size, the Investment Committee and staff implemented a series of benchmarks in the year 2000 designed to track Rochester’s asset allocation and performance in comparison to the top endowments in the country as well as to those of Rochester’s “close peers” in the original University Athletic Association (UAA). Rochester performs well against those benchmarks, especially on a longer term basis.

Rochester continues to feel the effect of having an endowment smaller than many of its peers. This is especially evident in the support provided by the endowment for undergraduate education. Although the total value of the University’s endowment is about $1.6 billion, the portion that generates support for the College (Arts, Sciences, and Engineering) is only about $300 million. In another comparison, Rochester’s endowment, when divided by the number of students, is about $219,000 per student. Emory University and Washington University in Saint Louis lead the UAA schools with more than $470,000 per student. The nation’s top endowment on a per-student basis is Princeton at $2.2 million per student.

The Office of Institutional Resources focuses its attention not solely on the investment return of the endowment, but on two other important areas: endowment spending and philanthropic contributions to the endowment. Thanks to some of the strategies and controls implemented in recent years, Rochester’s rate of endowment spending is declining and gifts to the University have reached historically high levels. Perpetual support to Rochester through gifts to the endowment is an essential element in assuring the future of the University. The article below helps to illustrate the critically important role of these gifts. Rochester’s past experience of low alumni giving appears to have been corrected, and is an indication that the University will be able to sustain -- and, ideally, grow -- the value of its endowment relative to peer institutions.

From: http://www.rochester.edu/endowment/update.html

The ’Real’ Source of Endowment Growth

While spectacular rates of return for some of the nation’s largest university endowments have captured headlines, endowment professionals have long known—based on their own experience and on independent studies—that the driving engine behind the growth has always been annual giving from alumni and friends.

“A typical endowment worth $1 billion or more today would be worth as much as 80 percent less if it were not for steady, annual gifts from alumni, friends, corporations, and foundations,” says Doug Phillips, senior vice president for institutional resources at the University. “That’s the real source of endowment growth.”

As with any investment strategy with a long time horizon (or, in the case of endowments, a perpetual time horizon), endowments take advantage of dollar-cost averaging, a concept familiar to anyone who has socked money into a retirement plan. The idea is that making regular, recurring investments allows the fund—whether a retirement account or an endowment—to buy more assets at lower prices. Over time, volatility in the markets “averages out” as the fund accumulates value.

In his influential book, Pioneering Portfolio Management, David Swenson, chief investment officer at Yale University, provides an example: In 1902, Andrew Carnegie established the Carnegie Institution of Washington, a scientific research philanthropy, with a $10 million endowment and later put in $2 million and $10 million in separate gifts.

In 1911, the institution’s endowment was worth $22 million. That compared to Harvard’s 1910 endowment of $23 million and Yale’s $12 million. By June 30, 1998, the endowment of the institution, with few additional gifts, was worth $420 million, ahead of the $360 million that would have matched inflation. In contrast Harvard’s endowment was worth $12.8 billion in 1998, and Yale’s was worth $6.6 billion.

“While differences in investment and spending policies no doubt explain some of the gap, absence of continuing gift inflows constitutes the fundamental reason for Carnegie’s failure to keep pace with Yale and Harvard,” Swenson writes.

In another study, researchers for the National Bureau of Economic Research in Cambridge, Massachusetts, found that not only does annual giving play an important role in the growth of endowments, but the percentage of those gifts put back into endowments makes a big difference, too.

The study of 78 private research universities found that institutions that have “re-invested” a larger share of their university’s annual gifts into their endowments over a 30-year period are much richer today in terms of endowment per student than those institutions that set aside a smaller allocation of gifts for the endowment.

On average, the universities in the study re-invested about 31 percent of their annual gifts. The allocation ranged from 15 percent to almost 75 percent. “This contributes to the increasing dispersion of wealth across private research universities,” the researchers note.

For additional information please see: http://www.rochester.edu/endowment/