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Our University, our endowment Part II: The UMass Foundation

While the endowment assets of the University of Massachusetts slipped by 4.6 percent in Fiscal Year 2009, the University of Massachusetts Foundation in Boston, which manages the five campus system’s finances, seems to have averted some of the financial land mines which struck many other colleges and universities.

The UMass Foundation’s assets fell from $390 million to $367 million in FY09, but compared to losses running well into the high 20 percent range for other local schools, UMass may be able to breathe a sigh of relief.

Although UMass had less to lose than some local competitors such as Boston University or Tufts, which previously had endowments over $1 billion, the school’s portfolio suffered nowhere near the hit that many neighbors took.

The UMass Foundation manages and oversees the University’s endowment fund, the aggregate of individual endowments established by donors to fund specific purposes such as annual scholarships and professorships.

Endowments generally have a principal sum of over $27,500, which are segregated on a fund-accounting basis and placed in the Foundation’s pooled endowment fund, and then invested in the stock market by the Foundation’s investment managers.

The UMass Foundation, which attempts to grow the University’s financial resources, is overseen by a 20-member Board of Directors, each serving three-year terms. The board is mainly composed of University leaders, including the president and chancellors, who serve in an ex-officio capacity, and UMass alumni from each of the five campuses who have become leaders in the various fields of finance and business.

The Board’s public members are nominated by President Jack Wilson and the chancellors of the campuses of the University system and elected by sitting members of the board. Some friends of the University and parents of students with expertise in the business world also serve on the Board.

From there, an 11-member Investment Committee is elected annually. With the guidance of a professional advisor, the Committee selects and monitors the Foundation’s investments, which are managed by external firms the Committee has deemed sound performers within their particular investment classes, and essentially oversees the performance of these mangers. The Investment Committee is also composed of accomplished financiers with expertise in varying disciplines of finance, helping balance the Foundation’s objectives and ensure a diversity of views on the direction the Foundation should take.

The Foundation makes its investments under the guidance of the Investment Committee, and, according to senior Foundation officials, essentially manages what proportions of the University’s endowment fund goes into different asset classes.

The Committee determines asset allocation, or what percentage of the endowment fund is held in cash, what goes into equities, fixed income, and what proportion is invested in other financial instruments.

At the end of FY09, the Foundation held 40 percent of its assets in fixed income, investments which are more liquid and yield cash income, 25 percent in alternative investments, such as hedge funds, 15 percent in U.S. equities, which compose the three major stock markets, the Dow, the S&P 500 and NASDAQ, 11 percent in international markets, and nine percent in cash equivalents.

These numbers have changed rather drastically as the markets have changed over time, as the University held more than 70 percent of its assets in equities as recently as 1999. The school’s share of fixed income has gained significantly in that window, increasing to 40 percent from about 20 at the end of last decade.

UMass Foundation Vice President Katherine Smith explained that the Investment Committee has decided to focus primarily on asset allocation and on selecting talented investment managers, rather than on purchasing individual stocks or buying commodities.

Unlike some schools with larger endowments like Harvard or Yale, UMass places its assets entirely in investments through its managers, as opposed to investing directly.

Smith explained how, once an endowment is given by a donor for a specific purpose to one of the five University campuses, its principal is placed into a pooled endowment fund, the aggregate of all individual endowments given to the University.

Once an endowment is invested, there is a “spending formula,” with which the University determines what percentage of the endowment will be used annually for its stated purpose and what percentage will continue to accumulate in the endowment fund.

“There is an agreed upon spending formula,” she said. “All gift agreements basically say that the University has discretion in terms of spending formula, the governing law dictates a prudent spending rate, which can be anything up to seven percent,” she stated. “Our spending policy is a range of four to six percent on a trailing average, and the actual annual percentage is determined by the chancellors and the president as a group, who recommend it to the Investment Committee, which then enacts the distribution.”

The spending formula is determined by the chancellors and the president, who, along with their financial advisors, determine the annual spending rate based on how the Foundation’s investments have fared and what the campuses’ financial needs are for the funds provided by the endowment. The president and chancellors then recommend the spending rate to the Investment Committee, which enacts the formula, which can change over time depending upon returns.

In terms of strategy, Smith said the Investment Committee’s aim is to always maximize return while managing risk, ultimately attempting to increase the endowment’s spending power. 

“The Investment Committee wants to see the endowment grow so that the long term spending power is preserved and enhanced over time,” she said.

The Committee attempts to leverage these risks based on its diverse composition; it includes stock experts, pension fund managers, who are actuarially-oriented, and other experts.

“We’ve changed our business practices in the last two years so that the campuses have more control and responsibility over the expenditure of endowment distributions,” said Smith. “The money is now plugged right into the University accounting system, so each vice chancellor can consider that revenue in each campus budget every year.”

While UMass’ endowment has historically not been at the level of some more elite Universities, Smith said the endowment fund has seen “extraordinarily good performance” over the last few years and that “every campus is working hard to increase its ability to raise funds for its endowment and for its other spending needs.”

Tom Navin, director of annual giving in the Development Office at UMass Amherst, echoed Smith’s sentiment that UMass may not historically have a legacy of students giving back to the school, but said the University is attempting to alter that image.

“I don’t think we have the same tradition of giving back that maybe other private universities have,” he said, “but we’re working hard to make that change.”

Although UMass had America’s 145-largest endowment as of the end of Fiscal Year 2009, which ended June 30, the Foundation appears to have weathered the economic woes beleaguering the nation’s higher education community better than many peers.

Though the University’s investment returns were -15 percent for FY2009, the median school surveyed in the National Association of College and University Business Officers lost 18.7 percent.

Further, in the second half of calendar year 2009, the Foundation saw returns up 11.93 percent, with market value up to $454 million.

UMass lost significantly less than many local schools. Harvard saw its endowment slip from $36.5 billion to $25.6 billion from 2008 to 2009, a decline of 29.8 percent, while Yale’s holdings fell to $16.3 billion from $22.8 billion, a 28.6 percent drop-off. Dartmouth’s assets fell to $2.8 billion from $3.6 billion, Brown dropped to $2 billion from $2.7 billion, a 26.6 percent slip, Williams’ holdings declined to $1.4 billion from $1.8 billion, a 22.1 percent decrease, Amherst College was hit with a 23.4 percent skid, falling from $1.7 billion to $1.3 billion, Tufts saw its holdings decline 23.7 percent to $1.1 billion from $1.4, Boston University fell beneath the billion mark to $892 million, a 22.1 percent decline, and Mount Holyoke took a 24.5 percent dip, losing more than $155 million to fall to $488 million.

Sam Butterfield can be reached at sbutterfield@dailycollegian.com.

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