Executive summary of responses to Free Press stories on U-M investment practices

Aug. 30, 2018

Since early this spring, The Detroit Free Press has been on an what appears to be a campaign to disparage and discredit the University of Michigan’s Investment Office.

Despite the fact that the Free Press has not found a single instance of wrongdoing on the part of the university, the newspaper continues to publish stories that rely on innuendo and so-called “critics” to leave erroneous impressions with its readers.

The Free Press has it wrong. Here is the university’s latest response.

And when the university attempts to provide facts to correct the errors in this and earlier stories, those facts aren’t included in the story or are buried at the end so readers are less likely to see the university’s side of the story. This pattern of knowingly leaving inaccurate impressions with readers is troubling and disappointing. We expect more from one of the state’s leading news organizations.

Here are the facts

After more than a year of investigating our investments, the Free Press has not found a single instance of wrongdoing.

The articles are heavy on innuendo, but light on facts – and facts matter.

Decades of annual external, professional audits find the same – no issues of concern.

The Free Press would have you believe U-M should not do business with our alumni donors or their families, even if it’s good for the university; even if an investment makes a lot of money to fund student scholarships, run our hospital or pay for our life-saving research.

Consider this: U-M has 380,000 individual donors in our current Victors for Michigan campaign, some of whom are alumni, some are not. If you add in their families, that number could be four or more times larger. When you tally it up, we are well beyond a million individuals with whom – according to the Free Press – we should not do business for no other reason than they have a donor connection with the university.  This makes no sense.

U-M has a meaningful series of controls for its investment functions, a conclusion based in part on a review of specified non-financial investment functions performed by accounting firm PricewaterhouseCoopers.. You can read about it here.

We urge anyone to review U-M investments – that is why we publish an annual investment report and provide regular updates throughout the year. The most recent is online here.

We have a detailed FAQ document about the endowment on our website here.

And last year our Investment Office even published a book ­– “The Evolution of Investing at the University of Michigan 1817-2016” – that details the history of U-M investments and the evolution of the university’s highly successful investment practices.

The goal of the U-M Investment Office is to maximize returns balanced against an appropriate amount of risk. The office has performed so well that distributions from the endowment – which exceeded the university’s state appropriation this year.

U-M has one of the most successful investment operations in all of higher education. The U-M endowment is ranked as the ninth largest among all university endowments.

U-M’s investment performance puts it near the top of all endowments for both the past five- and 10-year periods, as reported by Cambridge Associates, an investment consulting firm that serves colleges, universities and large institutional investors.

In the past 20 years, the university’s long-term investment strategy and spending policies have generated $4.2 billion in endowment distributions to support U-M operations – scholarships, medical research, academic programs and more. This comes at a time of lagging public funding for higher education.

Collectively, the Free Press articles are so rife with errors and false impressions that we took the extraordinary step of creating a dedicated web site to share the facts. Here is a link.

Just one recent example is a story that suggests, again, that U-M invests some of its endowment funds with donors because they give generously to the university. This is false.

In the course of managing the endowment, the university makes dozens of investments each year. Sometimes, those investments are with firms led by U-M alumni donors. Overwhelmingly, they are not.

In all cases, investment decisions are made based upon risk-adjusted rates of return. Our investment officers are compensated, in significant part, based on how well our investments do. Financial success of our endowment is the sole incentive in the choices they make. They want to pick winners – investments that are likely to offer good returns with acceptable risk.

The Free Press makes its most recent allegations, even though its reporters know that the donor they reference has been giving to U-M for more than 40 years and has no ownership interest or other official role in the investment firm operated by his son. The university did invest with the company operated by the donor’s son, but investment decisions are made completely separate from donor gifts. The Free Press knows this, yet persists in attempting to create doubts in the minds of its readers. 

Major concerns with the Free Press stories

Here are a several examples of how the Free Press stories got it wrong regarding the U-M endowment and its approach to investments.


What the Free Press claims:

“Executives at some of the nation’s top investment firms donated hundreds of millions of dollars to the University of Michigan while the university invested as much as $4 billion in those companies’ funds, a Detroit Free Press investigation found. More than $400 million of that amount was sent into funds managed by three alumni who advise the university on its investments” (though an Investment Advisory Committee).

The facts:

The story implies some sort of unethical deal involving Investment Advisory Committee members who donate money and the university’s investment in their companies. Any allegations of reciprocity are simply not true. But the Free Press uses as “proof” that on occasion the university does invest in some – not all – of the IAC members’ firms. What they don’t tell you:

The university’s investment strategy is to maximize financial return with an appropriate level of risk. Period. The fact is, U-M alums are some of the top investment managers in the nation. The university would be foolish not to reach out to these alumni for their high-level advice and, when it fits with the university’s investment approach, to invest in their well-managed funds. Meetings occur twice per year and focus on investment strategy. The Investment Advisory Committee makes no decisions regarding investments.

The current value of university investments in funds being managed by members of the university’s Investment Advisory Committee represent 2 percent of the university’s total investment portfolio. That means 98 percent of the university’s investments are managed elsewhere; by fund managers who are not, in any way, advising the university regarding investment approaches.


What the Free Press claims:

“While U-M hiked tuition, university leaders reduced the rate of how much money it sends from the growing endowment to university operations. If U-M had kept the spending rate at its original level, the university would have roughly 10% more to spend on financial aid and other priorities.”

The facts:

For the past three years, U-M has ranked among the top 10 colleges nationwide in Money Magazine’s list of “Best Colleges for Your Money.”

No students are being denied financial aid because of the university’s endowment spending rule. U-M is the only university in the state, and one of just a handful nationally, that meets 100 percent of full financial need for all in-state, undergraduate students. That means every in-state student who has financial need, gets financial aid. U-M is able to do that, in part, because of the excellent performance of endowment investments.

The university’s commitment to student financial aid is as strong as it ever has been. And the endowment helps the university maintain that commitment to future generations of students.

Without donor and endowment support, annual tuition in Ann Arbor would be nearly $6,000 higher per student. The Go Blue Guarantee, which offers free tuition to qualifying in-state students, also is supported by the endowment.


What the Free Press claims:

“The University of Michigan’s decision to cut the spending rate from its nearly $11-billion endowment has sent millions of dollars each year to investment funds instead of today’s students, a Detroit Free Press investigation found. The cut by the elected Board of Regents in 2010 has kept more than $30 million a year inside the endowment rather than doing more to help keep tuition low, hire more faculty and update classrooms, an independent analysis for the newspaper found.”

The facts:

Twenty-one percent of the total endowment is dedicated to student financial support, so the endowment has helped thousands of students afford college. Student aid is a key purpose of the endowment.

Endowments are intended to last forever. So, it is important for the university to maintain a careful balance of spending for today and reinvestment for future generations. To achieve both of those goals, U-M has set endowment spending, or distribution, at 4.5 percent. That level of spending is designed to ensure the principal of the endowment can continue to grow at a rate that at least equals inflation while still predictably and consistently paying out 4.5 percent “interest.” That rate of 4.5 percent is slightly above the median spending rate for all university endowments. In other words, U-M is right in the middle of the pack and not out of line at all with its spending rule.

The university’s approach to spending from the endowment has worked so well – through periods of strong positive investment return and through times of negative investment returns – that the distributions from the endowment have increased every year in the 20-year history of the investment office. That totals more than $4.2 billion. In the most recent fiscal year the distribution from the endowment was $325 million, which surpassed the total of state funding.


What the Free Press claims:

“U-M searches for big profits around the world and invests relatively little at home. The university, for example, has invested more with a Pittsburgh-based money manager – $220 million – than it has in any investment funds headquartered in Michigan (U-M has invested only $40 million in a single Detroit-based fund) over the last two decades.”

The facts:

This premise by the Free Press is misleading. That $220 million the newspaper claims U-M invested in Pittsburgh is not actually invested in Pittsburgh. The money manager in Pittsburgh is a bank that makes short-term investments in government securities on behalf of the university. Those investments are in the U.S. government, not the city of Pittsburgh.

U-M is one of the more active venture capital investors in the state of Michigan. The Free Press noted $40 million invested with one Michigan-based fund, but that fund invests nationally. The university’s MINTS program invests in startup companies that are based on U-M-developed technology.

MINTS has directly invested in and actively supports 21 companies spun out of university research, 10 of which are based in Michigan and employing more than 100 people with a goal of growing further into larger, successful companies. And MINTS, as well as other university programs such as the Monroe-Brown fund, continue to invest and help grow companies in Michigan and attract outside capital and talent to the state.

The university has invested significantly in Detroit and the metro area. Investment managers recently invested in three senior living facilities in the Detroit area. Another built a charter school. They have owned the Fisher and Kahn buildings in Detroit and the Detroit Free Press building. Our managers have invested hundreds of millions of dollars in hotels, office buildings, shopping malls and industrial facilities in the Detroit area over the years. Another manager employs about 100 people in a company located in the Traverse City area.


What the Free Press claims:

“As the value of the endowment has swelled over the years, the University of Michigan’s elected Board of Regents reduced its direct oversight. Much of that power now resides with the university’s chief financial officer and its chief investment officer. For most investments, there is no public debate. The regents have never voted against an investment recommended by staff, according to a review of board minutes stretching back nearly two decades.”

The facts:

Oversight of investments by the U-M Board of Regents has not changed. All new investments are brought before the board for approval. The board’s Finance, Audit and Investments Committee regularly meets with the chief investment officer and chief financial officer regarding university investments. The university also publishes an annual report of investments. The Board of Regents has great confidence in the highly trained professionals who lead the Investment Office and Financial Operations.


What the Free Press claims:

“Internal auditors at the University of Michigan, as far back as 2014, cited problems with the university’s management of its multibillion-dollar endowment, including a lack of proper oversight and staff members who accepted luxury gifts and high-end travel. But the public was never told. That’s in part because top U-M officials, including the man in charge of the endowment, criticized the university’s own auditors as unqualified to evaluate the investment office.”

The facts:

Free Press reporters obtained a copy of very preliminary observations made by the University Audits team in 2014. Many of the initial observations made by University Audits were misunderstandings or inaccurate. This preliminary work was never completed, after the head of University Audits determined that his team did not have the expertise to review the institution’s investment activities. That decision was detailed in a 2016 memo. Read the response to the memo. All of the items noted in the 2016 memo from University Audits have been addressed.

As a further expression of its commitment to transparency and appropriate governance regarding investments, the university announced that it would implement several changes to its practices. The changes were announced by the Board of Regents March 29.

In April, the university hired the highly regarded external auditing firm of PricewaterhouseCoopers to conduct an external review of investment operations and procedures. The university has in place a meaningful series of controls for its investment functions, a conclusion that is based in part on that review. The review did make a few suggested improvements, most of which already have been implemented. It is posted on the U-M website here.


What the Free Press claims:

“A former pension manager barred by the Securities and Exchange Commission helped convince his former colleague – the man who oversees the University of Michigan’s endowment – to pour nearly $100 million into funds he represented. U-M’s entanglement with the unregistered broker, which has not previously been reported, is seen by some critics as an example of what has long worried the university’s watchdogs: a lack of sufficient oversight and robust due diligence to avoid conflicts of interest at one of the nation’s largest college endowments. Among the broker’s problems: a high-profile, federal criminal trial in which he was acquitted and a banishment by the SEC on accusations of associating with a kickback scheme.”

The facts:

The Free Press story leaves the impression that the university knowingly invested money with an investment manager who was barred by the SEC. None of that is true. All this person, William M. Stephens, did was to suggest that U-M consider investing with a fund he represented. He never managed the U-M investment and he was not barred by the SEC for failing to register with the SEC until many years later. The SEC found nothing of concern regarding U-M’s brief interactions with Stephens. Stephens had a very limited role and was not part of the team that actually invested university funds. He was only involved in fundraising for his organization and had a very limited role at that. The university conducted proper due diligence, as we do with all investment opportunities, before recommending this investment.

Responses to earlier stories on U-M endowment (June 22, 2018)