The University of Michigan’s endowment provides steady financial support that is foundational to its success as one of the world’s great public universities.
Over the past 20 years, the university’s long-term investment strategy and spending policies have generated $5 billion in endowment distributions to support vital U-M operations. The endowment makes it possible for U-M to create innovative programs like the Go Blue Guarantee for student support, conduct world-class medical care and research, and support many dozens of top 10 academic programs across the institution.
The university is grateful to its donors for their amazing generosity and support, and the university takes very seriously the responsibility for investing those contributions.
Q. What are endowment funds?
The university’s endowment is essential to sustaining academic excellence because it provides a guaranteed, never-ending source of income to support student scholarships, professorships, innovative programs, learning opportunities and life-saving research. Donors who contribute to the endowment do so because they want to support the university and positively impact U-M students and academic programs 25, 50 or 100 years from now.
The university’s endowment funds consist of both true endowments and quasi-endowments, also known as “funds functioning as endowments.” U-M’s true endowments are permanent endowment funds received from donors with the stipulation that the principal remain untouched and that it be invested to produce a never-ending source of support for the purposes specified by the donors. Quasi-endowments are funds reserved by the university on a permanent or long-term basis for specific programs or projects critical to the mission, financial health and growth of the university.
Q. How large is Michigan’s endowment?
Endowment funds were valued at $12.5 billion at June 30, 2020. The majority of the university’s endowment funds are pooled in the unitized University Endowment Fund (the endowment), which consists of about 12,000 separate endowment funds. These figures represent endowment funds for U-M’s three campuses and Michigan Medicine, the university’s health system.
Q. How important is the university’s endowment to its overall budget?
For fiscal year 2020, the endowment spending rule allowed for distributions of approximately $391 million to support operations. In the past 20 years, the university’s long-term investment strategy and spending policies have generated $5 billion in endowment distributions to support U-M operations.
Q. How does Michigan’s endowment compare with the endowments of peers?
U-M’s endowment is the ninth largest among all universities in the country, according to data compiled by the National Association of College and University Business Officers and the Commonfund. The university’s endowment per student ranks 99th, lower than many private peers with much smaller student enrollments.
Q. How does stock market volatility affect the endowment?
Stock market values go up and down. The university manages stock market volatility by maintaining a diversified portfolio, which includes stocks, bonds, absolute return, real estate, venture capital and other investments. However, diversification alone will not prevent the endowment from sustaining losses during market downturns.
U-M’s endowment distribution policy insulates the budget from short-term fluctuations in the financial markets by using a conservative spending rate formula. The university’s endowment distribution rule smooths out the impact of volatile capital markets by providing for annual distributions of 4.5 percent of the average seven-year market value of endowment shares. The approach helps the university budget more consistently.
Q. The university distributes just 4.5 percent of the endowment annually. How did the university arrive at this level of endowment spending?
The 4.5 percent distribution rate helps to insulate the endowment from anticipated market volatility that includes lower investment returns and higher inflation. It also ensures continued, steady support of university operations during uncertain economic times – including funding for student scholarships, faculty salaries and academic programs. The distribution from the endowment has steadily increased each year since 2003.
Q. Since U-M has a relatively large endowment, why doesn’t it use the endowment to replace the millions of dollars in state support that have been lost?
How endowment funds may be spent is usually restricted by the donor. Such funds can be used only for the specific purpose for which the endowment was established. The endowment is actually a collection of the 12,000 separate endowments, most of which have been donated to provide support for specific purposes such as scholarships, educational programs or professorships. To ensure continuing support for future generations, the funds themselves are not spent but invested so that part of the annual distribution can provide a steady flow of dollars each year. The endowment provides a margin of excellence for the university, but it does not replace the unrestricted funds coming from state support and student tuition dollars.
Q. Why not increase the rate of spending from endowment earnings when state funding is cut or growing slowly?
The current endowment spending rule is set to protect and grow the value of the endowment for the future as well as provide operating funds for the current year. The endowment must continue to grow over time to preserve the quality and health of the university. If an institution were to spend down its endowment for unplanned expenses, it would take many years to build the endowment back up through investment income, reduced spending and new gifts.
The university’s distribution rule has changed only twice since 1986.
U-M’s endowment spending rate is based upon the historic track records of the capital markets and inflation. It is designed to support operations in a way that strikes a balance between generating a predictable stream of annual support for current needs and preserving the purchasing power of the endowment funds for the future. This approach allows the university to protect and stabilize yearly distributions through strong and weak markets. The distribution to the general fund from the endowment has increased every year, for more than a decade, through this approach.
Q. U-M has earned more than 25 percent on its endowment some years. Why does it limit expenditures of earnings to 4.5 percent or less?
The FY2007 25.6 percent return on the endowment was exceptional, as was the 44 percent return in FY2000. The longer-term, 20-year return rate of 9.2 percent is more representative of what to expect from the endowment over time. It also is important to remember that in 2001, 2002, 2009, 2012 and 2016, the rates of return were negative and a positive payout of about 5 percent of the market value of the endowment was nevertheless available.
This consistent and increasing distribution helps the university plan for the longer term. It also has meant that when other institutions were making cuts, delaying pay increases and closing programs after significant declines in 2009, U-M, instead, had a $244 million distribution from the endowment to the general fund that year and avoided those types of sudden, drastic budget cuts.
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.
Earnings from invested funds are used for two purposes: a portion (4.5 percent of the average fair market value) is spent, and anything above that amount is added back to the invested principal to preserve the fund’s long-term purchasing power against inflation and market volatility. For example, an endowed professorship established in 1987 with an investment of $2 million would require an investment of $3.6 million today to be equivalent. Reinvesting a portion of the earnings helps make such growth possible and ensures that U-M meets ongoing needs reliably and in perpetuity.
Q. How does the university decide where to invest endowment funds?
The university has an Investment Office, led by the university’s chief investment officer, and it is that team of professionals that evaluates potential investment opportunities in a variety of market segments to create a balanced portfolio with an appropriate level of risk. This team then makes recommendations for investment to the university’s chief financial officer. The CFO takes recommendations for any new investments to the university’s elected Board of Regents for approval. The university typically works with investment managers to invest in funds and it is those investment funds that pool investments from other institutional investors to invest in specific companies.
Q. Does the university get advice on investments from others who are not part of the Investment Office?
The university’s chief financial officer also engages an Investment Advisory Committee. Members of that panel typically are U-M alumni who also are industry leaders in the investment or business communities. This committee is strictly advisory and offers the chief financial officer and others high-level advice on emerging markets and trends in institutional investing. This advisory committee of nationally recognized leaders never discusses individual investments and has no decision-making authority regarding investments. The Investment Office makes all investment decisions. The advisory committee typically meets twice a year. The charter of the Investment Advisory Committee says, in part:
“The function of the IAC is advisory. It has no decision-making or approval authority over investments, investment managers, or the operations of the Investment Office. The IAC does not vote on any matters. Members are expected to utilize their investment, business and other expertise and experience to advise on the strategic direction and implementation of the University’s investment program. They are expected to serve as resources, both at and outside of meetings (including individual consultations), to support the building of a successful investment program (such as assisting in providing introductions) and in the proper management of an investment office.”
Q. Why not use more of U-M’s endowment to reduce tuition?
Endowment distributions do help to keep tuition lower. In fact, without donor and endowment support, tuition would be $6,000 higher each year. However, the majority of the payout from the more than 11,000 Individual endowments is restricted to specific uses by donors and it helps the university serve a very broad population.
The portion available for U-M operations supports the education of more than 64,000 students across three campuses. About 22 percent of the total is restricted to direct student financial aid. Other endowed funds have an indirect effect on tuition as well. The income from the remainder of endowed funds is used to pay for faculty, academic support, research and building maintenance, so that tuition increases are not required to cover the full cost of faculty salary increases, for example.
About 20 percent of U-M’s endowment is restricted for the Michigan Medicine and other clinical operations, which serve the needs of more than 2 million patients a year.
Q. What are some examples of scholarships that are supported by endowments?
One reason donors give so generously to U-M is the confidence they have that the university will do its part to maximize their donations to support the university and its students. Endowments support scholarship programs like these:
Blavin Scholars program: Provides scholarship and program support for students who have experienced foster care. It was started in 2006 with a $1 million endowment. Today the value of this endowment is more than $2.4 million. With additional giving, the program has supported 86 scholars since 2009.
Sidney J. and Irene Shipman Scholarship: Established in 1996 with an endowment of $9.8 million to enrich the collegiate experience with interdisciplinary education and discussion and commitment to social involvement. It has provided student support every year since and today has a market value of nearly $30 million.
Brehm Scholars Program: Bill Brehm was a scholarship recipient when he attended U-M. In 2004, he made an endowment commitment of $1.05 million for a full tuition scholarship for students from Dearborn Fordson High School, his alma mater. That fund has grown to a market value of $2.8 million, and more funds have been added, resulting in a total endowment to support Brehm Scholars currently worth more than $13.1 million. The fund has supported 92 students since its inception.
Q. Why does University of Michigan tuition go up each year?
Even when the official tuition rate increases, financial increases at an even higher rate. For in-state students receiving financial aid, students are paying less today in tuition than they were a decade ago.
Tuition helps support the learning opportunities, quality teaching, undergraduate research experience and the respected scholarship that make a U-M education one of the best in the world. Through prudent fiscal management, we are committed to maintaining the high standards of the university and to supporting its priorities and initiatives, including financial aid, which will help prepare our students for success.
As the Board of Regents and the administration develop a budget and set tuition each year, maintaining the excellence of our educational programs and ensuring access to the university for students from all economic backgrounds are U-M’s top priorities. Accordingly, we have consistently boosted financial aid for students with demonstrated need each year.
The annual appropriation from the state of Michigan also plays a key role in setting tuition and fees. Over the past decade, state funding on a per-student basis has been cut substantially. At the same time, U-M is experiencing increased costs in core expenses, although the rate of growth in these costs has been tempered by rigorous cost containment efforts.
Q. What role does the endowment have in the new program called the Go Blue Guarantee?
Donors and the endowment plays a critical role in the university’s ability to offer the Go Blue Guarantee of free tuition to in-state students from families with incomes up to $65,000 a year. The Victors for Michigan fundraising campaign has raised more than $1 billion for student support, with much of that being invested in the endowment. The investment of those funds will help provide tuition assistance for many years to come.
Q. What are you doing to contain costs?
Controlling costs remains a top priority. The Ann Arbor campus already has cut $400 million in recurring costs from the general fund budget since 2004 and this year’s budget includes $102 million in additional cuts. The university continues to work to control health care costs, boost energy efficiency, make optimal use of existing space and eliminate non-core activities. U-M continues to identify and pursue opportunities to become more efficient and generate additional revenue, including the consolidation of information technology units, central scheduling of classrooms and revised travel and hosting guidelines.
Q. What goes into the cost of attending U-M?
There generally is a significant difference between the “sticker price” and what people actually pay out of their own pockets after receiving various forms of financial aid. Financial aid, in effect, discounts tuition to many people based on what they can afford. About 70 percent of in-state undergraduate students receive some form of institutional financial aid, including grants, work-study jobs and loans. About 51 percent of out-of-state undergraduates receive need- or merit-based financial aid. Ranked among the nation’s top universities, U-M is a bargain for Michigan residents, who are granted a significant tuition discount for being Michigan residents, when compared to the cost for out-of-state students.
Updated October 2020
U-M statement on investment policy
- Download print version (PDF)
November 17, 2005
The following describes the University of Michigan’s policies regarding the investment of our endowment, along with some historical context and perspective.
These policies have been consistent and clear over a very long period of time. We have the benefit of excellent and thoughtful work by our Regents and by two faculty-led committees, one in 1978 and another in 1999, in fully developing the rationale behind these policies as well as articulating the set of conditions that must be met in the rare cases where an exception will be made to our normal investment policies.
There is one overarching principle related to our endowment and investment strategy: The University’s governing board and officers have a fiduciary responsibility to protect our assets for the long term, so that we may leave to succeeding generations a University at least as strong as the one with which we have been entrusted. Therefore, the primary purpose of our endowment is to generate the greatest possible income, subject to an appropriate amount of risk, in support of the University’s missions of teaching, research and service.
In order to accomplish this goal, it is important that we maintain an investment portfolio diversified across a full range of legally recognized entities. To do otherwise would be to increase our risk and decrease our investment returns—perhaps significantly so. For this reason, our longstanding policy is to shield the endowment from political pressures and to base our investment decisions solely on financial factors such as risk and return.
However, the University also has recognized that there may be unusual instances in which we should consider exceptions to this policy. The threshold for such an exception has intentionally been set extremely high, for the reasons noted above.
In 1978, the Board of Regents adopted a resolution including the following language: “If the Regents shall determine that a particular issue involves serious moral or ethical questions which are of concern to many members of the University community, an advisory committee consisting of members of the University Senate, students, administration and alumni will be appointed to gather information and formulate recommendations for the Regents’ consideration.” Such a committee would be ad hoc, appointed only after the Regents determine that a particular issue might require a deviation from the normal investment policy.
This resolution does not provide details about what rises to the level of “serious moral or ethical questions,” or what will constitute “many members of the University community.” However, other language in the faculty advisory committee report as well as subsequent work by the tobacco divestment committee help to clarify these important questions.
The 1978 faculty committee that reviewed possible divestment from apartheid South Africa wrote that the University has some responsibility to consider the ethical implications of its investments “in those cases in which an extraordinary social evil is apparent and a broad consensus develops within the University community concerning the moral shortcomings of a particular firm or type of investment.” The committee stated its belief that “the University should not seek out controversy but rather should act only when a general consensus on a significant moral question has emerged within the University community.” It went on to say that the University “must make strenuous efforts to avoid making commitments, as a corporate body, to political positions that may intimidate its members, produce an atmosphere of distrust and suspicion, or create obstacles to free inquiry.”
The 1999 committee to investigate tobacco divestment was created by President Bollinger in accordance with the Regents resolution, after several years of sustained community concern about this issue. Although it is impossible to affix a number or a percentage to what will constitute broad community consensus on a given issue, it is worth noting that the Faculty Senate Assembly, Michigan Student Assembly and a number of other University leadership groups passed formal resolutions or in other ways expressed the view that the University’s ownership of tobacco stocks was of widespread concern. The resolutions of the Senate Assembly and MSA were nearly unanimous. In its report, the committee noted that the “overwhelming majority of the responses” to the committee and to the University administration supported divestment.
Even so, according to the committee, the decision to divest from tobacco companies proved to be “a complex and difficult challenge.” The committee wrote that “one service this report can perform … would be to provide everyone in the University community with a sense of the complexity of the issues at stake.”
In his charge to the committee, the University’s chief financial officer asked it to determine whether the holding of tobacco securities “is antithetical to the core missions of the University of Michigan and, therefore, merit divestiture.” The committee also undertook to determine what features of tobacco products and what activities of the tobacco industry warranted singling out tobacco securities for potential divestment.
According to the committee, in order to justify divestment, “the magnitude of both the misbehavior in question and the harm caused by that misbehavior must be so extreme that the company or industry would be a clear outlier in the corporate community.”
In recommending divestment, the committee argued that tobacco companies make a product that is unique in its capacity to cause death in its intended use, with more than 400,000 deaths in the United States and more than 4 million deaths worldwide each year as a result of tobacco use. The committee singled out the “dishonest and reprehensible” behavior of the tobacco industry in targeting its products to young people, artificially enhancing the addictiveness of tobacco products through the addition of nicotine, denying the health effects of tobacco and suppressing scientific research. It concluded that the health effects of tobacco and the actions of the tobacco industry “are especially antithetical to the missions of this University, given our commitment to teaching, research and service in the fields of health care and public health.”
These two instances—reflecting concerns about apartheid in South Africa and the deadly effects of tobacco—are the only two instances in the University’s history when exceptions have been made to our investment policy.
In the future, such exceptions will continue to be rare. We will ask the Regents to appoint an ad hoc committee to investigate the ethical and moral implications of our investments only when the following conditions have been met:
- The concern to be explored must express the broadly and consistently held position of the campus community over time;
- There must be reason to believe that the behavior or action in question may be antithetical to the core mission and values of the University.
- There must be reason to believe that the organization, industry or entity to be singled out may be uniquely responsible for the problems identified.
I encourage any community members who are interested in our investment policies to read the advisory committee reports on South African and tobacco divestment. Links to these documents are below, along with other useful materials related to this topic.
Timothy P. Slottow
Executive Vice President and Chief Financial Officer
South Africa stock divestment
- Senate Assembly Advisory Committee Report on Investment Policies and Social Responsibility (Feb. 28, 1978) [PDF]
- Regent’s proceedings regarding South Africa divestment (March 16, 1978)[PDF]
Tobacco-related stock divestment
- Report and Recommendations by Ad Hoc Advisory Committee on Tobacco Investments (March 17, 2000)[PDF]
- President Bollinger letter to Regents regarding tobacco divestment (June 6, 2000) [PDF]
- Regents approve divestment of tobacco-related stock (June 19, 2000)
- U-M endowment up $500M after another strong year (10/17.19)
- U-M endowment up $1B over last year with strong rate of return (10/18/18)
- University Record:University leaders reaffirm support of successful investment practices (9/13/18)
- Executive summary of responses to Free Press stories on U-M investment practices (8/30/18)