Feb. 2, 2018
We have a number of concerns about the accuracy of the Detroit Free Press stories. There are many factual errors, despite the fact that we provided numerous interviews, documents and background to the reporters to assist them in their work.
Listed below are a number – though not all – of the errors we found. We’ve noted the correct information and additional background on the endowment that has long been available publicly. Much of it has been posted online on our website.
U-M Chief Investment Officer Erik Lundberg runs an office whose job it is to establish our investment strategy and then evaluate outside investments and investment managers. U-M invests through these outside investment managers in a wide array of investment opportunities.
In the story, “University of Michigan pours billions into funds run by contributors’ firms,” the reporters write that the university invested as much as $4 billion in the funds of top donors. Documentation does not support that statement.
U-M is not “investing” in Pittsburgh to the tune of $220 million. The reference there is to a bank the university has used that invests some of its cash in Treasury Bills and government securities. The Minneapolis reference in the story also is incorrect.
It is wrong to suggest the university’s outside investment managers only invest in the city where they are located. They invest all over the country and the world.
The story says U-M invests little in Michigan. U-M actually is one of the more active venture capital investors in the state of Michigan. The Free Press noted $40 million invested with one fund, but that fund invests nationally. However, 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 the university, 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. Another owned the Thompson building on Eisenhower (777) in Ann Arbor and built the building next door. Another owned the Hampton Inn on State Street. 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 that produces natural gas.
Contrary to the article, the university does not invest in alternative assets because of competition with rival schools. The university invests in alternative assets because they provide better investment returns than a portfolio that consists of only traditional stocks and bonds. Our investments are about 60 percent marketable securities and 40 percent illiquid alternative investments.
All Ann Arbor campus FY 2018 revenues total is $8.4 billion, not $2.1 billion as noted in the article.
The endowment established to honor the chief investment officer does not benefit the CIO directly. Those endowment funds are used by the university to defray some of his compensation so investment proceed can be used in other ways. The Free Press knows that, yet they chose to tell their readers otherwise.
And virtually all of the proceeds from those investments are put to work in Ann Arbor, Flint, Dearborn to further the university’s commitment education, research, patient care and public service in Michigan and beyond.
The Free Press story, “U-M socks away millions, irking some students,” would have you believe U-M is hoarding cash rather than helping students, which is absolutely not the case and the reporters know it.
They focused on the “sticker” price of tuition, yet 70 percent of in-state undergrads get financial aid, which lowers the actual cost.
For most in-state students getting financial aid, those students are paying less today to attend U-M than students did a decade ago. That’s how aggressive the university has been with financial aid.
No state university offers more generous financial aid to in-state students than U-M.
That occurs through our Go Blue guarantee, which provides four years of free tuition to in-state students who are admitted and have a family income of up to $65,000, within certain asset limits. That’s about half the families in the state.
The U-M is the only state university in Michigan, and among just a handful nationally, to meet full need. We are able to do that because our financial aid budget has increased at twice the rate of tuition every year for a decade. U-M donors have given more than $1 billion for student support. The highest priority in the $4 billion Victors for Michigan campaign is student support.
Endowment funding is critically important
Gifts from donors and distributions from the endowment are more important than ever to the University of Michigan.
For fiscal year 2017, the endowment provided $325 million distribution to support the university. By comparison, our funding from the State was $314M.
That’s money spent in Ann Arbor, Dearborn and Flint to support students, faculty, academic programs, life-saving research and patient care. This includes efforts to keep college affordable.
Without donor and endowment support, annual tuition in Ann Arbor would be nearly $6,000 higher per student, for instance. The Go Blue Guarantee that offers free tuition to in-state students, is supported by the endowment.
That $325 million endowment distribution last year, coupled with a state appropriation of $314 million, is critical funding for the work we do. The University of Michigan would not be the world-class institutions it is today without strong support from the state and from donors through the endowment.
In the past 20 years, the university’s long-term investment strategy and spending policies have generated more than $4 billion in endowment distributions to support U-M’s mission while still growing the corpus at a rate that exceeds inflation, assuring that we can be even more financially secure in the future.
Investing with firms led by Investment Advisory Committee members
Over the years, the university’s investment portfolio is distributed among hundreds of different investment companies representing a strategically balanced approach to investing designed to maximize returns on those investments.
The current value of investments the university has 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.
The fact is, U-M alums are some of the top investment managers in the nation.
We 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. The key fact is that all investment opportunities get vetted in the same fashion and we only invest with funds and managers that meet our stringent criteria.
The university invested $50 million with SSG, not $70 million, as was reported. It is silly to suggest the university invested $50 million to get a $100,000 donation from SSG. The university is planning on an investment return many hundreds of times that amount.
With the prestige of U-M, it would not be surprising at all if we were to find U-M alumni working in all of the top investment firms.
Potential or perceived conflicts are a part of every business environment. The key is to manage them effectively. Investment Advisory Committee makes no decisions regarding investments. Meetings occur twice per year and focus on investment strategy.
Oversight by regents
University investments through the endowment get stringent oversight from the elected Board of Regents. The university also publishes an annual report of investments.
Additional endowment facts:
Although our endowment is among the largest in absolute terms, the university’s endowment per student ranks 84th, lower than many private peers, which have larger endowments and smaller student enrollments.
• Harvard has a $36B endowment for a total student population of 22,000.
• U-M has an $11B endowment for 63,500 students on three campuses.
With a 20-year annualized return of 9.7 percent, U-M ranks in the top decile for long-term investment performance among university endowments.
The endowment consists of approximately 10,500 separate endowment funds. These figures represent endowment funds for U-M’s three campuses and the health system.
About 21 percent of U-M’s endowment is restricted for Michigan Medicine (U-M Health System), which serves the needs of more than 2 million patients a year.
Another 21 percent of the endowment provides student support in the form of scholarships, fellowships and other forms of direct support.
The spending rule
It is important that the annual payout from the endowment be predictable and consistent, and that it keeps up with inflation. In a sense, we need the money to last “forever.”
The university purposefully sets the payout at a rate some might call conservative so that 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” to fund important segments of our educational mission. It is worth noting that the Free Press reports that the average payout percentage among university endowments is 4.4 percent, which means U-M is very consistent with many others.
The higher the payout rate, the greater the risk that inflation will erode the value of the investment through time and that investment earnings won’t keep up with the payout each year.
Increasing the spending rate, as some will suggest, in order to spend more today will reduce the value of the endowment and result in lower spending in future years, in effect shifting spending to benefit the current generation at the expense of future generations.
It’s worth noting that even in 2009 – when the rate of return on the endowment was negative 23 percent (-23%) – there was a positive distribution of about 5 percent from the endowment. There also were negative returns in 2001, 2002, 2012 and 2016 – yet the distributions to support the university’s mission continued without fail.
During this difficult economic time, other universities had to lay off faculty and staff, eliminate programs and halt projects under construction. At U-M, because of careful planning and the long-term approach to managing its endowment investments and distributions, this did not occur.
Much of that support comes from distributions made from underlying endowments through programs such as the following:
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 million. With additional giving, the program has supported 54 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 $27 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 Fordson High School, his alma mater. That fund has grown to a market value of $2.5 million, and more funds have been added, resulting in a total endowment to support Brehm Scholars currently worth more than $4.5 million. The fund has supported 50 students since its inception.
Bates Professorship: The Bates Professorship of the Diseases of Women and Children was created in 1898 with a $156,000 bequest from physician Elizabeth H. Bates to recognize U-M as one of the nation’s first universities to offer medical education to women. That initial support has grown to $2 million and has supported the salaries of seven different U-M Medical School professors in the last 119 years.