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.
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
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,
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
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
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.