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The Michigan Daily - Friday, March 31, 1995 - 3

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Investing endowment fund ensures future
stability of scholarships, programs

romAnheuser-Busch stockto apiece
of the Saks Fifth Avenue Building in
San Francisco, University invest-
ments span the country and the globe.
The University has more than $2.1 bil-
>n invested worldwide, an amount
roughly equivalent to the combined yearly
budgets of the University and its hospitals
- one of the 25 largest college and univer-
sity endowments in the country.
The interest income from these
investments supports scholarships,
faculty positions and other Univer-
sity programs and awards.
"The assets are largely the result
of gifts from alumni and friends of the
University over a very long time. The
endowment fund is made up of hun-
dreds of those kind of gifts," said
Faris W. Womack, executive vice
president and chief financial officer.
Endowment funds are donated di-
rectly to support scholarships, faculty
positions and programs, Womack
said. "Each endowment benefits an
actual project, student or faculty mem-
ber," he said.
Where the money
goes
The LSA budget included $5.1
million in endowment and investment
income last year. Endowment fund-
ing in LSA supports all department

University Endowment Fund Investments
Here is how the University invested its $2.1 billion endowment fund. All figures are from Dec. 31, 1994.

High credit
rating saves

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Common Stock Managers
Bond Managers
Mortgages
Cash Reserves
Real Estate
Oil and Gas
Venture Capital
Other Alternative Assets

'U, money on
renovations
For many students, building a good personal credit
rating is a big concern. But imagine an institution with
billions of dollars in assets, which often takes on millions
of dollars in debt. As the dollar amounts rise, so does the
importance of a good credit rating.
"We borrow a lot of money. In the course of doing so,
we increase our credit and decrease our interest, because
there's not much risk that we won't pay it back," said
Farris W. Womack, executive vice president and chief
financial officer.
The University finances projects, such as the renova-
tion of the East Engineering Building and the addition to
the Randall Laboratory, by selling bonds. To convince
investors to buy its bonds, the University, like any other
borrower, must pay interest to the investors. That's where
a good credit rating comes in.
The University has a credit rating of "Aal," the sec-
ond-highest credit rating given for bonds by Moody's, an
agency that rates the credit of institutions.
Because the University has a high credit rating, inves-
tors know there is little chance that it will not pay back
borrowed money. That means investors will accept a

l

People tend to
invest their
assests for
retirement, but
.dowments have
no horizon."
- Farris Womack
executive vice president and
chief financial officer

chairs, said
Wendy Keeney,
development of-
ficer in the LSA
development and
external relations
office..
"We also have
Dean's Merit
sc ho1ars hips,
which are mostly
based on merit.
They supply in-
state tuition for
four years,"
Keeney said, add-
ing that endow-

Source: University Report on Investments
to recruit, to attract new students,
freshmen that are highly competitive
from across the nation.
"We generally do not provide full
scholarships, but we do give substan-
tial grants," he added.'
The dnr's ideof
thFe game
When the University accepts an
endowment gift, it enters into a con-
tractual relationship with the donor,
Womack said.
"Once the University has those
funds for the purpose of a scholar-
ship, we are obliged to try to make
sure. the purchasing power of the gift
remains intact," he said.
Womack said most endowments
are restricted gifts; that is, they are
earmarked for a specific purpose.
Once the University accepts a gift for
a specific purpose, it has an obliga-
tion to ensure the gift can continue to
serve that goal, he said.
This means that if an alum donates
money this year to fund a full scholar-
ship, the University must make sure
those monies will still fund a full
scholarship in 2095. With the cost of
tuition, housing and books rising faster
than the rate of inflation, the Univer-
sity must find a way to ensure that
endowment funds increase faster too.
That's where investing comes in.
"To maintain the purchasing
power of the gift it's necessary to
invest the funds in assets that are
going to grow," Womack said.
f. O
future
Investing for a university endow-
ment fund is substantially different
than an individual's retirement in-
vestment, because the services the
fund supports should last forever.
"It's a very important concept that

ments support these scholarships.
The College of Engineering has
about $60 million in endowment
funds, which generate about $1.5 to 2
million in interest income each year,
said Brad Canale, director of college
relations for the College of Engineer-
ing.
"The endowment supports profes-
sorships, where a professor is ap-
pointed to the named professorships;
and those can be full, assistant or
research professorships - there's a
whole classification system," Canale
said. "In Engineering, we primarily
deal with full professorships."
Engineering endowments also
support student scholarships.
"We focus on merit-based (schol-
arships). We do have some need-based
ones, but our focus is on merit-based,"
he said. "Those scholarships are used

University endowments have to last
forever. People tend to invest their
assets for retirement, but endowments
have no horizon," Womack said.
Economics Prof. Frank Stafford
emphasized the difference between
personal investing and investing the
University endowment fund.
"A person investing for their own
long-term interest, for retirement or
whatever, is eventually going to draw
down some funds and spend them or
give them to their kids," he said.
The University, on the other hand,
does not plan to liquidate investments
'at some future point. The University
invests so it can use the interest to
support programs, and, if everything
works right, the University will never
spend the principal.
However, since tuition has in-
creased so quickly, it is increasingly
difficult to maintain a scholarship
endowment.
"Tuition has increased at such a
rate that this can't go on much longer,
otherwise nobody could afford to go
to college," Stafford said.
"If you had a scholarship for medi-
cal benefits and housing and tuition,
everything a student would need, that
rises faster than the rate of inflation
and it would take a lot more endow-
ment," he said. "It's virtually impos-
sible to do."
Making the
commitmentl
Because the University pledges to
maintain an endowment, it must be
careful about the commitments it
makes, Stafford said.
For example, to avoid committing
to an endowment that may be impos-
sible to maintain, the University may
take funds that originally could sup-
port two full fellowships and use it to
fund one full and one partial fellow-
ship. Then the extra money can be
invested to help ensure that the Uni-
versity can continue to offer both
awards well into the future.
"The University has lots of funds
to invest, and they have to think about
how realistic it is to expect to keep
earning the same rate," Stafford said.
"If they make a lot of money and
pledge to use it to support a program
and then their investment funds drop
off, do they cut back on the program
or liquidate some of their stock to
keep it going?"
Aside from avoiding overcom-
mitment, the University must also
carefully invest endowment funds to
ensure continued support of endow-
ment programs.
ThP Tii-mitt'Rn~a r fo.nf

where we think the returns are likely
to be the greatest," Womack said.
Building a
portfolio
The University chooses firms, or
managers, to oversee its investments.
This means the University is not in-
volved in picking individual stocks,
bonds or other investments. Instead,
the University approves a certain type
of investment, like the U.S. domestic
stock market, and hires a manger to
oversee the project.
"We chose (managers) on the ba-
sis of past performance," Womack
said. "Our evaluation of managers is
over a full business cycle, three to
five years. We try not to have a knee-
jerk reaction in one year. But if the
performance is bad over a period of
time," the University may find an-
other manager.
The University tries to find a wide
variety of investments that will give it
diversified exposure, he said. This
type of investment strategy helps
hedge against losses in any one in-
vestment area.
Diversified exposure has helped
the University ride out fluctuations in
inflation and the stock market. But
the slow growth of the domestic stock
market has affected University in-
vestments, he said.
"In the '80s we had a very strong
domestic stock market. In the '90s it
has not been particularly good,"
Womack said. "More than inflation,
the value of the dollar, the growth in
markets or lack of it have affected our
investments.
"1994 was a very tough market
year, but those years come, that's
why we're in for the long term, not in
and out. If you go in and out, you're
likely to miss the highs and hit the
lows."
r:I

JONATHAN BERNDT/Daily

lower interest rate
on the bonds, and
the University -
and ultimately stu-
dents - save
money.
"We have
'Aal,' the highest
rate ever given to a
public university.
That came about
because we have a
wide variety of as-
sets as an institu-
tion; our financial
strength is one of
those, but so is the

kind of students we attract," Womack said.
Economics Prof. Frank Stafford said the credit rating
affects bond sales.
"If we are going to borrow money to finance a project
for building construction, and the building is funded two-
thirds by alumni, for a building that's totally to benefit
students, we can borrow money by issuing bonds for the
other million on future student tuition revenues," Stafford
said., "Now, if you tried to sell those bonds on the bond
market, what interest rate would the University have to
pay to get people to buy them?"
Stafford said that the interest rate would depend on the
University's credit rating, and the better the credit rating,
the lower the interest the University will have to pay.
"Say I'm looking to buy some University bonds. I'm
going to ask, 'What's the chance that the University won't
repay (the bond)?' Looking at its financial policy and
credit rating, I would see there's almost no chance of the
University being in default," he said.
However, the University's ability to repay debt is not
the only consideration in its credit rating.
"Agencies rate on various things. Certainly financial
status is one of them. Another is the attractiveness of the
institution. 'Can it continue to attract the kind of students
in the number it has been?"' Womack said.
He also said the ratings consider the research a Univer-
sity supports, and "its potential to continue to do all the
things it has been doing.
"We ought to all take great pride in this. It reflects well
on the institution, and any time the institution looks
" good, we all look good," Womack said.

It reflects well
on the institution,
and any time the
institution looks-
good, we all look
good. "
-- Farris Womack
executive vice president and
chief financial officer


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