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March 16, 2009 - Image 7

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The Michigan Daily - michigandaily.com


Monday, March 16, 2009 - 7A

The n
ENDOWMENT the endo
From Page 1A or othe
These i
tant that students, faculty, admin- endowm
istrators, alumni and everyone tially loa
else connected to the University collects
understand how the school's multi- the loan
billion-dollar financial backbone pal amou
actually works. Bonds
this fisc
Though referred to in the singu- 5.1 percen
lar, the University's endowment - investme
temporarily valued at $6.5 billion as in , bo
of Dec. 31 - is actually made up of have
over 6,000 different investments. decrease
These investments are orga- due to
nized into asset classes - group- limited
ings of similar kinds of investments gains to
- or "buckets," as University Chief made c
Investment Officer Erik Lundberg pared
often calls them. other ty
The first and most recognizable of inv
bucket is the endowment's equities ments
or stock holdings, which made up the end
just over 20 percent of the endow- ment's
ment as of Dec. 31, according to a portfolio
February investment filing. according
The University invests in both to the 24
domestic andinternationalstocks- Report
the kinds any investor could buy on, Invest-
say, the New York Stock Exchange. ments.
The stocks include online shopping "Abso-
site Amazon.com, oil corporation lute retu
Exxon Mobil, American automak- is a much
er General Motors, British mili- of invest
tary contractor BAE Systems and ing on a
telecommunications giant AT&T, this buc
according to the latest equities her of d
data dated June 30. (For a database strategies
with complete endowment equities investors
information for the past five fiscal with whi
years, go to michigandaily.com.) includes
So far this fiscal year between bills, hi
July 1 and Dec. 31, the endowment's securitie
equities have recorded staggering as well
losses of nearly 37 percent while mhergers
also posting losses of 6 percent ings. Th
last fiscal year. The University's to try to
investment team has also sought to quarter -
decrease the amount of stock hold- always m
ings in the endowment, accord- of how t
ing to the June 30, 2008 Report of performi
Investments created by the Univer- One st
sity Investment Office. return" i
the michigan daily
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ext investment bucket in
twment is "fixed income,"
rwise known, as bonds.
nvestments, which com-
almost 9 percent of the
ent as of Dec. 31, are essen-
ns on which the University
interest and, at the end of
term, is repaid the princi-
have posted minor losses
al year of almost 1 percent
. 31. In the 2008 fiscal year,
, bonds recorded gains of
nt. Like stocks, endowment
tnds $4
to E
in >
ow- $3.25
of '2
irn," the next asset class,
h more complex grouping
tments. Rather than focus-
single type of investment,
ket is grab bag of a num-
ifferent investments and
s employed by University
and the outside funds
ch they work. This bucket
investments in Treasury
gh-yield bonds and debt
s of struggling companies
as corporate events like
or company restructur-
e goal for this bucket is
post positive gains each
- not incredibly high, but
taking gains ,- regardless
he financial markets are
trategy used in "absolute
is "long-short" investing,

in which investors buy stocks (oth-
erwise known as taking the long
position) known to perform well
and sell stocks (known as the short
position) performing poorly. As
long as the purchased stocks out-
perform the sold stocks going for-
ward, the investor will gain from
the strategy.
Having posted a 10-percent gain
in the previous fiscal year, positive
returns had almost always been
the case for "absolute return" until
the current fiscal year as of Dec. 31,
in which it has recorded losses of

investment team meets with fund
managers and investors, learns
about their investment strategies
and decides whether or not to work
with that fund. If the University
decides to work with these groups,
its investors commit initial money
to the fund. Unlike stocks or bonds,
however, venture capital and pri-
vate equity commitments usually
span multiple years and sometimes
more than a decade, meaning Uni-
versity investors can't simply yank
their money out of a fund if they so

team has sought to increase the
percentage of the endowment made
up of venture capital and private
equity investments.
But venture capital and private
equity, too, have suffered losses of
3 percent and almost 10 percent,
respectively, as of Sept. 30. (The most
recent data for the endowment's illiq-
uid assets is Sept. 30 because of a lag
time in calculating illiquid asset val-
ues; liquid assets, on the other hand,
are easier to calculate.)'
The -last two illiquid buckets in
the endowment are real estate and

nearly 21 percent.
The endowment also hasa "cash"
bucket containing cash holdings,
which comprised over 3 percent of.
the endowment as of Dec. 31.
While stocks, bonds and "abso-
lute return" investments are con-
sidered liquid assets - meaning
they can be converted more quickly
and easily into cash - the rest of
the endowment consists of illiquid
assets, which are often investments
in longer term partnerships and
Venture capital and private equi-
ty investments - together making
up almost 23 percent of the endow-
ment as of Dec. 31, according to the
February investment filing - are
two types of illiquid investments.
In the case of venture capital
and private equity, the University's

"So the investment period is for
four years," Lundberg explained.
During that period, the fund or
group will "go out and buy a com-
pany, or they'll go out and start
companies, or they will go out and
sponsor entrepreneurs and help
them grow their companies. ... And
when the company's ready, they'll
take it public or they'll sell it to
another company, and then we get
our money back. But it may take 10,
in some cases up to 15 years, from
when the fund starts until it ends."
Historically, the venture capital
and private equity buckets have-
reaped rewards for the endow-
ment, reporting 3- and 5-year
returns anywhere from 16 percent
to 26 percent, according to the 2008
Report of Investments. Not surpris-
ingly, the University's investment

comprise around 27 percent of the
endowment as of Dec. 31, according
to the February investment filing.
Real estate investments involve
endowment funds being invested
in real estate managers through-
out the United States and the world
who identify property development
opportunities such as buying office
and residential properties and then
improving and reselling them for a
Though profitable in past years,
real estate investments included in
the endowment have suffered loss-
es of about 7 percent as of Sept. 30.
The final bucket is the endow-
ment's energy investments. The
largest portion of the energy buck-
et, Lundberg explained, is invest-
ments in companies thatbuy oil and

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gas fields that are declining in pro-
duction and use advanced extrac-
tion methods to make those oil and
gas fields produce more.
"They maybe drill a few more
wells, but the whole idea is there's
proven oil and gas reserves in there,
and their goal is to get out more
than what the seller could've'gotten
out knowing what they do," Lund-
berg said.
Though the 'energy bucket had
posted a 13-percent loss as of Sept.
30, the endowment's energy invest-
ments reported an astounding 61
percent return in the 2008 fiscal
year, on the back of record oil and
gas prices in the first half of 2008.
On top of that, the energy 'bucket
has recorded 3-year returns of 47
percent and 5-year returns of 56
percent, according to the 2008
Report of Investments.
Other colleges and universi-
ties with multi-billion-dollar
endowments often employ mas-
sive investment teams - Harvard
Management Company, which
oversees the school's endowment,
pension assets and other invest-
ments, employs over 200 people,
and the University of Texas Sys-
tem's management company has
almost 60 employees listed on its
The University of Michigan
Investment' Office, ' located in
downtown Ann Arbor, is a bit more
The University's investment
team consists of 12 financial ana-
lysts and three administrative
staff members. Heading that team
is Lundberg, a Norwegian native
and former analyst and invest-
ment strategist for phone company
Ameritech, who started the Univer-
sity Investment Office in 1999.
Prior to the onset of the current
financial crisis last fall, Lundberg
returns over the past decade, having
helped, alongside impressive Uni-
versity fundraising efforts, to grow
the endowment from $2.5 billion in
1999 to $7.6 billionby June30.
As a result, Institutional Investor
magazine named Lundberg one of
its "Excellence in Investment Man-
agement" award winners in 2007.
Lundberg also earns one of the top
base salaries at the University, hav-
ing made $426,000oin2006 and 2007
and $491,000 in 2008, according to
annualUniversity salary data.
Although the investment team
oversees the direction, strategy
and performance of the school's
endowment, University analysts
don't actually do the buying and-
selling. Instead, outside investment
groups, who partner with the Uni-
versity Investment Office, make the
actual investment transactions.
"Our job is to put together the
composition of the aggregate port-
folio, like deciding how much we
should have in stocks and bonds,
and then all of these different asset
classes," Lundberg explained, "and
then go out and say (to outside
investment groups), 'Populate that
(portfolio composition) with the
best of breed outthere."'
Coming up with the most profit-
able investment strategy isn't solely
investment team, either. As Lund-
berg said, "It's not just me sitting in
my corner office here looking at the
world saying, 'Hey, this is what we
should be doing."'

Integral to the investment team's
strategy is the advice of the Univer-
sity's Investment Advisory Com-
mittee. An eight-member group of
investment veterans, the commit-
tee's members include directors at
institutions like Goldman Sachs
and Bain Capital and individuals
whose specialties range from ven-
ture capital to private equity to
other kinds of investments. (For
a list of the Investment Advisory
Commitee's members, go to michi-
Committee members meet with
the University's investment team
severaltimes a year, offering advice
on what kinds of investments they
think would benefit the endow-
ment and other strategic advice for
investing the University's money.
'The Investment Advisory Com-
mittee has been widely praised.
After participating in one of the
committee's meetings, Charlie
Munger, the vice chairman of the
venerable 'Berkshire Hathaway
Corporation and a former Univer-
sity student, said it was the best
investment committee he had ever
seen of its type, recalled committee
member Sanford Robertson.
Lundberg also praised the com-
mittee, describing it as "a very good
sounding board, (offering) very
good advice, sound advice."
Lundberg also emphasized that
other parts of the University help
with various aspects of managing
the endowment. The University
Controller's Office, for example,
continually tracks the endowment's
investments for the Investment
Office, Lundbergsaid.
"We rely very heavily on other
parts of the University to do our
job," he said.

For Tuesday, March 17, 2009
(March 21 toApril 19)
This is an up-and-down day. You're
very restless. You want adventure and
something different, but somehow, this
doesn't click with your job and your pri-
vate life. Frustrating!
(April 20 to May 20)
This is a poor day to make major deci-
sions about shared property or anything
having to do with inheritances, insurance
matters, taxes or debt. You feel pulled in
two directions.
(May 21to June 20)
Discussions with partners and close
friends are bit challenging today. Bosses
or parents cotld be critical. It's not all
bad; however, it's not all good, either.
(June 21 toJuly 22)
Be extra patient with co-workers
today. It's easy to feel mildly annoyed
about a lot of things. Fortunately, in
between these hangnail moments, there
are a few rainbows. (Whew!)
(July 23 to Aug.. 22)
Romance is touchy today. You might
feet at adds with your main squeeze.
Teaching ortaking care of children could
be a bit exasperating. But really, none of
this is a big deal.
(Aug. 23 to Sept. 22)
Conversations with family members
and people you live with, as well as
close friends, are all a bit dicey today.
It's minor stuff, but it's there. Just be
(Sept. 23 to Oct. 22)
Make sure you are concentrating when
driving or doing any kind of mental
work. You might feel impatient with rou-
tine details. Don't push yourself too hard

(Oct. 23 to Nov. 21)
Be patient with children today. Be
extra careful with money matters, espe-
cially related to sporting events, hotels,
theme parks and vacations. Keep your
(Nov. 22 to Dec. 21)
The Moon is in your sign today; how-
ever, it's challenged by Mercury and
Saturn. The good news is your ruler,
Jupiter, arrives tothe rescue! Ta da! This
creates moments of impatience inter-
spersed with laughter.
(Dec. 22to Jan. 19)
Remind yourself that your glass is
half-full, not half-empty. The fact that
you're reading this column shows you're
in a fortunate segment of the population
on planet Earth.
(Jan. 20 to Feb. 18)
You might have financial concerns
today. (Join the club - we number mil-
lions.) Curb your expenses right now.
Stay under the radar.
(Feb. 19 to March 20)
Be gracious while talking to parents
and bosses today. Things can gokwell,
hut there are a few snags. Look foe
win/win scenarios, because they do
through dance, aviation and travel attract
you. You like activity, and you like to be
involved, especially with a noble cause.
You flit from one thing to another seek-
ing stimulation, and offering your sym-
pathy and talent where possible. You
don't like to be pinned down! You're
modern and cutting-edge. Work hard to
build or construct something important
this year.
Birthdate of Gary Sinise, actor; Nat
"King" Cole, singer; Kate Greenaway,

J 2009 King Features Syndicate,[ ic.



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