UM system gets slightly lower return on investment

KU and other universities with similar endowments have outperformed the UM system.
Tuesday, February 15, 2005 | 12:00 a.m. CST; updated 10:24 p.m. CDT, Tuesday, July 1, 2008

[Note: this story has been modified since its original posting to correct errors.]

The University of Missouri system’s endowment investment return for 2004 was below average compared to other institutions with similar total assets and was outperformed by the University of Kansas investment teams.

Although greater than the 15 percent national average for returns, according to an annual survey of 741 institutions sponsored by the National Association of College and University Business Officers, UM’s 17.4 percent return for fiscal 2004 lags behind the 17.9 percent average for institutions with total assets of $501 million to $1 billion. UM also lags behind the 20.3 percent return posted by KU.

Although the difference is minimal, UM is consistently outperformed by universities with similar endowments in years when domestic and foreign stocks are performing well.

The study attributes this year’s large return nationally to strong markets in the United States and abroad. This surge in investment returns follows a three-year period of poor market performances after the terrorist attacks of Sept. 11, 2001. In those years UM’s investment return exceeded KU’s returns.

Any gifts, bequests or other funds donated to support a university program in perpetuity are considered endowments. The endowments are invested, and the profit from the investments is the investment return.

Endowed funds are primarily scholarships that benefit students. The endowed gift is invested, and a portion of the return is used each year for the scholarship.

Both UM and KU take a more conservative approach than other institutions for target allocation of investments or determining the general percentage of the endowment fund to be invested in each sector.

“This is a public institution in the Show-Me State,” said Nikki Krawitz, UM vice president for finance and administration. “The Board (of Curators) is more conservative and more concerned with fulfilling their fiduciary responsibility and are worried about the downside risks.”

UM invests more than 60 percent of its endowments in U.S. and international equity, while KU invests about 55 percent in these sectors. Alternative investments take advantage of inconsistencies in the market, meaning the success of these investments relies on the stocks performing counter to expected. These investments can include hedge funds, venture capital and private equity. UM invested only 2.2 percent last year in alternative investments. KU had a target of investing 7.5 percent.

UM’s conservative investment portfolio has prevented it from experiencing losses as steep as other institutions during times when the stock market has declined.

“Because of its balanced investment policy, programs funded by the endowment have had a stable income,” said MU Assistant Professor of Finance Cynthia McDonald.

The Board of Curators added real estate investments six or seven years ago, and Krawitz said the allocation to alternative investments was approved two years ago.

“The board is cautiously approaching a more aggressive asset allocation,” Krawitz said.

McDonald said she is pleased the university funnels such a small percentage into alternative investments. She said few hedge funds have superior long-term performances and a lot of money can be misused by chasing them.

If the university did not have a diversified portfolio and experienced great losses, then donors might become reluctant to give to the university, McDonald said.

KU attributes some of its success to its conservative investment allocation.

“The stock market rebounded, and the economy is returning, giving high investment returns by our emphasis on equities,” said John Scarffe, director of communication at KU Endowment.

The change of the market value for KU’s endowed funds from June 30, 2003, to June 30, 2004, also exceeded the change for UM’s funds. KU’s funds experienced an increase of more than 15 percent, climbing to $849 million from $734 million. The market value of UM’s endowed funds experienced only a 4.1 percent increase, bringing the total amount to $844 million from $811 million.

KU’s endowed funds now top UM’s by about $5 million, although this is partly due to the six-year fund-raising campaign called “KU First: Invest in Excellence” that ended in December. The fund-raising campaign raked in $653 million.

Both KU and UM have similar formulas for determining how much of the endowment fund will be distributed annually. For UM, this amount is determined by taking 5 percent of the average market value of the endowed funds during the past 12 quarters. The university finds the market value of its endowed funds every quarter of the fiscal year. The amount distributed to university programs, however, cannot exceed 106 percent or be less than 96 percent of the amount the university distributed in the previous year.

Despite negative media coverage due to the NCAA’s investigation into MU basketball recruitment violations, endowments for the MU campus have continued to increase since 2003.

“Generally speaking, negative publicity regarding intercollegiate athletic situations does not have an impact on fund raising for the academic side of the university,” said Linda L’Hote, MU executive director of advancement.

In 2004, MU received more than $20 million in new cash donations, increasing from about $19 million in fiscal year 2003. For the current fiscal year through the end of January, MU has received more than $15 million with five months remaining. An additional $47.7 million in documented pledges has been raised to be paid over the next five years.

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