[Note: this story has been modified since its original posting to correct errors.]
While other institutions delegate investment management to nonprofit organizations or corporations, the University of Missouri System centrally manages the investment of endowment funds under the approval of the UM Board of Curators.
This management involves setting targets for how much money from the endowments will be invested in different sectors, such as equity, real estate and hedge funds; hiring investment managers for the different sectors; and making decisions concerning the distribution of funds each year to university programs.
At other universities, independent organizations are in charge of tracking funds and hiring investment managers, and a small number of institutions have even formed corporations to manage investments.
For investment decisions, UM hires management firms specializing in different sectors of investments. Compared to the structure of other universities which receive large endowments, UM’s process for managing investments is centrally controlled by the system administration.
UM works with an investment advisory firm, Rocaton, which recommends a group of firms when UM is looking to hire new investment managers. These managers are narrowed down by the UM system treasurer and department of finance and administration before they make the final decision.
UM sets guidelines for the hiring of investment managers. These guidelines include provisions that specifically require the consideration of women- and minority-owned firms and firms owned and operated in the state of Missouri. In the curators’ meeting Feb. 4, two new firms were hired: American Century out of Kansas City, and Earnest, a minority-owned firm. These firms will replace Fidelity Management for domestic equity investments.
“We tend to look at turnover when (the firms) don’t add additional value to our portfolio,” said UM Finance and Administration Vice President Nikki Krawitz. “We want returns that don’t just meet the benchmark but exceed the benchmark.”
When evaluating a firm’s performance, UM examines a five- to 10-year period rather than each individual year.
“There’s a lot of randomness associated with investing, but there is one thing you can control in investing — your costs,” said MU Assistant Professor of Finance Cynthia McDonald. “On average, better performance is with less turnover.”
The Office of Administration and Finance at the University of Kansas has less input on investment management decisions than its UM system counterpart.
With endowment funds comparable to UM’s funds, KU approaches investment decisions through an independent, nonprofit organization, KU Endowment.
Chartered in 1891, KU Endowment has its own board of trustees with the university chancellor as a member. This allows for a clear path of communication between the KU Endowment and the university.
“The difference between us and the University of Missouri is that KU Endowment is totally independent of the university’s administration,” said John Scarffe, KU Endowment’s director of communication.
The independent organization is responsible for raising private gifts, independent corporate gifts and gifts from organizations. KU Endowment does not set fund-raising goals for the university.
“We believe our fiduciary responsibility is to get the best return possible,” Scarffe said.
Similar to UM, KU Endowment hires investment firms that manage investments in the different sectors. Some universities, however, handle a portion of their own investments through an independently run corporation.
The University of Texas System created the first external investment corporation formed by a public university system in 1996. The University of Texas Investment Management Co. oversees some investments for UT through investment managers within the corporation. Harvard University has a similar operation in place for its investment decisions.
UT’s company remains connected to the university, but under less stringent controls than KU Endowment.
“We have a contractual relationship with the University of Texas Board of Regents,” said company spokesman Greg Lee. “This agreement outlines the roles and responsibilities of both parties, what we can and can’t do.”
Of the nine members on the company’s board of directors, three are regents for the UT system and one is the UT chancellor.
The company manages and oversees all investments. Internal staff directly manages about 30 percent of the portfolio and hires and oversees the external investment managers that handle the rest of the portfolio. Investment staff are paid a base salary, but an additional performance compensation program provides a bonus if performance is exceptional.
“If the investments perform very well and exceed the performance of others, then the staff may earn a bonus,” Lee said. “However, if investments don’t perform well, then the staff may earn no bonus at all.”
Many of the external managers are compensated in a similar way, earning little or no fees unless the performance exceeds expectations, Lee said.
Krawitz said a similar structure for UM has not been discussed in the past three years.
“Given our size, it doesn’t make sense,” she said.
The market value for the UT endowment fund for 2004 was $17.3 billion, while UM’s fund was more than $844 million.
Both the amount of money UT’s investment company manages and its unique corporate structure allow for it to develop a highly diversified portfolio. This portfolio yielded one of the highest returns nationally at 20.1 percent last year. The UM system and KU invest less than 10 percent in alternative investments, which Krawitz described as riskier investments than equity. UT, however, is able to target 40 percent of its funds into alternative investments that are long-term in nature.
“This different asset allocation also helped UT’s earnings in the current year,” Lee said.