Recovery slow for U endowment fund

The fund underpeformed compared to the market benchmark.

Conor Shine

After suffering steep losses during the economic recession, the University of MinnesotaâÄôs endowment funds showed signs of recovery in 2010 but still performed below benchmarks.

The value of the UniversityâÄôs Consolidated Endowment Fund, which is used to support academic programs and financial aid, sat at $861.5 million as of June 30, the end of the 2010 fiscal year. This is a 5.5 percent increase over the previous yearâÄôs value, but the amount is still well below the $1.1 billion held in June 2008, according to a report being presented to the Board of Regents on Thursday.

Although the fund increased in value, chief financial officer Richard Pfutzenreuter said that, with its 5.5 percent increase, the fund “underperformed” compared to the market benchmark, which increased by 9.4 percent.

Because the CEF is comprised mostly of old money and does not bring in new donations, the growth of the fund is shaped by the investments made by the University Office of Investments and Banking, Pfutzenreuter said.

“The numbers improved, but honestly we would have loved to have done better than the benchmark,” Pfutzenreuter said.

University endowment funds across the country are recovering and posting increases after being battered by the recession, said Jonathan Robe, a research associate at the Center for College Affordability and Productivity.

The UniversityâÄôs investment strategy may have limited growth, Pfutzenreuter said, but the endowment should continue to improve as markets calm down and become more predictable.

The CEF is one of three endowments at the University, but it is the only one managed internally. The University of Minnesota Foundation Fund and the Minnesota Medical Foundation Fund both posted gains in 2010 after losses the year before, but the funds, which have values of $1.1 billion and $189.4 million, respectively, are managed independently and were not included in the regentsâÄô report.

The University will pay out approximately 4.6 percent of the fund this year âÄî close to $40 million âÄî for academic support and student aid. But across the nation, there is discussion over whether universities should be using more of their endowment funding to support students.

While itâÄôs good for endowments to continue to increase in value, itâÄôs important the money is effectively used and not just held for the future, said Lynne Munson, a former deputy chairwoman for the National Endowment for the Humanities.

Munson, who has testified before the U.S. Senate Finance Committee on the issue of university endowment reform, said schools are too focused on the future, to the detriment of their current students.

“The rapid rise in tuition is something that needs to be explained and needs to be addressed,” Munson said. “These endowments are a wonderful opportunity for that. It seems to me weâÄôre hoarding these funds rather foolishly when they could be effectively spent now to produce more research and to make it easier for a more diverse base of students to attend the college.”

Private endowments are required by law to pay out 5 percent of their value each year, and similar spending rules for university endowments were brought up by U.S. Sen. Charles Grassley, R-Iowa, in 2007.

No formal legislation ever materialized, and new legislation isnâÄôt likely to come anytime soon, Robe said.

Although he thinks mandatory rules on endowment spending could “hamstring” universities and ultimately hurt their funds, Robe said paying out more from the endowment would be an effective way to drive down the costs for students.

“We have to be cautious still as the effects of the recession are winding out âĦ but I think there definitely is room for more properly targeted spending of endowments,” he said. “It strikes me as odd that universities would raise tuition costs on students who are having difficulty covering all of those costs while amassing large endowments.”

The University spends a responsible amount of the CEF, Pfutzenreuter said, and it has to be careful not to “erode” the endowment by paying out too much each year.

“That argument about paying more out of the endowment is an old, tired argument,” he said.

In addition to the payout, administrative costs and inflation must also be covered without affecting the principal, he said.

The University will continue to monitor endowment payouts, he said, and adjustments can be made in the future.