The University Investments Office sent out its year-end letter in early February, detailing the strategy, performance, and makeup of the University’s investments for the fiscal year 2017.

The University’s endowment posted a growth from $802.2 million on June 30, 2016 to a value of $967 million by June 30, 2017. Buoyed by an unprecedented level of gifts, this increase also factors in a successful year for the University’s investments, which posted a growth of 14.6 percent.

Relative to other institutions with an endowment between $500 million and $1 billion, the University’s annual growth rate over the last year, three years, and five years measured within the top 25 percent. The 4.9 percent annual growth rate of the University’s investments over the past 10 years was above the median growth rate for such institutions.

Since the end of the 2017 fiscal year last June, the endowment has continued to grow past $1 billion. However, a recent downward market correction has jeopardized this mark.

“We reached the milestone of a billion-dollar endowment in December, and we have fluctuated above and below that mark since,” wrote Director of Operations and Senior Investment Associate at the University Investments Office Brett Salafia in an email to The Argus.

Even though the endowment performed well relative to other institutions in fiscal 2017, its performance does not necessarily stack up to the University’s goals.

“This benchmark represents the returns need to preserve the purchasing power by generating returns greater than inflation and our 4.5 [percent] target spending rate,” the letter reads.

Inflation can be a high hurdle, as the University’s costs are rising at a higher rate than the standard consumer.

“To measure inflation, we use the [Higher Education Price Index], which tracks the costs that are specific to higher education and represents the growing needs of the university’s operating budget,” Salafia wrote. “I believe the main drivers of HEPI are salaries, benefits, and utilities.”

In fiscal year 2017, the University surpassed this goal by 6.4 percent, but while the annual performance was high, the Investments Office does not focus on annual returns.

“It’s important to note that the investment return was only for one year, and as of a specific day,” Salafia wrote. “We’re definitely proud of what we did, but it’s only one year. We don’t focus on it too much because our objective is to create value over longer periods of time.”

The endowment’s growth over the previous 20 years did not quite match up to its established goal, falling .4 percent behind. At the same time, this is heavily influenced by the impact of the financial crisis.

“Over the trailing 10-year period we fell short by about 2 percent because that period includes negative performance from 2009, which followed the financial crisis,” Salafia wrote. “A lot of the comparison depends on what start date and end date you choose.”

Yet while the University did not meet its goal of inflation plus a level of spending for the 20-year period, it beat a hands-off approach called a “passive benchmark” by a 21 percent margin.

The significantly positive returns come after a rocky fiscal 2016 in which the endowment returned a negative 3.2 percent.

This greater volatility is part of an investment strategy that differs from one tailored to an individual for retirement. While an individual is looking to cash in when they retire, an institution like Wesleyan will be around longer, and thus can absorb more risk. This means the University does not have the level of diversification seen in an index fund, which can hold hundreds of stocks. Instead, the manager the University works with will specialize in niche fields.

“We believe in the philosophy that the fewer stocks owned by a manager, the better one can understand the details of the company,” Salafia wrote. “In some cases, a particular fund that Wesleyan invests in could hold only 10 to 20 stocks.”

The Investments Office factors in diversity through other means.

“Wesleyan achieves diversification by assembling a portfolio of managers or funds to create an endowment portfolio,” Salafia wrote. “This all boils down to focusing their resources and exploiting an expertise that they have developed.”

The University has increased diversification in its investments since 2000, reducing the once dominant field of domestic stocks from 45 percent in 2000 to just 12.5 percent today. The resulting volatility in annual returns once jeopardized the stability of the endowment as a source of spending, but the University later reformed its rule to create a more consistent stream of revenue for budgets.

“In 2012, the university updated its endowment spending formula to be based 70 percent on the prior year’s spending plus inflation, and 30 percent from 4.5 percent of the market value of endowment as of the previous fiscal year,” Salafia wrote. “Compared to the prior formula, this one provides more certainty and stability for budgeting purposes while also reacting to market conditions.”

The high returns for fiscal year 2017 provide more spending power for the University. The University spent $36.3 million from the endowment in that period, the highest in at least six years.

 

Mason Mandell can be reached at mjmandell@wesleyan.edu and on Twitter @MasonMandell.