$2-Billion Is No Longer ‘Icing on the Cake’

May 27, 2004 | Read Time: 6 minutes

Chart: Where U.Va’s Endowment Is Invested

Table: U. of Virginia’s Endowment at a Glance

Related articles: View all of the advice and commentary from this special supplement on endowments
By ERIN STROUT

There was a time not so long ago when the University of Virginia’s budget experts viewed the institution’s endowment as “icing on the cake.” Now the university’s executive vice president and chief operating officer, Leonard Sandridge, refers to it as “the basic cake itself.”

That cake is now worth nearly $2-billion, icing and all, and it feeds a widening budget gap created by a 31-percent cut in state funds for the university over the last two years. Exacerbating the shortfall was a decade of state-ordered tuition rollbacks and freezes.

And so last year, for the first time, the venerable public institution received more operating funds from private gifts and endowment income than it did from the state. Continuing that reversal, 8.3 percent of the operating budget in the current academic year came from endowment distributions and gifts, while 8.1 percent came from the state.

Despite those financial pressures, the university continues to undertake new programs. The endowment pumps about $83-million into the budget each year, revenue that is critical to maintaining Virginia’s reputation as one of the nation’s top public institutions, university officials say.

To keep the cash flowing, the university has in recent years embraced an increasingly aggressive strategy for wringing money from the endowment, allocating 55.6 percent of endowment assets to hedge funds and 13.8 percent to private equity. The remainder is in international equity, domestic equity, fixed income, and real estate. Few endowments of any size invest so heavily in alternative investments.

“Clearly the last decade has been a period of significant focus on professional management and results-driven decision making,” Mr. Sandridge said.

Some critics take one look at the nontraditional portfolio and deem it risky. Experts say that hedge funds can be useful in diversifying investments, but require a tremendous amount of due diligence and resources to manage them, which can strain budgets. The more complicated strategies require more experienced people in investment offices, who often require higher compensation.

About 80 percent of the university’s hedge-fund investments are committed to long-short equity funds, which are considered less volatile than other types of hedge funds, Mr. Sandridge says.

Long-short fund managers buy stocks whose prices are expected to increase, and take “short positions” that pay off when stocks fall in value. The strategy is designed to generate profits during bullish periods in the stock market, but serve as capital protection in falling markets. Moreover, hedge funds run by managers with proven track records and expertise can provide higher returns than other investments when markets languish, Mr. Sandridge says. The down side, he notes, is that the university could miss out on big gains when the equities markets are up.

“We believe we have a very high-quality group of investment managers in our hedge-fund portfolio,” Mr. Sandridge says. “I could argue that hedge funds, as we use them, are a vehicle to an absolute return year after year.”

The endowment is managed by the University of Virginia Investment Management Company, which was established in 1998 as a subcommittee of the Board of Visitors’ budget-and-finance committee. Uvimco, which employs 15 analysts and investors, handles the investment of the funds and also selects other individual hedge-fund managers based on their expertise and on whether the manager’s approach fits with the university’s overall portfolio and policies, Mr. Sandridge says.

Risky or not, the endowment has performed well at a time when other colleges and universities have struggled with declining returns. In 2002-3, Virginia’s endowment posted a 9.2-percent return, compared with a national average for its peer institutions of 2.9 percent. As of March 31, the university’s investments had returned 12.3 percent in the current year.

“We take a long-term view to investing,” Mr. Sandridge says. “Within that framework, our board and investment professionals have made sound investments over a number of years.”

The strength of the endowment has allowed the university to undertake new, high-profile programs, such as Access UVa, a student-aid policy announced in February that is starting to be duplicated at other colleges and universities. The plan replaces loans with grants for needy undergraduates. It also caps the amount of need-based loans that students from middle-income families can take out.

Access UVa will be fully implemented by the 2008-9 academic year and will cost the university $16.4-million each year, in addition to $4-million of endowment and gift resources already committed to need-based aid.

Beginning with the class that enters this fall, UVa will give grants in place of all loans that are offered to students whose families earn below 150 percent of the federal poverty line, an amount equaling $27,600 in 2003 for a family of four. Students who qualify for any form of need-based financial aid will receive grants that will eliminate the need to take out loans totaling more than 25 percent of an in-state student’s costs over four years.

Access UVa is supported by unrestricted endowment funds and by tuition. Because tuition increases are often unpredictable, Mr. Sandridge says, he cannot estimate how much of the student-aid program will come from each of the two sources.

“I can say that Access UVa would not be possible without the endowment,” he says. “It will fluctuate each year depending on if the state allows us to raise tuition.”

Financial aid isn’t the only new effort that is receiving endowment funds. Virginia’s Board of Visitors established a “budget defense fund” for the president’s use, primarily from unrestricted endowment income. The defense budget is used for a special opportunity fund, which can pay for new activities and preserve course offerings and sections. It also provides bonuses to faculty members, in addition to those financed by the state. Lastly, it is used to increase base salaries for high-performing faculty members.

As the endowment continues to grow, Mr. Sandridge predicts, it will contribute to a wider range of university activities, including some that are traditionally supported by the state. Regardless, university leaders aren’t taking for granted that the performance of investments will always be as profitable as it is now.

“One must always remember that past results do not indicate the long term,” Mr. Sandridge says, “and identify the investment vehicles that will be the success of the next several years.”

WHERE U.VA’S ENDOWMENT IS INVESTED

Real estate	2.3%

Hedge funds	55.6%

Cash	4.6%

Domestic equity	6.5%

Fixed income	7.7%

International equity	9.5%

Private equity	13.8%

Total: $1.96-billion as of June 30, 2003

SOURCE: U. of Virginia

U. OF VIRGINIA’S ENDOWMENT AT A GLANCE
	Assets	Investment returns	Donations to the university	Distribution to the operating budget	Management fees¹

1995	$763-million	16.90%	$99.0-million	$29,187,801	$422,729

1996	$949-million	15.60%	$119.8-million	$30,578,056	$653,499

1997	$1.24-billion	17.60%	$135.2-million	$39,435,218	$770,883

1998	$1.4-billion	14.01%	$135.2-million	$43,592,573	$836,561

1999	$1.3-billion	18.40%	$119.2-million	$52,723,165	$1,317,743

2000	$1.8-billion	43.80%	$83.1-million	$56,105,321	$1,700,257

2001	$2-billion	2.00%	$118.5-million	$73,783,551	$2,526,185

2002	$1.8-billion²	-0.10%²	$153.9-million	$78,774,219	$2,579,456

2003	$1.96-billion²	9.20%²	$121.9-million	$83,142,090	$3,166,460

1. Fees paid to the U. of Virginia Management Company 2. New reporting model requires recording of depreciation expense and reporting of capital assets net of depreciation. Note: All figures based on June 30 fiscal year.

SOURCE: U. of Virginia