Endowment Questions and Answers
Wayne State University's donors invest in the future of the institution by giving to the endowment, supporting students and faculty, as well as academic programs and research. A gift to the endowment is an investment in long-term growth and perpetual support.
Below are questions and answers that focus on the endowment and how endowment giving works at Wayne State University.
- What is an endowment?
- What is the value and investment performance of Wayne State University's endowment?
- Who manages Wayne State University's endowment?
- How is the endowment invested?
- What happens when a donor establishes an endowed fund?
- What is the spending rate policy?
- What is the impact of the endowment at Wayne State?
- Why doesn't the university use more endowment income to support operations and/or reduce tuition?
- How does Wayne State's endowment compare to other universities?
- Why does Wayne State need a larger endowment?
Wayne State University's endowment is a lot like your retirement account. The university carefully invests our funds now so we have the money to support our plans for the future. The annual earnings generated by these investments are then used to support university programs in accordance with donor-specified terms. A gift to the endowment is an investment in the university's future because endowed funds provide permanent support.
Endowed funds at Wayne State University are pooled together and reside in the Common Trust Fund. These funds are invested with a goal to grow their value over time and provide support for the university in perpetuity. Donor-established endowed funds at Wayne State can be restricted, meaning that they are used to support a purpose specified by the donor. Many Wayne State donors designate their giving for a specific purpose or to support a specific school, college, department or program. Alternatively, some donors establish unrestricted endowed funds that are used by the university to provide support where it is needed most.
The Wayne State University endowment was valued at $311 million as of September 30, 2016. This total reflects an annualized investment return of 9 percent for the period October 1, 2015 through September 30, 2016. The annualized investment return was 4.1 percent during the past three years, 7.3 percent during the past five years and 5.1 percent during the past ten years.
Though Wayne State's ten-year investment returns remain in line with peer institutions, returns from mid-range periods have lagged. The Wayne State University Foundation Board and the Investment Committee have reevaluated the endowment asset allocation and have hired a new external advisor to assist in creating a high-performing investment portfolio.
The Investment Committee of the Wayne State University Foundation oversees the management of the endowment. The Wayne State University Foundation was established in 2000 by the Board of Governors to provide a centralized means of encouraging and managing financial support from private sources. A board of directors, made up of prominent members of the community and the university, supports the foundation's mission. The foundation's Investment Committee is made up of volunteer professionals with financial management expertise and staff members of Wayne State University.
The Investment Committee assists the Wayne State University Foundation Board with all investment-related decisions, including policy and strategic planning, investment manager selection and implementation, and review for compliance and performance relative to objectives. The committee uses outside investment managers for investments in the pooled endowment fund.
The Wayne State University Foundation Investment Committee has designed an investment policy to grow the endowment and protect the purchasing power of its assets over time. The policy ensures a diversified portfolio with a carefully managed asset allocation, with each asset class having an allowable range. Further diversification is provided by using a mix of investment managers. The target allocation is as follows:
- Domestic equity – 27%
- Fixed income – 18%
- Non-U.S. equity – 15%
- Global assets – 13%
- Private markets – 13%
- Hedge funds – 7%
- Real assets – 5%
- Cash and cash equivalents – 2%
When a donor establishes an endowed fund, the university creates two accounts—an endowment account (also known as the corpus) and a spending account (also known as the beneficiary account). The endowment account houses the invested principal, which includes the donor's original gift, future gifts and endowment investment earnings. No spending occurs from this account. Instead the university distributes a portion of the income earned from the invested principal to the companion spending account on a quarterly basis. The spending account receives the distributions, and expenditures are made from the account based on the terms of the university's spending policy and the donor's signed memorandum of agreement, which ensures that the fund fulfills the donor's intentions.
For example, if a donor makes a $25,000 gift to establish an endowed scholarship, the full amount of the gift resides in the endowment account. New gifts may be added to the fund at any time. As investment earnings accrue, the fund increases in value. Each quarter, the university distributes a portion of the income earned on the invested principal to the spending account in accordance with the university's spending rate policy (currently 4.5 percent). These spendable earnings are used to award the scholarship to a student who meets the criteria identified by the donor, based upon the provisions outlined in the donor's memorandum of agreement.
Wayne State's spending rate policy determines the amount of income distributed from the endowment account to the spending account. The university designed the policy to preserve the value of the donor's original investment while providing funds to meet the donor's specified purpose. The spending rate policy is codified in a Wayne State University statute approved by the Board of Governors.
The spending rate policy stipulates that the amount distributed is determined by averaging the quarter-end market value from the previous three-year period and multiplying that number by the distribution rate. Using an average over time minimizes the impact of dramatic fluctuations in the market and ensures more stable distributions to spending accounts. Using this method, university administrators are able to estimate how much the endowment will generate in spendable revenue. The current distribution rate is 4.5 percent.
In accordance with university policy, a percentage of endowment distributions is allocated to support the university's fundraising activities. Currently, the allocation is 0.45 percent annually. Gift allocations to fundraising activities increase the value of a donor's gift because every dollar invested in fundraising at Wayne State produces approximately $7.44 for the university.
The endowment provides annual income to support university programs and initiatives in accordance with donor-specified terms. Although some of the endowment is unrestricted, most of it is designated for a specific purpose. Nearly two-thirds of the endowment supports students and faculty. A further breakdown of how the endowment supports the university is as follows:
- Student scholarships, fellowships and awards – 38%
- Chairs, professorships and lectureships – 27%
- Miscellaneous special purpose – 21%
- Research – 12%
- Facilities – 1%
- Unrestricted/to be determined – 1%
More than 98 percent of the Wayne State University endowment is restricted for existing programs. The purpose of the endowment is to provide a steady stream of financial support for the university. A conservative spending policy allows the endowment to grow with inflation and provide a solid foundation of financial support for the university in perpetuity. As the endowment grows through new donor gifts and investment returns, the amount of total dollars distributed to university programs will increase as well. Increasing the spending rate of endowment income would make assets more susceptible to market volatility and risk reducing the endowment's overall value.
The Wayne State University endowment ranks 241 on a list comparing 815 public and private university endowments compiled by the National Association of College and University Business Officers (NACUBO) for fiscal year 2016 (described as July 1 through June 30). NACUBO released its 2016 endowment report in February 2017. Wayne State's ranking places the university among the top one-third of the universities listed. Wayne State's University Research Corridor peers, the University of Michigan and Michigan State University, are ranked 9 and 37, respectively. The University of Michigan's endowment was valued at $9.7 billion as of June 30, 2016, and Michigan State University's totaled $2.2 billion.
Directly comparing universities solely on endowment value, however, does not provide a complete picture because institutions vary widely in size. Annual endowment distributions at Wayne State fund approximately 1.7 percent of the university's operating budget. According to the 2016 NACUBO Commonfund Study of Endowments, the average higher education institution funds 9.7 percent of its operating budget through its endowment. Wayne State's endowment funds a smaller percentage of the budget because of the university's past reliance on state support for much of its operations.
Now the university is diversifying its funding sources. A key focus of Pivotal Moments: Our Campaign for Wayne State University is to significantly grow the endowment. The university has set a goal for one-quarter of the campaign's $750 million total to ensure permanent endowment funding, with the primary focus of new endowment resources to support students and faculty members.
The financial picture at Wayne State University has changed over the years. State support is declining as a percentage of the university budget. Since 2001, appropriations went from 63 percent to just 32 percent of the budget in fiscal year 2016. The university must turn to other sources for revenue. Increased endowment income will join tuition, fees and research grants as important sources of support. This will provide the university with greater financial flexibility to pursue future goals, regardless of changes in state support.
New endowment funds will enable the university to strengthen its mission as a university of opportunity, while pursuing new initiatives and areas of excellence in education, research and community support. Scholarships will provide more aid to students. Endowed chairs and professorships will help attract and retain leading faculty. Support funds will ensure resources for cutting-edge research and learning opportunities. Overall, new endowed funds in these areas will benefit students and faculty now and into the future, in perpetuity. The university will be able to move forward with the security of permanent endowment.
The fastest way to grow the endowment is with new gifts. To learn more about how to support the university, please contact the Division of Development and Alumni Affairs at 313-577-2275.
2016 NACUBO-Commonfund Study of Endowments, NCSE Public Tables Endowment Market Values, National Association of College and University Business Officers
(Updated May 2017)