CMU endowment fund improves following poor 2011 calendar year

Central Michigan University’s endowment fund finished the 2012 calendar year at $81,590,000 after an increase of 14 percent since 2011.

The increase comes after a large drop in 2008 and again in 2011, which Vice President of Finance and Administrative Services David Burdette said is due to a challenging economic period.

“In 2011, CMU continued to be heavily invested in equities. The equity market, as measured on June 30, 2011, was lower at that point in the year,” Burdette said. “(The years) 2008, 2009, 2010 were tough times for investors, and a lot of people found that out.”

The most recent quarter, ending on Dec. 31, reported an increase of 2.2 percent for CMU.

An endowment is an external gift given to a university meant to be perpetual with restrictions on what the money can be spent on, most commonly for student scholarships.

The university won’t expend the principle amount of the gift to ensure the continuation of the fund long-term and invests it to help it grow.

CMU’s spending rate is 4.5 percent, which means the scholarship can increase 4.5 percent to cover inflation over time and keep the value of the scholarship in future dollars.

“If we did apply a 4.5 percent to an endowment down from its principle, now you’re down more and have farther to grow,” Associate Vice President of Financial Services Barrie Wilkes said. “So when you start spending in a down market, it makes it much more difficult to grow back to where you began.”

If the principle drops below the original gift’s value, a scholarship is not given that year until the principle value is regained, though Burdette said CMU has continued to distribute scholarships due to overall growth.

“CMU has been able, over the past several years of market ups and downs, to provide continuity of funding of student scholarships because of its conservative market investment strategies,” Burdette said. “But CMU cannot always guarantee future earnings. That’s why CMU follows a rolling average to avoid major market down-swings.”

Burdette and Wilkes meet with an outside fund manager and report to the board of trustees, which sets an investment policy with parameters to which they can invest funds.

“We can’t guarantee an endowment won’t go below the principle amount, but we do our best to avoid it,” Burdette said. “We’re trying to weave between alternative investment options within the policy, within the market and within our outside advice.”

A diverse portfolio is preferred in order to protect investors from a loss.

CMU’s investments from an endowment perspective includes stocks, fixed income and commodities to protect investments.

“The more you spread the portfolio in different types of investment options, the lower you spread the risk,” Burdette said. “You’re also trying to be sure that all your assets aren’t correlated, so they don’t all react the same in different market conditions.”

When it comes to fundraising efforts, Burdette said successful fundraising is dependent on how well your endowment is doing.

“Our track record shows that if you leave your endowment, you know it’s going to be protected to the extent we can,” he said. “You know it will grow and you know it will give scholarships year after year. Donors like that positive outlook, and CMU has very good fundraisers and great alums.”

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