Eastern Michigan University’s endowment fund switched its financial consultant from the Swiss company UBS AG to the Boston-based NEPC at the end of October.
EMU’s endowment had been with the Zurich-based UBS since 1999, but earlier this year, the endowment’s administrators decided it was time to make a change.
Founded in 1989, the EMU Foundation is an educational endowment – a private fund that is charged with investing EMU’s money as wisely as possible in order to grow its nest egg. The money is then used for enlarging the general fund, contributing to financial aid for students and funding research. This is a common practice, and it means EMU doesn't have to rely entirely on tuition and revenue shares from Lansing and Washington.
Laura Wilbanks, the chief financial officer of the EMU Foundation, said she had no complaints about UBS, but that it was simply time to move on.
“Our performance with them has been very strong,” said Wilbanks. “We just felt it was time to take a look at some other organizations.”
It is common practice for endowments to test the waters of the financial markets every so often to see if a better deal is available. 11 firms bid to take the consulting position over from UBS, and from those 11, three were invited for presentations to the endowment’s investment and finance committee. NEPC won in the final round.
“We feel like when an endowment reaches a certain level, the 50 to 60 million dollar range, is about that level when you can start to diversify your portfolio more,” Wilbanks said.
EMU's endowment is currently $66 million. The endowment has also further diversified its investments. With UBS, NEPC pointed out the endowment was heavily invested in equity i.e. shares in companies. 70 percent of the endowment’s investments were in equity, 20 percent in fixed-income – which includes securities like bonds where interest payments are fixed in amount until the maturity date – and 10 percent Global Asset Allocation.
While that is considered safe in a bullish economy, it is riskier in a bear economy, advised NEPC. A bear market is a market in which asset prices decline and investors are pessimistic. A bull market is the opposite; when prices increase, investor optimism follows.
NEPC will move the endowment into hedge funds and global assets.
“The purpose of the alternatives is to provide that cushion when equity markets and fixed income markets are being very volatile,” said Wilbanks. “The assets began to move Sept. 16. The balance of them we’re moving early October. As of this moment, it should be in place.”
The new version of the asset allocation will be 35 percent in alternative investments, 30 percent in equity, 20 percent in fixed income, and 15 percent Global Asset Allocation.
Endowments nationwide have been doing well recently. According to the National Association of College and University Business Officers, investment returns in educational endowments nationwide averaged 11.7 percent in the 2013 fiscal year. EMU was a part of this trend.
EMU’s $66 million endowment is still much smaller than other schools across the state. The University of Michigan has an endowment of $8.4 billion according to their website. Wayne State University’s endowment grew to $277 million and Michigan State University reported a $2.3 billion endowment.
Wilbanks acknowledged that EMU’s much smaller endowment does create limitations, but pointed out that the endowment has done well in the last few years.
“Five years ago our endowment was at $35 million,” said Wilbanks. “And we have grown it to $66 million in five years, primarily from investment performance, which has been very solid…also some very generous gifts."
In five separate years, between 2000 and 2014, the endowment fund suffered losses. In 2001, the endowment fund suffered a loss of 14 percent, -7.1 percent in 2002, -6.4 percent in 2008, -18.2 percent in 2009, and -0.4 percent in 2012.
Losses between 2007 and 2009 can partly be explained by the financial crisis suffered in the U.S. in which multiple banks on Wall Street failed and the stock market plummeted. In spite of those losses, the endowment fund had an overall return of 7 percent in that same time period.
The endowment’s 10-year return on investment has been 8 percent, 14.4 percent for five years, 10.9 percent for three years, and 18.8 percent for one year.
According to the EMU Foundation’s 2013 annual report, the number of donors reached 9,746 in the 2013 fiscal year. NABUCO will not be releasing its latest survey of reporting higher education instructions until January. But Wilbanks said she is confident EMU will be in the top 15 percent of best performing endowments.
“We are very proud of the work we have done in respect to the investment management of the endowment,” said Wilbanks. “We are very excited to be in this new relationship with NEPC. Every interaction we’ve had with them to date has been very positive and they are not afraid to think outside the box.”