The Endowment

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The Role of the Endowment

The fundamental purpose of the University’s endowed funds is to support the core academic mission of the University by supplying a steady source of income to supplement the operating budget. For fiscal year 2020, the endowment funded 16 percent of the University’s operating budget.

Spending from the endowment is used primarily for academic purposes, going toward academic programs, instruction and research, faculty salary support, student aid, library acquisitions, and maintenance of the buildings and classrooms.

The University of Chicago’s endowment finished fiscal year 2020 with a market value of $8.2 billion, including $1.0 billion of Medical Center endowment and $84 million of Marine Biological Laboratory endowment. Ninety-eight percent of the endowment is invested in the Total Return Investment Pool (TRIP). Over the past 25 years, the endowment has grown from $1.4 billion to its current level of $8.2 billion and has been boosted by solid investment returns, generous alumni support, and prudent spending (see figure 1).

Maintaining and growing the value of the endowment over time is critical to ensuring that the steady source of income the endowment provides will not be eroded. At the University of Chicago, that is accomplished in a number of ways, including implementation of a well-diversified portfolio and a balanced spending policy.

Endowment Spending

The control of endowment spending, a critical factor in maintaining value over time, is a responsibility that is vested in the trustees of the University. Each year as part of the budget process, the trustees are asked to approve a level of spending that is within the range of 4.5 to 5.5 percent of a 12-quarter average market value, lagged one year. The current spending rate is 5.5 percent. The flexibility afforded the trustees by virtue of the range allows them to lower the rate of spending during periods of market appreciation and to increase it during periods of decline. The current spending rule, which was implemented with the fiscal year 2005, is designed to strike a healthy balance between long-term asset preservation, prudent spending for current operations, and capital budget support. It has the added benefit of protecting the payout from sudden swings or shocks in the financial markets.

TRIP Investment Policy

The mission of the University of Chicago’s Office of Investments and the Investment Committee of the Board of Trustees is to provide stewardship of the University’s investment assets. This includes managing the University’s endowment to support the University’s academic and medical programs and ensure that the endowment benefits both current and future generations. The University’s endowment is largely invested in the Total Return Investment Pool (TRIP).

The investment objective of TRIP is to achieve a return consistent with a level of risk that is appropriate for the University and the Medical Center. The Office of Investments takes a Total Enterprise Asset Management (TEAM) approach in designing the investment strategy of TRIP. A TEAM approach takes into account the economic risks borne by the University, such as growth objectives and debt ratios, in selecting an appropriate level of risk for TRIP. The primary measure of risk in the portfolio is the Global Equity Factor (GEF), a metric that is similar in concept to beta. Based on the TEAM approach, the Office of Investments has recommended and the Investment Committee has approved a policy portfolio with a long-term central tendency GEF of 0.90 for the University. TRIP’s GEF may vary within the policy range of 0.80 and 0.95.

Additionally, the long-term strategic policy seeks to target the portfolio’s exposure to private assets of 40 percent in normal market environments. The portfolio is currently somewhat below its private investment target. Private asset class exposure may vary widely depending on market conditions. Should there be material changes to the financial conditions of the University or investment markets, the Office of Investments and Investment Committee will revisit these parameters.

TRIP invests in a broad array of assets, including global stocks, US Treasury bonds, real estate, natural resources, private equities, private debt, hedge funds, and portfolio protection (tail hedging) strategies. The Office of Investments achieves exposure to these categories by selecting and engaging external managers. The Office of Investments may also make direct investments and co-investments, and use exchange traded funds and derivatives to ensure adherence to investment policy and risk parameters. In seeking to maximize returns given these risk parameters, the Office of Investments recommends an annual investment plan of broad asset class ranges and a private investment commitment budget. The annual investment plan is an implementable policy statement of our TEAM-driven risk and liquidity targets. The Investment Committee of the Board of Trustees annually reviews and approves the investment policy statement (see table 1).

Investment Performance

For the fiscal year ended June 30, 2020, TRIP gained 3.2 percent on an unlagged basis and outperformed the market-based, policy-weighted strategic benchmark used by the University by 260 basis points (see figure 2). Over the past several years, most peer endowments have moved to an unlagged performance reporting methodology. In short, accounting books are held open longer to include the valuations of private investments that typically take 60 days after month end to report. On a lagged basis, TRIP gained 1.6 percent, outperforming the benchmark by 252 basis points.

The powerful equity market rebound that began in late March 2020 and continued through June 2020 pushed public equities from the negative mid-teens to flat for the year. Markets were driven by assertive monetary and fiscal policies. Investors drove up stock prices particularly in technology and health care. The continued divergence between growth and value was considerable for the year. Large companies outperformed smaller cap companies. The US maintained its strong advantage over developed and emerging international markets. Brexit uncertainty contributed to the rather significant underperformance of UK stocks.

TRIP’s private equity investments were particularly strong across the portfolio—earning performance in the mid-teens for the fiscal year. The private equity portfolio’s sector exposures positioned it favorably versus the broader market. The fixed income holdings (one-to-ten-year Treasuries) were a positive contributor to the absolute performance. Other asset classes, excluding real estate investments, contributed positively on a relative basis.

TRIP strongly outperformed its strategic benchmark across all time horizons. Most of this success has been driven by manager selection with a positive contribution from asset allocation decisions. On a lagged basis, TRIP gained 9.5 percent annualized over the past 30 years.

The University and its trustees have selected an investment strategy that is consistent with its total enterprise, long-range planning strategy in pursuit of academic eminence.