Endowment gifts last forever

Special funds create perpetual scholarships, chairs, programs

During his annual academic convocation address last fall to faculty, Father Dennis Dease described how intricately tied the future of St. Thomas is to its ability to provide more scholarships and better facilities and to recruit and retain the best faculty and staff.

“What will it take to achieve these noble goals?” he asked. “The answer can be summed up in one word: endowment.”

Ah, endowment ... the financial foundation of any strong university, right? Some call it a panacea for the pocketbook. Others view it almost as a magical elixir.

As pervasive as that one word is in higher education, it also is misunderstood and poorly defined, and all different kinds of numbers get bounced around. Budget managers talk about “pure” endowment and “quasi” endowment and “invested assets,” and apples-and-oranges comparisons emerge. Employees become perplexed when they hear the numbers – an endowment of $271.3 million on June 30, 2005, as reported by the National Association of College and University Business Officers – and think, “Wow, St. Thomas is loaded. Why can’t we spend more of that money?”

Dr. Michael Sullivan, chief investment officer and a faculty member in the College of Business, smiles when he hears those kinds of comments. And he has heard them a lot in the 21 years he has overseen the university’s investment portfolio.

“Endowment is all about intergenerational equity,” he said. “You are building a benefit for current and future generations on an equitable basis, if you do it right. One way to look at it is that you always should be able to buy something tomorrow for what you pay today.”

The way to do that is to have your endowment grow as a result of investment returns and additional gifts, minus withdrawals to help pay for scholarships, deanships and endowed chairs. Combine those factors and you come up with what Sullivan calls the 9.5 Percent Rule.

“That’s our strategic goal for return on investments,” he said. “It takes into account four factors: withdrawal for spending (4.5 percent), long-term inflation rate (3 percent), growth beyond inflation (1 percent) and investment fees (1 percent). “The real growth, beyond investments, is in new gifts.”

Here is how St. Thomas followed the 9.5 Percent Rule last fiscal year. On July 1, 2004, St. Thomas had $265 million in endowment investments. It earned 9.9 percent ($26.3 million) on those investments; spent 6.5 percent ($17.1 million); used 3.6 percent ($9.5 million) for other purposes, including transfers to other investments; and received 2.5 percent ($6.6 million) in new gifts. On June 30, 2005, the endowment value was $271.3 million, or 2.4 percent higher than a year earlier.

Sullivan prefers to cite a larger number – $351.6 million – as the June 30, 2005, value of St. Thomas’ investments, including endowment. That figure includes funds set aside for building projects, debt reserve and working capital. The growth that year was 10.2 percent ($32.5 million) over fiscal 2004.

Any number you look at – $265 million in endowment investments or $351 million in overall investments – and it still looks like St. Thomas is “loaded,” doesn’t it? The higher figure is double the operating expenditures in 2005, and the lower figure ranks St. Thomas No. 174 nationally, according to NACUBO. Sullivan throws up his hands when he hears the “loaded” word.

“Not even close!” he said. “The real comparative measure isn’t overall endowment but our endowment assets per student,” and St. Thomas has what Sullivan calls a “modest” figure of $33,620 – or slightly higher than this year’s comprehensive fee of $30,668 for undergraduate students. (NACUBO does not rank schools on per-student endowment.)

Sullivan and the Investment Committee of the Board of Trustees are responsible for managing investments, and he points with pride to how St. Thomas has exceeded its goals, or “benchmarks,” in all but four years (1998-2000 and 2003) since moving to that system in 1984. Cumulatively, St. Thomas exceeded the benchmark by 22.1 percent from 1990 to 2005, or an average of 1.4 percent a year, which is in the top quartile of NACUBO-monitored institutions.

“We beat our benchmarks consistently,” Sullivan said, “and that consistency is remarkable. We don’t shoot the lights out, but we’re usually over the fundamental goal of a 9.5 percent return.”

Benchmarks vary by the classes of investments, such as stocks and bonds. For example, one equity manager, Ark, manages $29.3 million in large cap stocks. Its benchmark is to beat the Standard & Poor’s 500 Index by 1 percent after fees. For the year ending Dec. 31, 2005, returned 7.7 percent vs. a benchmark of 6 percent. Three-year (16.1 percent vs. 15.5 percent) and five-year (5.1 percent vs. a minus 0.5 percent) Ark performances also beat benchmarks.

“We hire good money managers,” Sullivan said. “You can’t beat every benchmark (there are about 20) every quarter, but you want your overall portfolio to do so.”

St. Thomas has a diverse portfolio. Last year, money managers invested the $351 million in domestic stocks (53 percent), international stocks (7 percent), fixed-income funds such as bonds (21 percent), real estate (9 percent), and cash or cash equivalents (10 percent). The mix can change from quarter to quarter; in January, for example, 16 percent was in international stocks.

Sullivan and his staff interview their money managers twice a year. The Investment Committee reviews performances and asset allocations and gets involved when Sullivan wants to fire or hire a manager. He finds trustees “instrumental” to the process and to success.

“They set the overall strategy and tone,” he said. “To a person, they are on other boards, run investment firms or manage their own money. They have a big-picture knowledge base, and that’s invaluable.”

In the end, the goal is simple: to increase the value, year after year, of the university’s endowment. Sullivan goes by another rule: the Rule of 72. Based on his 9.5 percent investment return goal, thus adding 4 percent value each year, it would take 18 years (72 divided by 4) to double the value of a $100,000 fund. It would take only 9 years if you added 8 percent value (72 divided by 8).

Benefactors appreciate that kind of growth because they know their gift always will be there and can become even more influential.

“The real benefit of an endowment gift is that you give today and tomorrow,” Sullivan said. “If we manage the money right – and we do – an endowment will have purchasing power forever.”

What’s a typical endowment fund?

Scholarships: St. Thomas has 200 endowed scholarships valued at $52 million, with individual values ranging from $50,000 to $8.5 million. One is named for the late Donald Leyden, a senior administrator. Established in 1987 with $50,000, the scholarship’s value was $410,000 on Dec. 31, 2005, with $110,000 from gifts and $300,000 from investment returns. Eight students majoring in journalism or Catholic studies received Leyden scholarships totaling $9,500 this year.
: Dr. Marisa Kelly will be the first person to hold the new Al and Mary Agnes McQuinn Distinguished Chair in Arts and Sciences when she becomes dean of the College of Arts and Sciences. The McQuinns established the chair with a $5 million gift, and it will fund curricular innovations and special projects.
Endowed chair
: St. Thomas has 23 endowed chairs, including the Qwest Chair in Global Communications and Technology Management held by Dr. Sameer Kumar. The chair was established in 1986 with gifts of $706,000; its value today is $2.9 million. The chair funds student research assistants and release time for Kumar, who teaches two to three classes a year, to conduct research, write books and papers, and serve on editorial boards of journals.
: St. Thomas established the Joseph and Edith Habiger Endowment for Catholic Studies in 1997 with a gift from their son, Monsignor James Habiger, retired executive directo of the Minnesota Catholic Conference. Subsequent gifts from a number of sources have totaled $700,000, and with investment growth the program had a value of $945,000 on Dec. 31, 2005. The funds provide for a lecture series and scholar-in-residence and artist-in-residence programs.

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