How Does It Work: The Endowment(s)

How Does It Work: The Endowment(s)

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Drexel University's endowment is the largest asset on its balance sheet and is actively managed by the Investment Office, with guidance from the Investment Committee of the Board of Trustees, to ensure continued healthy growth. Last year, the combined endowments for Drexel University and the Academy of Natural Sciences reached $1 billion for the first time.

In this latest installment of "How Does It Work?", get the answers to your burning questions about the endowments from Chief Investment Officer Cathy Ulozas, Managing Director and Deputy Chief Investment Officer Matt DeAngelo, Senior Investment Analyst Chi Nguyen and Investment Analyst Stephen Chase.

Q: What exactly is an endowment? What purpose does an endowment serve for a university like Drexel?

A: An endowment is a pool of financial assets and investments that exist to support the needs of a college or university. These investments are designed to exist in perpetuity - consistently being invested and reinvested to grow over time, much like a retirement investment account.

However, unlike a retirement investment account, an endowment generates income (or cash), which is returned to the University each year to support various purposes such as funding scholarships and financial aid, supporting research and faculty salaries, and improving and maintaining campus and research facilities and infrastructure. Other uses include enhancing academic programs and supporting community outreach.

The aim of the endowment is to invest the University's funds responsibly and securely to ensure a steady, pre-defined percentage of funds is returned to the University. It is the largest asset on the balance sheet and is actively managed to ensure continued healthy growth. All gains from invested funds are redeployed.

Drexel's Investment Office manages two endowments, one for the University and one for the Academy of Natural Sciences. Together, these endowments are about $1 billion in total. A spend rate is used to determine the amount that is returned to Drexel and the Academy each year. The rate is set by the Board of Trustees and must fall within the 2 percent minimum and 7 percent maximum set by the Commonwealth of Pennsylvania. In just the past eight years, both endowments' spend totaled over $260 million.

Additionally, the endowment includes non-pooled trusts and annuities, which are included as part of the endowment but are not directly managed by the Investment Office. Instead, these funds are managed by the donors and/or those they designate to manage the assets.

Q: How much money is given to the endowment each year?

A: The endowment receives funds in the form of grants and gifts. Some gifts have guidelines on how they need to be invested or used, which restricts the amount of funds available for "withdrawal." Gifts to the Drexel endowment have averaged $13 million per annum for the last eight years.

Q: How is Drexel's endowment invested?

A: An endowment comprises thousands of unique investments across asset classes, and Drexel's Investment Office creates and maintains an optimal risk/return profile to achieve long-term growth. The two portfolios (Drexel University and the Academy of Natural Sciences) have similar constructions and risk/return profiles.

Generally, the investments fall into three buckets:

• Growth Assets typically have the highest rate of return and consist of Global Equity (U.S. traded securities, International - or EAFE - securities, and Emerging Market securities). Growth Assets also include Private Equity (or non-publicly traded investments), Venture Capital and High Yield.
• Safety Assets include those with a lower rate of volatility, meaning they are less risky and grow at a lower rate. But, in a down market or a recession, these assets support the overall portfolio, almost acting like ballast on a ship. Examples of these assets are Fixed Income (bonds), Cash (like a savings account), and Marketable Alternatives (traded loans).
• Inflation Assets are investments that are sensitive to inflation, such as real estate and commodities. Inflation assets also include infrastructure funds, which can include physical assets such as toll roads, aircraft, solar, utilities and cell towers,.

Together, these assets comprise a total portfolio that has steadily grown since the Drexel endowment was formalized in 1991 and with the addition of the Academy of Natural Sciences in 2012. The annualized rate of return across 32 years is approximately +8.3 percent.

As mentioned above, the endowment invests funds in various types of financial assets. It is engineered to provide stable returns in positive and negative economic conditions while minimizing market risk as far as possible. For this, funds are invested in various types of liquid and illiquid assets. Liquid funds are generally stock and bond funds, which can be sold quickly, and illiquid funds, which generally are liquidated only through the return of capital and return from the fund manager at their discretion. These funds often provide higher return over the long term.

Q: What is a common misconception about endowments?

A: The most common misconception is that a university can take any amount of money from the endowment at any time. The truth is that there are many restrictions on how an endowment can be used. Some are from the state government, others by the Board of Trustees, and others from the donors, who contribute and specify how their donations will be used.

Additionally, since the endowment is a pooled fund, separating restricted and un-restricted funds is a challenge, especially during times of withdrawal.

Since the endowment invests in various financial assets, they are exposed to domestic and global economic volatility. Market conditions and geopolitical concerns have a significant impact on the performance of the endowment. To minimize the negative impact of these fluctuations, the portfolio is diversified into various asset classes, liquidities, sectors and countries. Certain assets and asset classes return positive results in times of high inflation, like commodities, while fixed-income securities (bonds) tend to perform well in recessionary times or when the Federal Reserve is increasing rates.

Q: What's one thing you want members of the Drexel community to understand about the endowment that you haven't touched on already?

A: The endowment has a fiduciary responsibility to support Drexel's financial needs. Over the years, the endowment has supported the University's growth and major capital expenditures like purchasing St. Chistopher's Hospital for Children and the refurbishment of residence halls, including the recently re-opened Kelly Hall. Various University-awarded scholarships are also withdrawn from the endowment, among other support that flows through the University's operating budget.

Additionally, the endowment is pleased to benefit from the Dragon Fund, a $4 million investment fund led by undergraduate students at the Bennett S. LeBow College of Business. The Dragon Fund focusses on U.S. mid-cap equities and started in September 2007 with an initial investment of $250,000. Students carry out independent research to identify stocks that are expected to return positive gains. Among the Dragon Fund's many successful stock picks are Netflix and NVIDIA, when those were not yet household names. The Dragon Fund was the best-performing manager in the endowment last year and has an annualized return of +12.3 percent since September 2007.

Q: Where can folks go to get more information about the endowment?

A: You can find more information about the Investment Office and how to reach us on our webpage on Drexel's Treasurer site. Detailed information about Drexel University's endowment and the annual report are available on the University's website. For further information about how endowments typically invest and the news within our industry, check out the publications we rely on, such as Institutional Investor, Pensions & Investments, the Financial Times and FundFire.