Understanding Union College's endowment

Endowment facts and figures

• What is an endowment?

  An endowment is an investment portfolio designed to provide a reliable, steady stream of revenue to support the mission and operations of the College over the long term. The endowment is funded through gifts to the College, and the Union endowment currently represents the combined philanthropy of more than 1,300 individual gifts.

• How does an endowment work?

  The purpose of an endowment is to provide long-term funding support to key College priorities. As such, only a small portion of the endowment’s principal – ideally no more than 5 percent, but sometimes higher – is made available to the College in any given year. The investment goal of the College is for the endowment to earn a rate greater than the spending rate, plus the current rate of inflation, thus protecting the principal for future generations. Using a trailing average is the best way to limit swings - up or down - in the funds provided to the budget.

• How important is the endowment to the financial health of the College?

  The annual endowment distribution provides approximately 20 percent of the College’s operating funds. In the current fiscal year (FY2022-23) the endowment is scheduled to provide approximately $29 million of Union’s operating net budget revenues of $144 million.

• What is the current value of Union’s endowment? How has it performed recently?

  At the end of fiscal year 2023 (June 30), the Union’s endowment was valued at $530 million, representing a 5.8 percent increase from the end of FY 2022. By comparison, the value of Union’s endowment fell 14.7 percent during FY 22 and the College earned a positive 29 percent return in FY 2021.

• Can the College use the money in the endowment any way it wishes?

  No. The majority of donor gifts – over 80 percent – are restricted gifts, which means they can only be used in ways consistent with the stated wishes of the donor (for example, specific financial aid awards). The remaining portion of the endowment can be used for unrestricted, operational purposes of the College.

• Who manages the funds in the endowment?

  The Investment Committee of the Board of Trustees, composed solely of our volunteer trustees, makes all investment decisions, consistent with the College’s investment objectives and asset allocation policies. To put into effect these investment decisions, the Investment Committee - in turn - chooses various funds and investment vehicles, which are run by fund managers. In FY22, the College had investments with 49 fund managers across 72 funds.

  These funds have pre-stated investment characteristics (such as industry or geographic parameters), investment objectives (such as value, growth, emerging companies, established companies or many other types of objectives), investment time horizons, and risk profiles. The Investment Committee tries to choose fund managers that, in total, provide a sophisticated and globally diversified portfolio to achieve the endowment’s long-term return expectations, while also minimizing volatility.

  These fund managers do not manage Union's endowment and they do not make investment decisions on behalf of the College. They only make investment decisions for their respective funds, which are investment vehicles for any number of parties.

  The Investment Committee is composed solely of volunteer College trustees and has no paid staff.

• How much does Union pay these fund managers annually?

  As is standard in the industry, fund managers are paid a management fee which is a percentage of assets under management (AUM in industry parlance). Some funds also have performance bonuses. The returns of the College are net of these fees. This is roughly analogous to the expense ratio an individual Union employee might see on their TIAA or Fidelity investments shown on those firms’ respective funds.

  Union has an agreement with Gerber Taylor, an investment consulting firm the Colleges uses for research, reporting, modeling and advice services; however, all investment decisions remain the sole province of the Investment Committee. Union pays Gerber-Taylor less than one-tenth of 1 percent of the assets under management for their services.

• Union used to report managers’ fees in its financial statements. Why has it stopped that practice?

  In August 2016 the Financial Accounting Standards Board (FASB) issued new guidance on reporting of management fees on endowments (ASU 2016-14, Topic 958) for non-profit institutions. According to the FASB:

  Requiring an NFP (not-for-profit) to report its investment return net of external and direct internal investment expenses provides a more comparable measure of investment returns across all NFPs, regardless of whether their investment activities (1) are managed by internal staff, outside investment managers, volunteers, or a combination or (2) employ the use of mutual funds, hedge funds, or other vehicles for which management fees are embedded in the investment return of the vehicle. No longer requiring the disclosure of those netted expenses also eliminates the difficulties and related costs in identifying embedded fees and the resultant inconsistencies in the reported amounts of investment expenses. (emphasis added)

  To put this guidance more simply, the FASB did not find that reporting managers’ fees was useful information for readers of financial statements because:

  • There are too many different ways to calculate and report managers’ fees employed by NFPs. Therefore, there is no reliable way to compare reported results across institutions.
  • Manager fees do not provide a good measure of relative amount across endowments or relative performance.
  • All NFPs report performance on a net return basis, which is the key metric for those who use financial statements for management information.

  For Union, this new standard became effective after FY19. At that time, the finance administration of the College elected to keep providing this information, which continued after FY20 as well. Beginning with FY21, our Controller and Assistant Controller, in consultation with our auditor, KPMG, decided that the time required to produce this information, its low informational value (per FASB), did not justify the effort.

  The Financial Accounting Standards Board is the governing body that promulgates all policies, practices, regulations, and guidance under which we must conduct our annual financial audits.

• What’s your response to criticism from some who say the College has wasted millions of dollars in recent years paying fund managers that have underperformed the market?

  While in any given month, quarter or year, a single investment strategy – such as passively investing in a broad market index like the S&P 500 – may yield better results, over time the endowment’s diversified approach has proven to generate better risk adjusted results.

  To the extent that Union may lag peers in a certain time period is not an indictment of the strategy itself, since most of our peers are pursuing the same strategy, but an indication that other institutions have managed their asset allocations and fund choices differently

• Why doesn’t Union just fire underperforming fund managers and get someone else?

  Individual fund manager strategies will be in and out of favor over short-term periods. It is unrealistic to expect them to outperform their indices and benchmarks over every time period. The College’s Investment Committee closely monitors the performance of its fund managers and will terminate managers for a variety of reasons (e.g., performance, changes in personnel, style drift). Sometimes the best decision is to stick with a fund manager that has underperformed because their strategy is out of favor as they are poised to rebound. The Investment Committee does not want to chase “hot performance” as this is a well-documented failing of many individual investors.

• The College's Form 990 would suggest a considerable percentage of the endowment is invested off-shore. Is this correct?

  No. The IRS requires us to disclose each fund's location for incorporation / domicile on the 990. Many of these funds have chosen a non-US address for purposes of incorporation and registration, but that has little direct bearing on where, or how, these funds are invested. The College invests in a number of funds that have a variety of investment goals - noted above - including specific industries (technology, biomedical, etc.), geographic areas (China, Europe, emerging markets, etc.), stage of company development (early stage startup, late stage startup), financial condition (financially stable, looking to grow, bankruptcy/turnaround) or other factors.

  To provide a domestic analogy, fully 67% of the United States Fortune 500 companies are incorporated in the State of Delaware. If one were to invest in an index fund that tracks the top 500 companies, it does not mean that 67% of the invested dollars are in Delaware.

• How do other schools manage their investments versus what Union does?

  Once an endowment reaches a certain level, approximately $800 million or so, conventional wisdom suggests that the institution should have a dedicated staff of investment professionals to oversee day-to-day operations. As noted, Union is below this threshold, so we do not have an investment office. Investments are handled by the Investment Committee, which is not compensated, with help from outside by Gerber Taylor as consultants. The table below shows an actual comparison of budgets between Union’s approach, and a peer institution of very similar size but a larger endowment:

  Investment Office

  Budget Comparison	Sample Peer	Union
  Total Compensation: CIO, Analysts, other support staff	$1,653,000	$0
  Operating Expenses
  Travel	$50,000
  Telephones	$2,400
  Postage and Printing	$400
  Utilities	$2,700
  Total Materials	$3,000
  Office Space Rental	$80,000
  Contract Services and Fees	$800,000	$458,030
  Miscellaneous	$500
  Total Operating Expenses	$939,000	$458,030
  Total Expense	$ 2,592,000	$ 458,030

• Why pay fees at all to fund managers? Couldn’t the College just passively invest in a fund or funds designed to mimic the overall performance of the stock markets?

  While passive investing is an option, that strategy is not one pursued by the vast majority of higher education endowments. In the higher education universe of endowments, fully 85 percent of schools have at least half of their invested assets in actively managed funds, and this number skews sharply to higher concentrations of actively managed funds.

  In fact, the larger the endowment, and the more successful the endowment, the higher the percentage of funds that are considered “actively managed.” A fully passive investment strategy is pursued by about 1 percent of higher education institutions, and these tend to be very small endowments (< $50 million on average). The reason for this is that most actively managed portfolios have delivered above-market returns over the long-term. In addition, a fully passive investment strategy limits an endowment in building a diversified portfolio.

  Lastly, it should be noted that even a passive portfolio is not fee-free, although the expenses are lower.