UD Endowment Annual Report

The global economy and capital markets showed remarkable resilience in fiscal year 2024 despite aggressive rate hikes from central banks around the globe in the fight against inflation.  While not back to pre-pandemic levels, inflation has come down spurring a surprisingly strong stock market performance led by innovations in technology such as generative artificial intelligence.  Market returns last year were extremely concentrated as more than half of the gains came from just seven mega-cap technology names.  Against this backdrop, the University of Delaware endowment rose by +9.61% compared to a return of +15.41% for the policy benchmark.  Meanwhile, the median return for the peer universe of foundations and endowments with assets of at least $1 billion performed +9.46%.  The endowment return last year was above the +8.0% long-term average return on the endowment and strong enough to see an increase in endowment assets after the $77 million in distributions made during the fiscal year to the university’s operating budget.  The endowment lagged the policy benchmark return last year because the benchmark uses a public market index as a proxy for the private markets.  We take a long-term approach to investing the endowment and over time periods of three years and longer, the private investments in the endowment have significantly outperformed the public markets.  It is also worth noting that the private investments in the endowment were up +5.0% in calendar year 2022 when the global stock market was down -18%. Marketable investments, which make up more than half of the endowment, were up +13.6% for the fiscal year compared to +13.0% for the marketable benchmark thanks to strong returns from US stocks and hedge funds.  We are pleased with the nearly double-digit return achieved on the endowment last fiscal year given the outlook at the start of the year.  We attribute this return to a focus on long-term results and maintaining an asset allocation that favors growth investments.  

The last twenty-eight years have brought plenty of market volatility, but the University of Delaware endowment has emerged through it all in a very strong position.  Over this period, the endowment has achieved an +8.0% annual return compared to the strategic benchmark return of +7.2% and the median foundation and endowment return of +7.3%.  We are proud of the fact that we have achieved these market-beating results while taking less risk than our benchmark and our peers, as seen in the chart below.  

The Investments Office considers the potential returns and risk characteristics of each investment in the endowment.  By comparing different investments based on their risk-adjusted returns, we can optimize the portfolio and determine how much extra return we can achieve by taking on additional volatility.  Producing a stable and growing source of income for endowment beneficiaries is our primary obligation to the university.  The best way to ensure that endowment beneficiaries receive a stable and growing income stream is to manage the endowment in a way that ensures stability and growth of performance.  We resist the urge to invest the entire endowment in the US stock market, even though that might produce better returns, because that would subject our beneficiaries to wild swings in annual support.  This volatility in annual income would have a severe negative impact on academic department budgets, the ability to offer scholarships to students and the general operating budget of the university.  Over the last decade, the volatility of returns on the university’s endowment has been much lower than that of the vast majority of endowments with assets greater than $1 billion as shown in the chart below.  Strong returns with limited volatility produces a high Sharpe ratio.  The Sharpe ratio measures excess returns above the risk-free rate per unit of volatility.  The endowment ranks in the top quartile among large endowment peers on this metric as shown in the chart on the right.  

Thanks to this disciplined approach, the Investments Office has successfully increased total distributions to endowment beneficiaries every year for more than fifteen years.  Last year, we provided $77 million in distributions from the pooled investment portfolio, which is up from $47 million in 2012.  This works out to a +4.2% annual growth rate in support of the university, which is above the rate of inflation over the same period of +2.7%.  In addition, distributions as a percentage of the university’s operating revenues have risen from 5.5% to 6.3% over the same period.  What makes this growth more impressive is that it occurred during a period where the payout rate has declined from 4.5% of trailing 12-quarter market value to 4% in recent years.  As a result, the university now has additional financial flexibility to deal with unexpected budget challenges.  Over the last three years, distributions have grown each year in a range of 5% to 10%, which has been a welcome relief for beneficiaries dealing with elevated inflation and a tight budget environment.

The endowment provides perpetual funding to support the university’s educational goals while preserving real value for future generations.  To that end, the university’s Board of Trustees, Investment Visiting Committee, and Administration have a shared mission to maximize the endowment’s total return consistent with the university’s prudent investment risk constraints.  This mission requires an expected long-term return that exceeds the inflation-adjusted annual spending rate.  In order to pursue that goal, the university maintains an equity-biased portfolio and seeks to partner with best-in-class management firms across diverse asset categories while also managing some endowment assets in-house.  The Investments Office manages the endowment under the guidance of and within the policies authorized by the Investment Visiting Committee of the university.

The target spending rate for the endowment is 4% to 5% of the three-year average market value as determined annually by the university’s trustees.  In Fiscal 2024, the spending distribution from the pooled investment portfolio to the university was $77.2 million, providing financial support and flexibility to the university’s operating budget.  This was an increase of more than $4 million over the prior fiscal year, which was most welcome due to the challenge higher inflation has had on our operating budget.  In recent years, our role in supporting the university has become more meaningful as funding from the State of Delaware has declined.  The blue line in the chart below shows the decline in operating appropriations from the State of Delaware as a percentage of total operating revenue at the university, while the red line shows the increase in distributions to the university over time.  The ongoing generosity of our alumni and friends has helped to ensure the long-term financial health of the university through the establishment of endowed gifts.  A strong endowment allows the university to fund initiatives that will have a lasting impact on the student experience and the overall institution. 

The endowment supports a variety of aspects of university life.  There are more than 1,470 endowment accounts that make up the overall university endowment.  The largest number of these accounts were established to support the College of Arts & Sciences.  Other schools that enjoy a substantial benefit from having annual support from endowed accounts include the College of Engineering, the College of Health Sciences, the Alfred Lerner College of Business and Economics, the College of Agriculture and Natural Resources, the College of Earth, Ocean, and Environment and the College of Education and Human Development.  Other endowments have been established to support our strong athletics programs and other critical institutions on campus such as the library. 

As the chart below illustrates, most of these endowment accounts were established for the support of our students through student aid so that young people of every background can attend the University of Delaware.  Research shows that campus communities that reflect a broad range of perspectives and backgrounds significantly increase the quality and value of education for all students. These transformative learning experiences enhance critical thinking, promote civic responsibility, enrich formal and informal exchanges amongst students, and prepare our students to navigate in an increasingly global workplace and society.  

Other endowments have been created for instruction and departmental research as well as the general ongoing operational needs of the university.  Since the endowment is a permanent pool of capital, it is designed to provide a reliable source of income in perpetuity for the various causes that each account was established to support.

Due to the perpetual nature of the investment program, the long-term performance results are a true reflection of the endowment’s investment horizon.  Long-term performance has been strong on both an absolute and relative basis despite challenging market conditions.  The endowment recorded an annual return of +7.4% in the twenty-eight years ended June 30, 2024, exceeding the +6.0% annual return for a passive portfolio of 60% global stocks and 40% global bonds.  This annual outperformance confirms that the endowment model’s long-term investment approach has worked well for the University of Delaware.   

The chart below illustrates that the compounding of excess returns can have a significant impact on the university over time.  An endowment of $1 million established twenty-eight years ago would have grown to a compounded value of $8.5 million compared to a value of only $5.2 million invested in a global portfolio of 60% stocks and 40% bonds.  At first glance, the difference between the +7.4% annual return for the endowment and the +6.0% annual return for the passive portfolio may seem trivial, but due to the power of compounding that excess return has created $3.4 million in additional assets over the twenty-eight-year period on the original $1 million investment.  It is no wonder that Albert Einstein observed that “compound interest is the eighth wonder of the world”.  This difference is represented by the yellow area in the chart below.  For this reason, the Investments Office actively manages endowment assets to achieve incremental positive returns.  Large endowments are better able to achieve incremental positive returns from active management than smaller investors due to their access to top-performing funds and lower management fees.  Continued excess returns on the endowment will allow the university to make life-changing investments in the education and development of a greater number of University of Delaware students. 

The endowment has seen tremendous growth over the years.  While there are references to an endowment at the University of Delaware prior to the 1850s, our current records date back to 1974 when the University of Delaware had the 17^th largest endowment in the country according to the 1974 NACUBO Survey.  The $106 million market value on the endowment that year has ballooned to a current market value of $2.1 billion on the pooled investment portfolio thanks to strong performance, a constant focus on expense reductions, generous contributions from alumni and friends and a prudent distribution policy.  The endowment continues to grow in importance each year to the strength of the university’s balance sheet while the annual distributions make up a larger slice of the university’s operating budget.  

The pooled investment portfolio is made up of permanent endowment funds as well as operating funds invested for the long-term.  The yellow bars in the chart below show the operating funds in the pooled endowment portfolio.  The decision to invest operating funds into the long-term portfolio was first made in 1997 to achieve a return on the university’s excess liquidity that was above what could be achieved in short-term fixed income investments.  This has proven to be a smart decision for the university as the value of these operating funds have more than doubled in value while still providing between 4% and 5% in annual income to the university’s operating budget.  Our financial position has been strengthened by this additional wealth and liquidity.  We briefly tapped into this excess liquidity during the Covid-19 pandemic to ensure that the university could maintain a high level of services to our student population during that difficult time.  Going forward, these funds will continue to provide the university with additional financial flexibility to deal with any unexpected budget challenges. 

The university has developed asset allocation guidelines based on its total return objectives, income requirements, and capital market expectations.  These guidelines are long-term oriented and consistent with the endowment’s risk posture and investment objectives.  We have seen dramatic changes to our asset allocation over the last twenty-eight years with the allocation to domestic stocks and bonds falling from more than 80% of endowment assets to less than 30% today.  These funds have been redeployed into the international equity markets and alternative assets such as hedge funds and private investment funds, which should not only provide higher returns in a greater variety of investment environments but also help to control overall risk.  

We made our first foray into private investment and real estate funds in 2000.  Now, twenty-four years later we have achieved a 42% allocation to these important investments.  When looking at the various assets in which the endowment invests, private investment and real estate funds have consistently had the largest positive contribution to our performance.  While the returns last fiscal year were only up mid-single digits, these funds have achieved a net return of +13.7% annually over the last five years pushing the value of the endowment higher.  Private investment and real estate funds will continue to be an important driver of endowment performance in the future.  

Another area where we saw strong relative returns was in our hedge fund investments.  Our managers showed us that the last year was filled with attractive relative value opportunities as our hedge funds achieved a net return of +13.1% in fiscal year 2024.  Over the years this allocation has proven to be a strong alpha contributor to the endowment while reducing the overall volatility of endowment returns.  Fixed income investments also enjoyed strong relative performance in fiscal year 2024 as we focused on capturing the yields available in the front end of the yield curve.  The best performing assets in the endowment last year were global stocks.  US technology names were the main contributor to this strong performance as US equity holdings were up more than +26% for the year.

Developing risk and return assumptions for the various asset classes offers a guide to the range of possible investment performance over a given period.  These assumptions help the Investment Visiting Committee to guide the asset allocation and risk levels that are chosen to meet the university’s investment performance goals over the long-term.  In prior annual letters we have noted that we expect capital market returns to become more subdued over the next decade due to lower interest rates, lower economic growth, heavy debt loads, the unwinding of accommodative monetary policy and inflated market valuations.  While some of these challenges remain with us today, we see a shift to a new economic era characterized by higher growth rates, strong capital investment and higher interest rates.  While valuations will continue to provide headwinds for the outlook for marketable securities, the recent lackluster returns in alternative investments should make them more attractive to investors going forward.  The benefits of artificial intelligence and automation are expected to boost corporate earnings and economic growth, while also helping control inflation. Geopolitical tensions remain a risk, but overall, the outlook for 2025 is optimistic, with a healthy economy and solid foundation for asset markets as investment levels rise and rates normalize. We believe that setting realistic capital market expectations leads to good asset allocation decisions and a better performance outcome for the endowment.  

The chart below can provide some guidance as to where the University of Delaware’s endowment will be looking in the future to achieve strong risk-adjusted returns.  The outlook for private investments still suggests that this is the area with the most performance potential for the endowment which is why we continue to make commitments to this asset class.  Global equities also have strong return expectations, but increased volatility in this asset class suggests that we will maintain a more neutral position going forward.  

Despite generally lower return forecasts across most asset classes, we maintain our positive view on the capital markets.  Our analysis suggests that the endowment will produce a +7.7% annual return over the next ten years.  This suggests that our payout rate will have to stay at the low end of the 4-5% range after inflation and expenses are considered.  We will continue to invest for the long-term and make strategic adjustments to the asset allocation based on changes to our capital market expectations.

The endowment is important to the University of Delaware to make sure that we can continue to deliver value to our students and attain higher levels of quality than would otherwise be possible.  This reliable long-term support allows us to increase student aid, make commitments to senior faculty, initiate pioneering research, and invest in innovative technologies and other physical assets. The endowment’s long-term investment horizon and smooth distribution policy provide this essential support even in difficult financial times.    

For the donor, establishing an endowment at the University of Delaware will create a legacy today that will live on in perpetuity.  An endowment gift can provide assurance that programs that are important to the donor will always survive.  Establishing an endowment also gives donors the ability to perpetuate their annual gifts. For example, a generous donor that has consistently contributed $10,000 per year to the university as part of the annual appeal over the last twenty-five years would have provided $250,000 to the university’s operating fund over that period.  Sadly, that $10,000 donation today would not even be enough to cover tuition for an in-state University of Delaware student.  If that same donor had established an endowment for $250,000 twenty-five years ago, the endowment value would have almost tripled to $748,000 today and would be generating enough in annual distributions to pay for two in-state University of Delaware students with enough left over for their meal plans.  The endowment will continue to grow and have a greater impact on our school in perpetuity.