FAYETTEVILLE -- A historic investment return for the University of Arkansas Foundation helped push to more than $2 billion the value of net assets held by the foundation to benefit multiple campuses in the UA System.
"The UA Foundation's return for the fiscal year of +40.1% net of all investment fees and expenses is the highest return that we have ever recorded," Clay Davis, president and chief executive officer for the foundation, said in an email.
Davis said the 40.1% rate of return is the highest going back to 1990, when the foundation began investing endowed funds separately from other nonendowed assets.
Since 2010, only one year had an investment return for the foundation exceeding 20%: 2011, with a 21.3% return. Last year, the foundation, which is based in Fayetteville, reported a 2.9% investment return.
The foundation manages endowed accounts created by gifts from donors. These accounts "share in investment gains and losses for a year on a pro rata basis, so every campus we serve benefits from the 40.1% in exactly the same way," Davis said.
The fiscal year 2021 investment return "compares very favorably to our peers [based on size]," Davis said, adding that the rate of return outperformed what's been reported as the net investment return for Harvard's endowment, 33.6%.
An investment note published on the foundation's website stated that the 40.1% return "exceeded the 34% median return of over 130 college and university endowments based on preliminary data reported by Cambridge Associates."
K. Thomas Liaw, a professor of finance at St. John's University who studies investment management and has written about university endowments, in an email called the foundation's return "impressive." He said many university endowments produced high returns for the year, including some better than 50%.
"An important factor contributing to the higher return is the recovery of the market from the pandemic," Liaw said in an email.
Liaw referred to the S&P 500 index, which encompasses 500 top U.S. companies and is considered a benchmark economic indicator.
"The S&P 500 index gained 40.8 percent during the same period. Other asset classes performed well, too," Liaw said.
INVESTMENTS SOAR, NOT SPENDING
For endowed funds, a big gain in value doesn't mean there will be a correspondingly large rise in spending support for an institution.
Endowments have a specified spending rate, typically 4.5% to 5% for university endowments, Liaw said.
"There is greater support for programs and initiatives. But, not all earnings are spent in one year. So, a big jump in support is not expected," Liaw said.
The tax-exempt University of Arkansas Foundation manages -- with investment consultant Cambridge Associates -- external investment pools with a fair value of about $2.8 billion as of June 30, according to a financial statement.
Eleven UA System campuses and four foundations take part in these pooled investments, according to the University of Arkansas Foundation's financial statement.
This means that the foundation's financial statement doesn't capture all the gains from the pooled investments.
But the foundation's financial statement showed that its net assets increased to $2.06 billion as of June 30, up from $1.41 billion a year earlier.
Net realized and unrealized investment gains for the year totalled $456 million for the foundation, according to its financial statement. The foundation also listed more than $266 million in contributions for the year, counted as revenue.
A voluntary board of directors oversees the foundation's operations, and this board includes four current or past members of the University of Arkansas board of trustees, according to the foundation's website.
The foundation's financial statement listed a total value for an endowment, which it defined as consisting "of funds established for a variety of purposes, including both donor-restricted endowment funds and funds designated by the Board of Directors of the Foundation (the Board) to function as endowments."
These net endowment assets increased to $1.58 billion as of June 30, up from $1.11 billion a year earlier, according to the financial statement.
In fiscal year 2021, the University of Arkansas Foundation provided $65,352,945 in support to the UA System and its component campuses and divisions, Davis said.
He said this was similar to the $66,614,918 in support provided the previous fiscal year, with differences between years reflecting not only the foundation's holdings but also when campuses spend funds made available by the foundation.
"If you are thinking spending should be 40% higher, recall that spending is based on a 36-month rolling average of endowment values (that's the smoothing policy employed by all endowments)," Davis said.
The rate of return will ultimately benefit students at the University of Arkansas, Fayetteville, spokeswoman Amy Schlesing said, noting that the underlying gifts have associated guidelines for how the endowed funds are spent.
"This growth is beneficial to the University in multiple ways, for example -- gifts funding scholarships for students that have grown can allow for additional scholarships to be awarded from those endowments, just as gifts to fund research or academic programs will provide additional funding for increased research activities or the further strengthening of an academic area," Schlesing said in an email.
For the fiscal year that ended June 30, UA-Fayetteville received approximately $33 million in support from the University of Arkansas Foundation, Schlesing said.
While a UA System campus might receive support from other foundations, the University of Arkansas Foundation counts its assets as specifically benefiting 10 UA System campuses, the UA Division of Agriculture and the UA System.
"NOT THE NORM"
Davis described managing risk as a priority for the foundation when asked about the investment return being similar to the S&P 500.
"While the S&P 500 index constitutes one asset class that makes up a significant portion of our portfolio, no endowment manager would ever put all assets in the S&P 500 alone -- That's simply too much risk," Davis said. "Our goal is to maximize returns using an appropriate level of risk."
He said the foundation manages risk by having a diversified portfolio "that includes multiple assets classes."
Davis, after noting the one-year return, also referred to the foundation as being "long-term investors."
"More importantly for long-term investors like us is that our 3, 5 and 10-year average annualized trailing returns from 6.30.2021 are now +15.2%, +14.2% and +10.1%, respectively," Davis said.
Liaw, the finance professor, said in an email that the fiscal year 2021 investment returns are "not the norm."
"The long-term averages are much lower," Liaw said.
He described the importance of having such endowed funds for colleges and universities.
"Endowments will continue to account for a significant portion of operating expenses to support the institution's mission," Liaw said.
While many large university endowments are benefiting from high investment returns, other schools lack such support, Liaw said.
"Note that there is a disparity in endowments. The largest endowments are at $40 or $50 billion, and many are less than $25 million. The rich endowments are getting larger and much larger, while many others struggle to raise money," Liaw said.