University-Wide Letter Focuses on U.Va.'s Endowment

November 13, 2008

Nov. 13, 2008 -- Leonard W. Sandridge, Executive Vice President and Chief Operating Officer for the University of Virginia, brings the U.Va. community up to date on the state of the University's endowment.

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To the University community:

We are living in turbulent financial times. We see the impact on our daily lives when we go to the grocery store or the gas station, when we check on our retirement accounts, and when we pay our monthly bills.

It is impossible to read the newspaper or watch the evening news without being confronted by the significance of the upheaval in the world’s financial markets.   

Last month, President Casteen wrote to you about the impact on the University of the state’s mandatory $10.6 million budget cut, which is intended to help offset the state’s 2009 fiscal shortfall of $973.6 million.

Today, I write to bring you up to date on the state of the University’s endowment and to reiterate, as President Casteen did, that the University is a stable place of employment, as well as a financially strong institution. Despite the financial crisis, our endowment continues to give us the means to cope with reductions in state support and plan for our future. 

As you know from news reports, the University’s endowment, like endowments throughout the nation, has been affected by the fall-off in equity markets worldwide over the last several months. Fortunately, the value of our endowment has not dropped as much during this period as the markets.

When the economic crisis hit in late summer, the long-term pool invested by the University of Virginia Investment Management Company (UVIMCO) decreased from $5.1 billion on June 30 to $4.2 billion on Oct. 31. This is a 20 percent decrease; the S & P 500 index dropped 24 percent over the same period. 

Some recent news reports, I am sorry to say, have misinterpreted the status of our endowment and in some cases declared us to be in "distress." These accounts are simply inaccurate.

It is important to focus on the fact that UVIMCO has sufficient liquid assets to cover its obligations. The University has had no problem issuing debt thanks in part to a strong credit rating. We have not curtailed our building program. We have not reduced the current year payout from the endowment — in fact, we have increased it — and we have taken steps to protect services to our students and patients.

The University’s long-term investments are diversified and positioned to take advantage of a recovery that will eventually come.  UVIMCO has made decisions that call for investments to be made in private managers over the next three years totaling $700 million to $1 billion.  UVIMCO has the liquidity to make these investments as planned and will meet the capital calls. 

There also appears to be widespread misunderstanding of what the University’s endowment comprises and just how much goes into our operating budget. 

The University of Virginia’s long-term pool, invested by UVIMCO, consists of three major components: the core endowment overseen by the Rector and Visitors of the University of Virginia, the University’s corporate entity ($2.6 billion as of Oct. 31, 2008); University-related foundations’ endowment ($1 billion); and other non-endowment assets ($600 million). 

While we know that the University’s core endowment is extremely important to the University’s future — and to supporting such initiatives as new academic programs and the growth of AccessUVA — funds from the endowment make up just 4.8 percent of the University’s $2 billion operating budget. We benefit from a very diverse set of revenue sources that stabilize our institution in times such as this — a fact often cited by bond rating agencies. These include tuition, state funds, sponsored programs, sales, patient revenues, and gifts.

An institutional endowment is intended to create a perpetual source of support for the long-term aspirations of the University.  It is complex and must be carefully managed by a team of smart, agile, and extremely knowledgeable individuals. In our case, UVIMCO is that team.

UVIMCO’s staff and its board of investment professionals have done an extraordinary job of managing the University’s assets, bringing in a 10-year average annual return of 12 percent through the period that ended Oct. 31, 2008, including a 25.2 percent return in fiscal year 2006-2007. The average return on the S & P 500 index for the same 10-year period was zero percent.

The long-term averages reflect great stability and resilience in the University’s investment strategy.

We have seen economic instability in the past, managed through it and emerged stronger. During the first Gulf War, the University’s endowment reported a negative 10.2 percent for the third quarter but finished fiscal year 1991 at plus 8 percent. During the 1987 stock market crash, the endowment reported a negative 12.2 percent for the fourth quarter but closed out the fiscal year at no loss.
We are drawing on our experience of earlier downturns and working to maintain our momentum as the economy slows. In fact, we plan to take advantage of some of the investment opportunities that are emerging. You should also know that while we are feeling the effect of the external markets, additions continue to be made to the long-term investment pool: $150 million has been added since July 1.

UVIMCO’s experienced staff understands the challenges of the global markets. They have invested for the long term and have been able to help the University withstand previous financial crises. The endowment has been positioned to minimize the market risks. These are the times when we remind ourselves that taking this long view is, in fact, the prudent way to operate.

Last June, the Board of Visitors approved an increase in the annual distribution of the endowment from 4.5 percent to 5 percent, which translates to $161 million in fiscal year 2008-2009.  We will make this distribution as planned despite the current economic conditions.  As a result, our schools and departments will have more resources at their immediate disposal. 

The University is committed to doing the right things to assure the long-term health of the endowment, and I have every confidence that as the world markets begin to stabilize, the University will benefit. In the midst of the economic crisis, the University received reaffirmation from the top three rating agencies of the University’s AAA bond rating, in conjunction with the issuance of tax-exempt long-term bonds.  During the current economic crisis, we have had no problem issuing debt thanks in part to this strong credit rating.

I will not begin to speculate on when the markets will improve or how fast they will return to levels seen before the recent decline. The current stress may last several years. What we do know is that the markets will strengthen over time. 

What does it mean to you as a University employee? What we are going through is part of a global recession that has affected both the University’s state budget and our endowment. Although this is unfortunate, the endowment is responding to the downturn as we would expect. We anticipate that you as an employee will feel minimal impact. 

Our intention is to manage well in the current climate and come out of this as a stronger institution. We thank you for your ongoing support and confidence as we work through these tough economic times together.

Leonard W. Sandridge 
Executive Vice President and Chief Operating Officer