UW 2020 CEF

Investment

Investment

Investment Performance

For the fiscal year ending June 30, 2020 (Fiscal Year 2020) the University of Washington’s Consolidated Endowment Fund (CEF) returned +1.1% versus +4.2% for the passive benchmark and +0.6% for the public university peer median.  Markets were extremely volatile, particularly in the second of half of fiscal year 2020, when global equity markets dropped precipitously due to the Covid-19 crisis, but then experienced an almost equally dramatic rebound.  The rebound was driven by a narrow set of technology companies, with six stocks accounting for nearly all of US returns.  Holding a diversified portfolio was challenging and the CEF’s geographic and sector positioning greatly impacted performance.

Our focus remains on long-term results where the CEF has solid performance.  The chart below shows that the CEF has returned +5.5%, +7.8% and +6.1% for the 5, 10 and 20-year periods, respectively, and continues to outperform the passive benchmark over the long term.  Despite a challenging fiscal year 2020, the UW is above median performance relative to public peers for all periods.

The 20-year picture also highlights remarkable growth for the endowment. The CEF grew from $1.1 billion to $3.6 billion. In addition to new gifts totaling $1.1 billion (net of fees), nearly $2.0 billion of investment returns was paid out primarily to support campus scholarships, professorships and research over the last 20 years.

Investment Strategy

Asset allocation is critical to balancing the long-term potential return and the risk tolerance appropriate for the University of Washington.

The CEF’s $3.6 billion portfolio is diversified across two clearly defined categories of investments: those which facilitate growth or appreciation (Capital Appreciation), and those which preserve endowment values and provide liquidity (Capital Preservation). As of June 30, 2020, 72% of the CEF was invested in Capital Appreciation and 28% in Capital Preservation. During the Covid-induced market correction and continued volatility, our focus has been on actively rebalancing the portfolio to both preserve liquidity and to take advantage of market dislocations. UW remains differentiated from peers by a larger allocation to public international equities, particularly emerging markets in Asia.

Spending Policy

Given current financial market volatility and projected lower returns for the CEF, the UW Investment Management Company (UWINCO) Board recommended a reduction in the endowment spending rate from a total spend of 5.0 percent to 4.5 percent. The Board of Regents is vested with the responsibility to set an endowment distribution spending policy that balances the needs of current endowment beneficiaries with the requirement to protect the corpus of the endowment to meet future University needs. On February 14 2019, the Board of Regents approved an amendment to the Consolidated Endowment Fund Policy to implement a phased reduction to 4.5 percent starting fiscal year 2022.

To cushion the impact of a reduction to units, a 3-year stepped reduction in the spending rate was developed. The distribution rate reduction will be phased as follows:

All endowments will utilize the same rates. Once fully implemented, the program distribution rate will be 3.6 percent and the administrative fee distributions rate will be 0.90 percent to reflect a total distribution rate of 4.5 percent.

If the endowment achieves positive returns and continued growth through contributions, the impact of the gradual reduction in the distribution rate to units should be minimal.

Revising the distribution rate now puts endowment funds on a more sustainable trajectory that benefits students, faculty and all CEF beneficiaries now and well into the future.