UW 2021 CEF

Investment

Investment

Investment Performance

For the fiscal year ending June 30, 2021 (Fiscal Year 2021) the University of Washington’s Consolidated Endowment Fund (CEF) returned +35.1% versus +26.0% for the passive benchmark and +34.3% for the public university peer median. Despite the challenges brought on by the Covid-19 pandemic, fiscal year 2021 turned out to be a very favorable investment environment for risk assets as fiscal and monetary policies across the globe remained extremely accommodative. Unlike in fiscal year 2020 where the US led gains driven by a small number of big-name tech stocks, equity market performance this year was broader based. The CEF's diversified portfolio performed well in this environment.

Our focus remains on long-term results where the CEF has maintained solid relative performance. The chart below shows that the CEF has returned +12.5%, +9.4% and +8.0% for the 5, 10 and 20-year periods, respectively, and outperforms the passive benchmark for all periods. The UW also fared well relative to public peers with above median performance for all periods.

The 20-year picture also highlights remarkable growth for the endowment. The CEF grew from $1.1 billion to $4.7 billion. In addition to new gifts totaling $1.1 billion (net of fees), nearly $2.0 billion of investment returns was distributed 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 $4.7 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, 2021, 76% of the CEF was invested in Capital Appreciation and 24% in Capital Preservation. Our long-term strategy is to maintain an equity-oriented portfolio and we recently revised our strategic asset allocation policy targets to increase our equity exposure. We continue to keep ample liquidity within Capital Preservation to meet the CEF’s funding requirements, as well as 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 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 by 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. Fully implemented as of July 1, 2021, the program distribution rate is 3.6 percent and the administrative fee distribution rate is 0.90 percent to reflect a total distribution rate of 4.5 percent.

The strong FY21 performance will continue to benefit distributions over multiple years due to the use of a 20-quarter average market value in the spending calculation. This smoothing mechanism helps stabilize distributions as returns fluctuate each year. UWINCO will carefully monitor CEF positioning and market conditions and, along with Senior Administration and the Regents, will regularly review spending to ensure alignment with projected longer-term returns and best practices.