UW 2022 CEF

Investment

Investment

Investment Performance

For the fiscal year ending June 30, 2022 (FY22) the University of Washington’s Consolidated Endowment Fund (CEF) returned -5.5% versus -12.8% for the passive benchmark and -4.4% for the public university peer median. Following an exceptional FY21, this fiscal year was tough for public equity markets, with negative returns driven by rising inflation and a shift to monetary tightening across the globe. There was a sizable divergence between US and international performance. After years of outperformance, growth stocks lagged value stocks this year, with the smaller high-growth tech companies the hardest hit. Against this backdrop, CEF performance was mixed across the different portfolio strategies.

Our focus remains on long-term results where the CEF has maintained solid relative performance. The chart below shows that the CEF has returned +8.4%, +8.9% and +7.9% for the 5, 10 and 20-year periods, respectively, and outperforms the passive benchmark for all periods. UW performance relative to public peers is mixed but remains above median for longer-term periods.

The 20-year picture also highlights remarkable growth for the endowment. The CEF grew from $1.0 billion to $4.7 billion. In addition to new gifts totaling $1.2 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 to support campus distributions (Capital Appreciation), and those which preserve endowment values and provide liquidity (Capital Preservation). As of June 30, 2022, 73% of the CEF was invested in Capital Appreciation and 27% in Capital Preservation. Our long-term strategy is to maintain an equity-oriented portfolio. Last year we revised our strategic asset allocation policy targets to increase our private equity exposure, which is being phased in over a three-year period (FY22-FY24). We continue to target ample liquidity within Capital Preservation to meet the CEF’s funding requirements.

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.

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.