Investing Wisely, Growing In Prominence

Benjamin Franklin once advised that a penny saved is a penny earned – but if he were alive today, he may have added that a penny wisely invested is an even better deal.

That sums up the philosophy of those who manage SMU’s $1.363 billion endowment, the foundation of the University’s long-term financial strength and part of its permanent resources.

The Investment Committee of the Board of Trustees oversees the SMU endowment and guides the SMU Treasurer’s Office in finding attractive investment opportunities. Last year’s growth of $200 million in endowment assets and return of more than 20 percent resulted from good investment choices, strong markets and more than $22 million in new gifts, says University Treasurer Liz Williams.

Even before SMU opened its doors in 1915, the General Education Board of the Methodist Church established an endowment of $111,540 for the new University. It took 80 years for the SMU Endowment to reach the $500 million mark – in 1995. That growth accelerated dramatically, however, with the last major fund-raising campaign: A Time to Lead. About one-third of the total $542 million given by alumni and friends was designated for the endowment, says Marianne Piepenburg, assistant vice president for planned and endowment giving. “We were able to increase the endowment by nearly $150 million through new gifts during that campaign. Those gifts, together with the wise investment counsel provided by the University’s trustees, have allowed SMU to double the size of its endowment in the past 10 years.”

So what does this growth mean for students and faculty? Endow­ment funds, supported by gifts of all sizes, enable SMU to develop innovative programs, enhance academic quality by attracting outstanding students and faculty and raise the profile of the Uni­versity. In the competitive world of higher education, current endowment income and the assurance of its continued support for the future will allow SMU to compare more favorably with some of the best universities in the country such as Notre Dame, Duke, Brown, Emory, Vanderbilt and North­western.

The University’s endowment requires not only investment skill and donor support, but also discipline and patience. “Sometimes an observer will hear about a large endowment gift to SMU and think that this amount can go fully and immediately into support­ing the scholarship, academic program or faculty position created,” Williams says. “However, it will take awhile for earnings to accumulate and provide a consistent level of support.” That support is ordinarily about 4 to 5 percent of its market value (gift plus capital gains), she adds.

“As the market value grows from rein­vested earnings, future support will increase as well. Building endowment is an exercise in patience, but one that pays off in the long term.”

Funds held in endowment cannot be withdrawn at will, like a checking account, to cover the University’s daily operating costs. Donors who make the original gifts restrict them to endowment and designate use of the income from those funds for specific purposes. So an endowment is more like a savings account, earning a return for current financial stability as well as future growth.

An endowment works this way: An individual gives $500,000 to SMU to endow a President’s Scholarship, the University’s most prestigious and competitive award. The University then invests the gift through a number of strategies and markets. A portion of the interest and capital gains earned from the fund is spent annually for the purpose designated, in this case, the scholarship, while the excess remains in the fund’s principal to protect its value against inflation. So, the original value of the fund, plus any additional gifts, is preserved and invested. As the principal grows, earnings grow.

Williams compares the SMU endowment to a mutual fund pool, with each donor’s fund holding shares in that pool. “Essentially, we pool the endowment gifts and manage them as a single entity,” she says. “In inflation-adjusted dollars we are trying to support the purpose of the funds at the same or greater level each year,” Williams says. “That’s why it is important that we achieve returns that are equal to or greater than the amount we spend on the purpose, plus the amount of inflation.”

She points out that inflation is higher for universities than that reflected by the Consumer Price Index (CPI) because “our costs are related to people and quality improvements such as books and high technology. The price of a computer may go down each year, but the cost of improvements and upgrades in technology, allowing for the newest research capability to keep pace with competing institutions, continues to go up every year.” The impact of increasing costs for the kind of educational experience SMU provides affects the quality of that experience.

In the example of the President’s Scholar award, which provides the student’s full tuition and fees for four years plus study abroad and other benefits, the scholarship must increase each year as tuition rates and other costs rise. “If you give a full tuition scholarship to an incoming first-year student, that student will be much happier as a sophomore if the University continues to sup­port the full cost of tuition with the scholarship,” Williams says.

According to a 2006 study by the National Association of College and University Business Officers (NACUBO), SMU’s endowment ranks 55th nationally (out of a total of 62 schools with $1 billion in endowment). That’s fourth in Texas behind the University of Texas System with $13.2 billion; Texas A&M Uni­versity System and Foundations, $5.6 billion; and Rice University, nearly $4 billion. Harvard University, which has had the longest period of time to accumulate endowment, had $29 billion and Yale, $18 billion.

What is the budgeting impact? Last year endowment income provided approximately $45.5 million of SMU’s $320 million operations budget, or 14 percent of the total. That means 86 percent of the University’s budget came from sources such as tuition and non-endowment gifts. As SMU increases the income generated by its endowment, it is less dependent on tuition as a means of support – income that can vary each year with enrollment trends. This allows the University more flexibility in recruiting and retaining the best students in the applicant pool because it is not required to accept students it may not want, just to meet a budgetary number.

Despite the endowment’s strong growth, SMU, as a relatively young institution, remains undercapitalized compared to the majority of its benchmark schools, those that SMU emulates. One way to look at the strength of a university’s endowment is to calculate endowment assets per student. Using this measure, for 2006 SMU held $120,593 in endowment per student, compared to an average $257,455 per student among SMU’s benchmark schools. (For more information: www.nacubo.org/x2376.xml) “While we are building our endowment, those schools with which we compete are working just as diligently to build theirs,” Williams says.

That is why SMU’s new major gifts campaign will be devoted primarily to raising funds for the SMU endowment in four key areas: student quality, faculty excellence, academic distinction and the campus experience.

“Endowed professorships provide competitive salaries, research funds and other academic resources for the highest quality teaching and learning,” says Brad Cheves, vice president for development and external affairs. “Scholarships provide financial support for those talented and eager students who would thrive at SMU but are courted by other national universities. Gifts for academic programs enable us to strengthen and add to the curriculum, and support for extracurricular opportunities broadens the SMU ex­perience for our students.”

Scheduled to begin its public phase in 2008, the campaign aims to elevate the endowment to a level comparable with competing institutions, which have more resources for growth in quality and impact.