The Fisher Fine Arts Library, dedicated in 1891
Endowment and Investments
The University of Pennsylvania’s endowment totaled $10.1 billion as of June 30, 2015, an increase of $551 million over the past year. Penn’s endowment is comprised of over 6,500 individual endowment funds benefiting the University’s schools, centers, and Health System.
The vast majority of Penn’s endowment is invested in the Associated Investments Fund (AIF), a pooled investment vehicle in which the many individual endowments and trusts hold shares or units. An Investment Board appointed by the Trustees of the University oversees the investment of the AIF. The University’s Office of Investments is responsible for the day-to-day management of the AIF and implements the policies approved by the Investment Board.
The purpose of Penn’s endowment is to provide stable and perpetual support for the mission and programs of the University. Achieving this objective requires an investment and spending program that supports intergenerational equity. The AIF must provide substantial and stable spending today, but it also must preserve purchasing power in order to provide comparable resources to future generations. Penn seeks to resolve the tension between these competing needs by investing in a diversified, equity oriented portfolio and by adhering to a disciplined spending rule that smoothes the impact of changes in AIF value on the operating budget.
Endowment Growth and AIF Payout ($ in millions)
The University’s endowment spending policy balances the objectives of maximizing budgetary support to endowed programs and maintaining purchasing power of the endowment into perpetuity. The actual payout in any given year is determined by a formula designed to smooth the impact of short-term changes in the endowment’s value on spending distributions. The spending rule target payout is based on the sum of: (i) 70% of the prior fiscal year distribution adjusted by an inflation factor; and (ii) 30% of the lagged fiscal year-end fair value of the AIF, multiplied by 6.5% for financial aid funds and 4.7% for all other funds.1
The endowment supports a wide range of purposes across the institution, with the significant majority of funds dedicated to instructional use and student financial aid.
Endowment by Purpose - as of June 30, 2015
AIF Investment Program:
Penn builds its investment program around several simple tenets. First, in order to achieve the high returns necessary to preserve purchasing power after spending, the AIF is invested with a strong equity orientation. With the exception of fixed income, Penn expects that all asset classes in which it invests can earn equity-like returns over long periods of time. Second, Penn builds a portfolio that is diversified across different fundamental drivers of return. The University focuses on areas with the greatest inefficiencies across asset classes, strategies, and geographies. Finally, Penn capitalizes upon the perpetual nature of the University to invest with a long time horizon, creating a significant advantage relative to the many market participants who must focus on near-term certainty instead of long-term attractiveness when evaluating investments.
Penn has established a Strategic Asset Allocation (SAA), with investment class target ranges which represent reasonable allocation ranges for the portfolio in a normal environment. Portfolios within these ranges reflect the broad equity orientation and diversification that Penn seeks. The SAA guidelines consist of ranges rather than point targets, a reflection of the impossibility of knowing the future investment opportunity set facing the University. As the portfolio evolves towards the SAA ranges, Penn uses an Interim Policy Portfolio (IPP) to guide our asset allocation over shorter periods. Over time, we expect the IPP to approach the SAA ranges.
Penn revisits its asset allocation ranges and targets periodically to ensure that they appropriately reflect both the University’s long-term investment needs and the opportunity set facing Penn. The most recent review occurred in June 2015.
The evolution of Penn’s asset allocation towards a stronger equity orientation, greater diversification, and more inefficient markets has been steady over time.
AIF Asset Allocation as of June 30, 2015
AIF’s Portfolio Diversification Over Time
The AIF returned 7.4% in FY 2015. The investment performance produced $656 million of dollar gains for Penn. After spending, gifts, and other transfers, the AIF increased by $560 million, ending the fiscal year with a value of $9.7 billion. The broad endowment ended the year at $10.1 billion, an increase of $551 million.
Performance for the year was led by the extraordinary returns Penn’s venture capital portfolio, which was bolstered by continued private investor exuberance for early and growth stage technology-related business. The AIF benefited from strong performance in a number of other assets classes as well. Penn’s developed foreign equity and emerging equity portfolios produced significant outperformance, benefitting from the wide dispersion in country, currency, and security returns over the past year. Absolute return generated solid performance, outpacing equity markets. Real estate continued to rebound from the financial crisis, producing a strong return on the strength of solid leasing activity and robust exit markets. Penn’s natural resources performance was a notable outlier during the fiscal year, as the sharp fall in energy prices led to a significant decline in the portfolio.
Penn’s longer term performance has enabled the AIF to exceed its goal of maintaining real purchasing power after spending distributions. Performance over time has also outpaced Penn’s composite benchmark, a blend of asset class benchmarks.
1 The University temporarily increased the multiplier for financial aid funds in 2009 with the implementation of the expanded financial aid program. This rate will converge back to 4.7% over the next several years
For detailed annual report information, please click the link below.