The Fisher Fine Arts Library, dedicated in 1891

Endowment and Investments

Endowment Overview:

The University of Pennsylvania’s endowment totaled $9.6 billion as of June 30, 2014, an increase of $1.4 billion over the past year. Penn’s endowment is comprised of over 6,000 individual endowment funds benefiting the University’s schools, centers, and Health System.

Total Value of the Endowment (millions of dollars) Total Value of Endowment Chart

The vast majority of the 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.

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.

Payouts from the endowment provided $306 million in budgetary support to the University during the fiscal year. Spending support from the AIF for University operations has grown steadily over the past decade, increasing even through the financial crisis. For the year ended June 30, 2014, spending distributions from the AIF support approximately 10% of the University’s academic operating budget.

AIF Historical Payout (millions of dollars) AIF Historical Payout Chart

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, 2014 Endowment by Purpose

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’s long-term Strategic Asset Allocation (SAA) ranges reflect 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, we use 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 2014.

AIF Asset Allocation as of June 30, 2014 AIF Asset Allocation

The evolution of Penn’s asset allocation towards a stronger equity orientation, greater diversification, and more inefficient markets has been steady over time.

Penn’s Portfolio has Diversified Over Time Penn’s Portfolio

The AIF portfolio includes investments in illiquid funds, some of which require Penn to make capital commitments that will be drawn down and invested over a period of time. As of June 30, 2014, the AIF had $1.5 billion in outstanding commitments to private equity, real estate and natural resources partnerships as well as to certain managers in the emerging markets and absolute return portfolios. The AIF maintains a conservative liquidity profile and can meet these commitments easily in both normal environments and periods of market stress or dislocation.

AIF Performance:

The AIF returned 17.5% in fiscal year 2014. The investment performance produced $1.5 billion of dollar gains for Penn. After spending, gifts, and other transfers, the AIF increased by $1.4 billion, ending the fiscal year with a value of $9.2 billion. The broad endowment ended the year at $9.6 billion, an increase of $1.4 billion.

For the year ending June 30, 2014, Penn benefited from strong domestic and developed foreign equity markets. Although emerging equity markets were weaker than their developed counterparts, Penn’s portfolio outperformed dramatically on the back of strong stock selection by Penn’s managers and significant exposure to India. Absolute return produced a solid absolute performance with limited market exposure. After trailing public markets last year, private equity performance surged ahead, with Penn’s venture capital portfolio generating an exceptional return. Penn’s natural resource performance was strong as the mature portfolio produced several sizeable winners, while real estate also produced good absolute and relative results.

Penn’s longer term performance has enabled the AIF to more than achieve its goal of growing real purchasing power even after spending distributions. Performance over time has also outpaced Penn’s composite benchmark, a blend of asset class benchmarks.

Returns for Periods Ending June 30, 2014 Returns for Periods

Annual Financials

For detailed annual report information, please click the link below.

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