The University of Michigan, an encyclopedic survey ... Wilfred B. Shaw, editor.
University of Michigan.

Investments

Investments handled by the Investment Office include bonds, common and preferred stocks, mortgages (primarily for University staff members), short-term paper, some real estate properties, and miscellaneous contracts, certificates, and notes. A large source of funds for investment arises from the Endowment funds given to the University over many years. Also invested are amounts of cash temporarily held in various University funds. For many years the University handled its own Employees Retirement Fund for nonacademic staff members, which provided a large source of funds for investment, until the Fund was transferred in 1972 to the Teachers Insurance and Annuities Association and College Retirement Equities Fund.

The volume of investment activity handled by the Office has grown rapidly since 1940. The following table indicates annual investments in ten-year periods.

BOOK VALUE OF INVESTMENTS (dollars in thousands)
1939-40 1949-50 1959-60 1969-70 1976-77
Bonds $11,043 $23,917 $52,550 $ 93,294 $146,363
Stocks 515 4,537 17,784 44,806 46,949
Other 1,783 4,555 8,486 19,007 22,607
Total
Investments $13,341 $33,009 $78,820 $157,107 $215,919
The bond category includes both long-term and short-term securities. Market value compared to book value in 1976-77 Page  28was $235,600,000.

Policies governing investment procedures change from time to time to reflect financial markets and prospects.

In the 1943-44 President's Report, it was noted that the policy of that time "emphasized conservation of principal in comparison with production of income," which was a forerunner of an increasing concern over income maximization.

In 1945-46 the Regents adopted a policy statement as follows: "In order to carry out the wishes of the donors of endowment funds, due regard shall be given to the production of income from investments as well as to the conservation of the principal of the funds. The investment policy of the University shall be based on the principle of a broad diversification among various fields of investments and among various securities within these fields." No significant change took place, however, in the investments of University funds until 1951-52 when an agency agreement was entered into with the National Bank of Detroit for advice, consultation, and custodial service for investments of the larger endowment funds. At that time a formal program of investing in common stocks was started and, during the next 25 years, common stocks as a percentage of the total market value investment in the Endowment Funds increased from 13 percent in 1951-52 to 58 percent in 1976-77, at which time the maximum authorized limit was 70 percent of market value.

The Consolidated Endowment Pool is a group of individual funds, the terms of which do not require the assets to be invested separately. The principal of such funds must be maintained intact and only the income expended for the particular purposes for which the endowment was created. Thus, it is possible to take a long range approach to the investments of such funds. There is no problem of meeting any future obligations out of the principal, and the fluctuations of security prices are not of great importance except as they provide opportunities to buy and sell or to switch from one type of investment to another. Income is of prime importance, not only from the standpoint of amount but also of stability. Investments include common stocks, bonds, mortgages, land contracts, preferred stocks, and real estate. Page  29Share values are assigned for individual accounts and income distributed on the basis of these shares as currently valued.

The investments of working capital of various University funds are principally commercial paper and U.S. Government agency obligations. The maturities are short-term, and investments are adjusted on a day-to-day basis in accordance with the over-all cash position of the University. Fluctuations in the amount of these investments are therefore considerable.

The Reserve Funds - Investment Pool is a pooling for investment purposes of various University reserve accounts and other funds of this type. Although the funds in this pool may be drawn on for expendable purposes, it is expected that they will not be needed in their entirety in the immediate future. The investments are principally bonds of medium-term maturities. A moderate short-term position is maintained to provide liquidity.

The University has certain funds, mostly endowments, that must be separately invested in accordance with the terms of the gifts or bequest. In a few cases the terms also restrict the investments to certain types, such as bonds or other fixed-income securities. The investments of these funds are in accord with the restrictions or with the authorizations outlined above, with the exceptions of a few securities that have been retained at the request of the donors.

In accordance with the Bylaws, Sec. 3.07 (2), all investment transactions are reported to the Regents at the monthly meetings. The investments of the larger funds are reviewed with the Regents semiannually, and a report of all investments is submitted annually.

The Total Return Fund, established in July 1970, is a pool of individual funds, the terms of which permit the use of some or all of the capital gains, realized or unrealized, and principal in addition to ordinary income. The investment objective of the Total Return Fund is to maximize total return within reasonable standards of prudence. The term "total return" is considered to mean a combination of Page  30income in the ordinary sense and appreciation or depreciation in the market value of the investments, either realized or unrealized. The use of fixed-income securities, convertible issues, and common stocks is governed by the objective, rather than by any specific percentage limitations. There is no limitation on the selection of individual securities by the National Bank of Detroit, Trust Department, provided the University officers concerned with investment approve the purchases.

In 1975 a Donor Pooled Income Fund was established to produce income for beneficiaries with life-income interests.