Purchasing Power
Managing Emory’s endowment for the present and future

Vol. 9 No. 5
April 2007

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Purchasing Power
Managing Emory's endowment for the present and future

What is an endowment?

Asset allocation of Emory's endowment

“I tried to think of issues that the faculty might bring to the investment committee, and it's difficult to find one.”

“We want to spend today and benefit the students and faculty of today, but we don't want to do that at the expense of the next generation.”

Is Movie Science All Wet?
Tsunamis, global warming, and other film disasters

Unpopular Culture
Graduate students, risky topics, and professional cachet

Further reading

100 Semesters: My Adventures as Student, Professor, and University President, and What I Learned Along the Way
William M. Chace, President Emeritus and Professor of English


In 2004, the market value of Emory’s main endowment put the university in the number eight spot in the National Association of College and University Business Officers (NACUBO) annual rankings. But in 2005, Emory fell to eleventh and in 2006 to thirteenth. And while Emory’s thirteen benchmark institutions saw an average increase of 13.2 percent in 2005, the university’s endowment portfolio market value declined
3.5 percent, according to NACUBO.

With the diversification of the endowment’s portfolio in recent years, the complete divesting of Coca-Cola stock in the main endowment, a capital campaign in its early stages, and a new strategic plan, Emory seems to be positioning itself for bold new moves. Why, then, these declines?

While some may assume most faculty don’t consider the fortunes of the Emory endowment from day to day, in fact many keep a keen eye on its trajectory. “I think that most faculty have a grasp of the basics,” says Associate Professor of History Sharon Strocchia, “although understanding the complexities of the endowment requires considerable financial expertise and repeated exposure beyond normal faculty experience.”

The basics are Emory’s endowment has two components. The main endowment, which is the vast majority of the entire endowment, is made up of thousands of individual donor endowments and had a market value of almost $4.9 billion in 2006. It is managed by the Emory Investment Management team. The rest is the Woodruff Health Sciences Center Fund, which consists only of Coca-Cola stock. Its annual dividends fund the health sciences exclusively.

Emory’s chief investment officer, Mary Cahill, explains that several factors worked against Emory in 2005 to trigger those drops. At the beginning of the reporting year, 25 percent of Emory’s main endowment was in Coca-Cola stock, which declined significantly in July 2004. That drop was reflected in the 2005 reporting year. And since there were really no gifts going into the endowment during that time, she says, and spending is always going to happen, the overall value declined (a change of assets is equal to the return, plus gifts, minus spending).

In spite of the declining Coca-Cola stock, Emory has seen positive returns over the last several years. Excluding Coke, the managed endowment had annual returns of 13.9 percent, 17.7 percent, and 14.2 percent in 2004, 2005, and 2006, respectively. And the managed funds returns, which include Coke stock but exclude the Woodruff Health Sciences Center Fund, over those same years saw annual returns of 12 percent, 14 percent, and 13.2 percent.

New investment strategies

When Cahill came to the university in 2001, as the Emory Investment Management group was being created, it was the first time Emory had seen a full-time, professional investment group. Before then, the endowment was at least 60 percent invested in Coca-Cola stock, so there wasn’t much to handle, says Michael Mandl, executive vice president
for finance and administration. But the Coke stock began seeing some very lean years, and thus began the mission to diversify Emory’s endowment.

Though Emory began selling its Coke stock and currently owns none of it in the main endowment, the university continues to have a strong relationship with the Woodruff Foundation. The move to diversify was just prudence, says Mandl. “When the number gets as big as it was getting, it would have been irresponsible not to diversify the portfolio for protecting all the students and faculty today and tomorrow,” he says. “They understood and knew what we were doing. It was not adversarial.”

The record-setting Woodruff gift bestowed upon the health sciences in November 2006 indicates no hard feelings. About $240 million of the $261.5 million gift goes to fund the health sciences, in particular the cost of building a new clinic. None of that money goes into Emory’s main endowment pool, and it is not to be invested in perpetuity. Another $12.5 million will be used to further Emory’s strategic plan. Though the recent Woodruff gift will be invested in short-term holdings, it will be spent over five years.

Contrary to popular belief, Emory’s endowment fund is “fully diversified and would look like virtually any other large endowment in the U.S.,” Mandl adds. “It’s got the full range of investments from U.S. equities, international equities, bond funds, real estate funds, hedge funds, alternative investments, oil and gas, and natural resources—everything.”
Mandl says there are now two investment objectives. “One is to preserve the purchasing power for the future,” he says. “We want to spend today and benefit the students and faculty of today, but we don’t want to do that at the expense of the next generation. So we have to make sure the endowment grows at least for inflation and annual spending. The other goal is to produce as much income as we can for the current program. We want to be able to invest as much as we can today. We have to find
the right balance between the two, and that’s what the discipline of
the spending rate does.”

Spending policy

One frequent point of debate over the years, however, has been whether the spending rate on Emory’s endowment has been too conservative. Edie Murphree, vice president for finance, and her team in the finance division calculate the amount of spending from the endowment pool each year, based on a spending formula and policy approved by the Board of Trustees.

In fact, she explains, Emory’s board recently changed the spending rate formula because the previous policy created too much of a lag on past market values. “This problem has been especially evident in the last three years, when Emory has experienced a decrease in endowment spending because the formula was still bringing in the market value declines from 2001 through 2003,” she says.

The new formula balances several long- and short-term objectives by using two calculations, Murphree explains: “The first calculation applies a percentage to a twelve-month moving average of the market value of
the endowment. It ensures that the real value of endowment assets do not decline over time and reduces the lagging effects of market fluctuations.

The second calculation introduces a smoothing effect on the amount distributed by increasing the prior year’s spending by a growth factor. It ensures a stable stream of revenue that does not decline in real value over the long term.” The dollars distributed support more than 13 percent of the university’s 2007 unrestricted operating budget, as well as everything from research activities, restricted scholarships, chairs, and professorships to academic buildings and landscaping.

A faculty voice

Faculty often feel the direct effects of spending policies and endowment investment management, says Sharon Strocchia. “Emory has come up short in terms of salary enhancements to faculty who have demonstrated a longstanding commitment to the university. Research and travel monies allocated to college faculty have also remained static since the early 1990s. Other areas of concern for faculty across units are salary compression and fringe benefits.

“We’ve gone through a long period now of very minimal cost-of-living raises with few salary enhancements,” Strocchia continues. “That’s because the endowment has not performed well. It’s been a tough set of years, especially since, to the outside world, Emory looks like a rich institution.”

In 2002, opening up dialogue between faculty and trustees to bring forth some of those concerns became the mission of the president of the Faculty Council, William Branch, Carter Smith Sr. Professor of Medicine. “[The] Faculty Counselors Program was created in response to a mutual recognition in 2002 that there was not optimum communication between trustees and faculty,” says Strocchia, who served as Faculty Council president two years after Branch.

Rosemary Magee, vice president and secretary of the university, adds, “The desire was to help establish a closer sense of understanding between the faculty and the Board of Trustees, both of whom have an established and long-term commitment to the university—to provide the opportunity for real communication and collaboration.”

Faculty counselors sit on eight of the board’s fifteen committees. Nominated through the Faculty Council and selected by the trustees, they serve three-year terms. Faculty counselors who sit on committees such as academic affairs and campus life are more involved in communication between faculty and trustees, but on some committees, such as investment, where issues are more sensitive, counselors cannot report back to faculty. So what, then, is their purpose?

Strocchia says it’s a two-part role. One is to represent the faculty viewpoint, or multiplicity of viewpoints, to the trustees. The other is to try to represent the trustees’ points of view to faculty, if necessary. The impediment there comes into play because many issues the board takes up involve matters of confidentiality.

Dwight Duffus, White Professor of Mathematics and former faculty counselor to the investment committee, says the purpose of faculty counselors is still being clarified. His role, he says, was “largely as an observer. . . . Committee activity is largely high-level management of professional managers, so there is really not a role for direct faculty input. I think we’re trying to find good strategies for improving faculty/board and faculty/administration communications. And the counselors are an attempt to do that. It may well be that on certain committees, like campus life, the faculty play an active role. But for others, like investment, it’s going to be limited just by the nature of the committee.”

Finding the balance between reporting back to faculty and maintaining delicate information is no easy task, but Magee says, “It’s more [about] asking faculty to bring their combined wisdom to the process.”

Though Duffus says his role with the investment committee was limited, he enjoyed his time there. “It’s an opportunity to really learn about the various ways that an institution will attempt to enhance and protect its endowment and what the objectives are,” he says. “It’s quite something to be involved with people who are managing hundreds of millions of dollars. I’m sure there are lots of times they don’t sleep that well.”—L.K.S.