in 1996, when William Bulger took over as president of the University of Massachusetts, the school system was an afterthought in many ways on the college scene, both regionally and nationally. A disparate collection of five campuses with varying curricula and missions, the system was often overshadowed in academics, sports, and, especially, endowments by its private peers in and around the state and public brethren around the country.
Related: The genesis of this story
Bulger, who as Senate president used the state budget to bolster initiatives he wanted funded, recognized that money could fix a lot of what ailed the system. So in addition to using his State House connections to beef up the school’s funding, he also put a laser focus on growing the sleepy endowment that totaled about $38.5 million. It was a relatively tiny pot of gold that put UMass at the lowest end of endowment per student, a financial indicator that measures the strength of an endowment.

Bulger began to tap the large pool of alumni who rarely ever heard from their alma mater, reaching out to some of the more successful graduates, such as General Motors Chairman Jack Smith and General Electric CEO Jack Welch, not only to tap their largesse but also their names and connections.

The efforts paid off. By the time Bulger stepped down in 2003, the endowment had more than quadrupled to $171.6 million. The amount still paled when compared to many private schools and still lagged behind some of the university system’s more established public peers. But the system now had money to begin investing in areas that were previously closed to it.

Jack Wilson, Bulger’s successor, and current UMass President Robert Caret also bought into the need to grow the endowment. Successful fundraising initiatives allowed the size of the endowment to grow to more than $664 million, a figure that places UMass in the top 15 percent of college endowments nationally, according to a survey by the National Association of College and University Business Officers and the Commonfund Institute, a division of the largest nonprofit investment group that oversees a number of public and private college and university endowments.

The endowment’s investment performance, however, hasn’t matched many of its peers, mainly because the foundation’s investment strategy is mired in the mindset of small donations and small bank accounts. The safe, vanilla strategy of putting money in low-risk/ low-yield investments such as bonds and legacy blue chip stocks has helped the fund avoid the huge losses experienced by Harvard and other large endowments during the weak economic periods over the last decade.

But this cautious—some would say timid—investment approach has kept the endowment out of emerging stocks, hedge funds, private equities, and venture capital and left UMass trailing its peers who are reaping the windfall benefits of a recovering market. The school system’s conservative investment approach is potentially costing the school millions of dollars in returns.

Joshua Humphreys, president of the Croatan Institute in North Carolina and a fellow at the Boston-based Tellus Institute, is the author of a report on endowment investing in the wake of the Great Recession. He says the nature of what it means to be a prudent, responsible investor has shifted dramatically in recent years. “They [endowment funds] should be invested conservatively, but they should take risks,” he says. “You can take risk in an endowment that you can’t necessarily take in a pension fund, where you have a high annual payout to retirees.”

Charles Pagnam, a UMass executive vice president who began overseeing the school system’s endowment about a year ago, acknowledges the need to take the reins off the fund’s investment managers and unleash the power of the accumulated dollars the foundation is sitting on. But, he insists, it’s not as simple as shifting money from one pot to another. And he says the increased risk is something the endowment’s volunteer investment board has been reluctant to assume.

“You invest differently when you’re a larger fund,” says Pagnam. “You’re turning, in some ways, a supertanker as opposed to a speedboat.”

Coming on strong

The UMass Foundation is a private nonprofit organization that manages the UMass system’s endowment and owns buildings and property that it leases to the five campuses. The foundation is headed by UMass President Robert Caret, run by a staff that includes several UMass employees, and overseen by a 19-member board of trustees, many of them with investment experience.
The UMass Foundation was very sleepy until the mid-1990s. Then donations, gifts, and grants began flowing in.
The foundation was a fairly sleepy little organization from the time it was established in 1950 until the mid-1990s. Then things began to change. Donations, gifts, and grants started flowing in. State lawmakers agreed to match some private donations with tax dollars. There were ups and downs with the economy, but over time the endowment grew to its current size of $664 million. UMass has also been placing its own assets in the fund that over time have grown in size to about $300 million, bringing the grand total under foundation management to nearly $1 billion.

A university endowment is basically like a mutual fund. Donors give money to one of the UMass campuses in Boston, Lowell, Amherst, Dartmouth, or Worcester. The campuses put the money into the endowment, the money is pooled and invested, and a portion of the fund is taken out each year for specific purposes and allotted to individual campuses based on their share of the overall fund.

Donors receive periodic reports on how their money is being invested and the returns on that investment. The reports identify categories of investments, such as stocks, alternative, fixed income, and foreign investments, but details about which specific stocks or bonds are purchased or the names of the investment managers, who earned $8.8 million last year, are not provided to donors or the general public.

“We are a private foundation. We’re not a public foundation,” says Pagnam, an employee of UMass.

Most school endowments take a similar approach to investment disclosures, although there are exceptions. The University of Texas, for example, issues an annual report that details all of the system’s specific investments, including how much is invested in them, the return on that investment, and who the investment managers are.

Jerry Paros, an UMass alumnus, donated more than $2 million to establish a research fund for environmental sciences at his alma mater. Paros, the chief executive officer of Paros Scientific in Redmond, Washington, says he would like to see UMass do more with his money than simply invest it. “I have encouraged UMass to leverage our seed investments more by applying their expertise to solving problems in government and industry,” he says.

UMass officials say the foundation does attempt to invest in environmentally responsible and sustainable companies, but has not formally embraced policies related to environmental, social, and governance investment criteria that 18 percent of the nation’s endowments have adopted.

The growth in the UMass endowment has given the five campuses a financial safety net as well as an avenue to help reduce the financial burden of tuition and fees on students, with the bulk of the endowment dedicated to scholarships.

The foundation pays out 4 percent of the endowment’s total value each year, which came to $13.4 million last year, down from $18.7 million the previous year. The foundation doesn’t break down exactly where the money goes, but three-quarters of the funds in the endowment are restricted for specific purposes, such as scholarships, endowed chairs, research, and other academic needs. Sixteen percent of the money is temporarily restricted. Only 7 percent of the money in the endowment is unrestricted, meaning the foundation can funnel the proceeds to whatever purpose it wants. The $300 million invested with the foundation by the UMass system is controlled by UMass, but UMass does pay a 1 percent management fee to the foundation for its management services.

UMass financial reports do not break out how much of the payout from the endowment goes to fund the school system’s operating budget, but foundation officials say the amount was very small. The officials say money distributed for the operating budgets of the five campuses came to a less than one-half of 1 percent of the school system’s $2.9 billion operating budget. Framingham State spends about 3 percent of its endowment, roughly $250,000, on the school’s operating budget. The endowment at Fitchburg State University contributes nothing toward the school’s operating budget and earmarks all of the money for scholarships. At Harvard University, by contrast, 40 percent of the operating budget is funded by endowment funds.

In size, the UMass Foundation’s $664 million endowment is among the biggest in the country. It ranks 126th out of 841, placing it in the top 15 percent, according to a survey by the National Association of College and University Business Officers and the Commonfund Institute, which is part of a nonprofit investment group that oversees a number of public and private university endowments. With more than $32 billion in its endowment, Harvard University leads all schools by a wide margin. Yale University is second, with an endowment of $20.8 billion. The University of Texas, which has the largest public university endowment in the nation at $20.4 billion, comes in third.

Of all the public and private school endowments in the nation exceeding $1 billion, nine of them are in Massachusetts and 13 are in New England. That means the foundation has a lot of competition in attracting donor dollars and finding investment opportunities.

“We’re in New England, where you have the Harvards, the MITs, the Dartmouths,” says UMass spokeswoman Ann Scales. “No other research university around the country has that kind of challenge in their backyard.”

A conservative approach

The UMass Foundation is a conservative investor. The average public school endowment nationally has more than half its money—52 percent—in higher-risk alternative investments, including hedge funds, venture capital, private equity, and energy and natural resource plays. Approximately 11 percent is invested in safe, low-risk fixed income investments such as bonds and annuities and 2 percent in cash. UMass does just the opposite. It has nearly 30 percent of its money in fixed income investments, 6 percent in cash, and 26 percent in alternative investments. The rest is split between domestic blue-chip stocks and international equities.

The UMass endowment gained nearly 9.5 percent on its investments in 2013, but its average gain over the five-year period ending with 2013 was 3.9 percent. From 2009 through 2013, UMass had three years of positive returns —2010, 2011, and 2013—and two years of losses—2009 and 2012. In each of those years except 2009, the endowment’s performance was below the national average for all endowments and below the average for endowments of similar size. In 2009, the year UMass outperformed other endowments, the fund lost 15.1 percent of its value, compared to an average loss of 16.5 percent for endowments of similar size and an average loss of 18.7 percent for all endowments.

The go-go performance of the Standard & Poor’s 500 since the Great Recession has blown away the returns of most endowments, but most fared a little better than the UMass endowment. Since 2009, the UMass endowment has had half the gains of the stock-only S&P 500.

UMass officials say the fund’s conservative investment strategy may not garner the gains of sexy stock purchases or hedge fund allocations in the good times but the approach protects against severe losses when the economy tanks.

“I don’t think any member [of the board of directors] would be apologetic for the conservative strategy,” says Judith Murphy, associate vice president and controller of the UMass Foundation. “Preservation of capital is important to them.”

UMass Boston pools the donations, gifts, and grants it receives with those from the other campuses and the pot of money is managed by the UMass Foundation.

UMass officials point out that comparisons to other groups of endowments focus on averages and don’t represent a roadmap of how to invest. But experts say that, while the needs of each school are unique, the averages tell a story and give a clue as to best practices among investment policies.

“We recommend people compare themselves as close to peer groups as they can,” says John Griswold, executive director of the Commonfund Institute.

Richard Bookbinder, a managing member of Terra Verde Capital Partners in New York City, has been in the financial and investment advisory business for more than 40 years. His clients have included a number of college endowments. He says the conservative investment approach of the UMass Foundation can hurt the endowment’s bottom line because the low rate of return on fixed income investments is less than what a typical fund pays out each year in spending and management fees.

“As an investment professional, I think there a couple of messages. I’d have to ask what their reticence is in a greater concentration of alternatives,” Bookbinder says. “I would argue [that] the risk profile of the portfolio with the lower level of alternatives is higher than the portfolio that has more debt [bonds].”

Bigger is better

When it comes to endowments, size matters. In general, smaller endowments steer clear of alternative investments, partly because of the greater risk involved but also because of the large up-front capital outlay needed to invest in a hedge fund or make a venture capital play. Smaller endowments can’t afford to make a losing bet, so they adopt a more conservative investment philosophy.
Some observers believe UMass has the money to take on a higher level of risk but the mindset of a smaller investor.
Larger endowments, by contrast, can afford to put money into alternative investments because they have the resources to spread the risk among a larger pool of investments. In essence, larger funds take risks because they can and their size means the risks are manageable.

The UMass endowment has grown by attracting more and more donations from supporters of the system’s five campuses. Some experts say the UMass endowment could grow even bigger by pooling its funds with those from the endowments run by other state schools. Instead of each school hiring its own team of investment advisors, the schools could pool their money together in one large pot and hire one team of investment advisors to manage it all. It’s an approach that has worked for municipal pension funds, which have joined together under the state Public Employee Retirement Administration Commission to reduce costs and maximize investment capital.

Robert Antonucci, the president of Fitchburg State University and a former state education secretary, says he and the eight presidents of the other state universities, not including UMass, had investigated pooling their endowments about three years ago but abandoned the idea because they had different investment approaches.

“Financially, it didn’t look like it was going to get us any benefits,” says Antonucci, whose school has a $14.7 million endowment.

But Antonucci says it may be time to circle the wagons to get the most bang for the buck. Nearly all of the 29 public colleges and universities in Massachusetts have endowments, ranging in size from $1.5 million at Massasoit Community College to $26.9 million at Salem State University, totaling nearly $200 million. If added to UMass’s $664 million endowment, plus the $300 million in investment assets from the UMass system, the schools could make investments that the smaller endowments can only fantasize about now.

“I think it’s a great idea,” says Antonucci. “My bottom line is protection and two, that we get a good return on our investment. We would take a good look at something like that. We have that kind of flexibility.”

UMass, to some observers, has the money to take on a higher level of risk now but retains the mindset of a small investor. “There has been more of a migration, since the market debacle, to alternative assets,” says Bookbinder.

In an email, Paros, the UMass alumni, says his donation to UMass has been managed better than his donation to the University of Washington but not as well as his donation to Columbia University. He says the ability to make the value of his donation grow was one of the priorities of his gift in order for it to become self-funding and perpetual.

“It was a factor insofar as one would like the growth to exceed the inflation-adjusted expenditures, but I feel it is more important to treat the endowment as an entrepreneur would,” Paros wrote. “This means higher risk for higher rewards rather than settling for minimal low-risk returns.”

Pagnam says the foundation has been looking to get its foot in the door with some alternative investments. But he says those investments require large up-front capital outlays and personal relationships with the principals of startups or emerging companies, neither of which UMass has had before.

Bookbinder scoffs. “How much do they have?” he asks. “Six hundred million? They can get into any fund that they want.”

Pagnam insists it’s not that simple.

“It’s very, very difficult to get in,” says Pagnam. “A Yale and Harvard and those who have been in for some time, they go back to people they already know. The best don’t have to look for new people to put into their fund… I’m very comfortable in the approach that the investment committee is taking to get into the private arena. This same conversation in five years will be a different conversation.”