Investment Management Update

Penn State's endowment investments consist of a diversified portfolio of public equities, bonds, private capital, and hedge funds in addition to real assets. In managing our investments, we adhere to a prudent, rational, long-term strategy that seeks to maintain steady growth while minimizing the effects of volatile market fluctuations.

For many years the University has, as a rule, provided 5 percent of the pooled endowment's five-year average market value for spending. However, given prospects for modest investment market returns, the payout rate will be reduced incrementally over a multiyear period. Beginning with 2007, the payout is being decreased 0.1 percent annually until 4.5 percent is achieved in 2012. The University's spending policy balances out the "peaks" and "troughs" in the investment markets, saving a portion of the earnings in the good years to offset the less profitable years–thus providing generous current spending while preserving future purchasing power. This is known as "intergenerational equity."

At the end of fiscal year 2008, the endowment and similar funds were valued at nearly $1.6 billion. This represented a one-year net decrease of $53 million, and a five year net increase of $509 million. Over this same period, the endowment has provided $284 million of program support, including $60 million in fiscal 2008. For the year ending June 30, 2008, the endowment returned -1.9 percent and has averaged 12.1 percent over the last five years. In the longer term, Penn State's endowment has averaged 9.7 percent per year, net of gifts and expenses, since June 30, 1988.

These results demonstrate long-term growth across various financial ups and downs, such as the bull market of the 1990s, the steep decline at the turn of the century and subsequent economic recovery, and the recent downturn due to the credit crisis. This, in turn, has allowed the endowment to support program spending, such as scholarships and faculty positions, while maintaining real, inflation-adjusted growth for future generations.

Looking toward the future, the steady growth of the world economy has heightened inflation concerns, especially natural resources such as oil and gas. With approximately 15 percent of our investments regarded as inflation sensitive, Penn State's diversified endowment portfolio continues to be appropriately invested for long–term growth and sustainable spending.

Market Value of Penn State's Endowment and Similar Funds

Fiscal Year Ending June 30