Investments
Approach to Investing
At Penn State, managing investments involves thoughtful decision-making, integrating multiple perspectives, and taking disciplined actions. Here’s how it works:
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Strong Governance: Our Board of Trustees is the ultimate fiduciary of the investments. We aim to be responsible stewards of these assets, guided by a prudent investment philosophy and disciplined implementation through the Penn State Investment Council and the Office of Investment Management. The critical aspects of the investment approach are addressed in the Investment Policy Statement (IPS).
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External Managers: Most of our investable assets are overseen by external investment managers. We do directly manage some U.S. Treasury securities for liquidity purposes.
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Strategy Determination: We use a multi-stage approach, primarily focused on:
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Manager Selection: We choose investment managers based on our assessment of their people and their strategies; some follow index approaches, while others use a more active approach.
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Asset Allocation: Portfolio construction benefits from balancing liquidity needs with a mixture of investment strategies to achieve the necessary return on investment to achieve the financial objectives over the appropriate time horizon while not exceeding risk tolerances.
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Balancing Risk and Return:
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No investment guarantees return or eliminates all risks.
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Equity-related investments (publicly traded or private) offer potentially higher returns but come with increased uncertainty.
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Index strategies (with lower fees) and active strategies (based on views) both play a role in our portfolios.
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We consider social and environmental considerations when investing, aiming to achieve a maximum return with an acceptable degree of risk.
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Private Investments: These are based on unique opportunities. They can offer greater returns, but they usually involve higher investment management fees and increased risks such as less portfolio flexibility due to their illiquidity. We select managers carefully after thorough due diligence and only invest when we are compensated appropriately for the increased costs and risks.
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People and Culture: Our focus isn’t just on strategy and historical performance; it’s about the people behind it. We seek exceptional investment managers.
By integrating investment manager selection, asset allocation, and risk management, we increase our chances of success in meeting our investment objectives to fund the spending distributions to support the intents of the endowments and the needs of Penn State in support of the University mission.
Endowment Assets
Most of the endowed funds established at Penn State are invested in the Long-Term Investment Pool (LTIP). Each individual endowment owns units in an endowment pool, just as an individual would purchase shares in a mutual fund. The endowment pools own units in LTIP.
Endowed gifts are expected to be held by the University in perpetuity. The initial gift is invested, and annual distributions are allocated to the purpose designated by the donor. Endowment gifts are usually considered restricted because donors specify how their contributions will be used. The goal of the University is to preserve the principal amount of the gift while annually distributing cash through spending distributions for the specific purposes outlined by the donor. An endowed gift is intended to have the same inflation-adjusted value and impact for future generations.
The University’s policy level for distributions from each unit value of the Endowment Pool is five percent. To focus on the long-term and assist in reducing the short-term fluctuations of distributions due to near-term changes in the investment markets, the actual distribution each year is calculated by multiplying the five percent by the 20-quarter average of the market value per unit of endowed pool assets. The use of a rolling 20-quarter average, instead of the most recent unit value, is intended to smooth 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. This provides generous current distributions while preserving future purchasing power, which is known as “intergenerational equity.”
To demonstrate the impact of an endowed gift, assume $100,000 was gifted in 2003 to establish an endowment. Over the last 20 years, the endowment gift would have generated $116,000 in aggregate distributions to support the endowment’s purpose. As of June 30, 2023, due to the compounding of investment returns, the original gift is now worth $204,000 and will benefit future generations.
As of the end of fiscal 2023, total endowment assets were valued at $4.57 billion, of which $4.54 billion was invested in the Long-Term Investment Pool. Ending June 30, 2023, the total endowment assets increased by a cumulative $1.7 billion over the last five years. This amount reflects the impact of investment returns and generous giving, net of annual distributions to support scholarships, and other intentions defined by each endowment. Over this same period, endowment assets invested in LTIP have provided $685 million of distributions to Penn State. The University’s diversified approach allows the endowment to support endowment intentions, such as scholarships and faculty positions, while maintaining inflation-adjusted growth for future generations.
Operating Investments
Operating investments support the needs of Penn State. These investments serve a few purposes for the University:
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Liquidity: Provides flexibility, allowing the University to access funds quickly when needed.
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Cash Flow Management: Instead of allowing cash to sit idle, the University invests cash to align with the timing of future cash flow needs to support the operating budget, University projects, and other obligations.
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Capital Preservation and Growth: The University seeks the safety and stability of these investments while targeting some growth.
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Higher Returns than Savings Accounts: Investment returns are expected to generate income greater than income derived from savings accounts, but usually lower income and growth from long-term investments due to a lower risk profile.
Long-Term Investment Pool
The Long-Term Investment Pool (LTIP) is Penn State’s investment portfolio, in which most of the University's endowed funds and other non-endowment assets with similar long-term investment objectives are invested.
This commingled pool operates much like a mutual fund. As with a mutual fund, the value of each unit at the time funds are invested in the pool determines how many units an individual fund acquires. LTIP’s investments consist of a diversified investment portfolio of public equities and fixed income, private equity, real assets, and other opportunistic strategies.
LTIP Market Value
Penn State's Long-Term Investment Pool, known as LTIP, includes the University's endowment funds and other University long-term investments.
As of June 30, 2023, LTIP's market value information is:
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$6.22 billion
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Increased 47% over the past five years. This amount reflects the impact of investment returns and generous giving, net of consistent spending - including support for student scholarships and other University programs.
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73% or $4.54 billion are endowment assets.
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27%, or $1.68 billion, are University funds that are invested for the long-term to assist with funding the University's operations and obligations.
Investment Performance
Penn State's diversified approach to managing LTIP has allowed the endowments to support program spending, such as scholarships and faculty positions, while maintaining real, inflation-adjusted growth for future generations.
As of June 30, 2023, LTIP's investment return was 5.6% over the last year, 9.9% per year over the five-year period, 9% over the 10-year period, and 9.3% over the 20-year period. These annualized investment returns are net of external investment manager fees and investment administrative expenses. These results demonstrate long-term growth even when considering periods of negative investment returns.
LTIP's investment returns compared to a "Passive" portfolio consisting of a 70% Equity index (MSCI ACWI IMI Index) and 30% Fixed Income (Bloomberg U.S. Aggregate Bond Index) are as follows:
The chart below represents the growth of $1 compounding using LTIP's returns for the 20-year period ending June 30, 2023, and is compared to the returns for the MSCI ACWI IMI Index (Equities), the Bloomberg U.S. Aggregate Bond Index (Fixed Income), and a "Passive" benchmark (70% Equities and 30% Fixed Income)
As shown, the 20-year cumulative growth for LTIP's diversified portfolio outperformed the MSCI ACWI IMI Index with less pronounced oscillations, indicating that LTIP was less volatile than equities over the same period. LTIP has also outpaced the growth of $1 invested in a diversified portfolio of U.S. Fixed Income and the Passive benchmark.
Asset Allocation
The LTIP asset allocation continues to be well-positioned for long‐term growth while remaining diversified across strategies using both public and private investments. The purpose of the diversified approach is to help ensure resiliency in times of investment market variability. A diversified approach isn’t expected to produce the best or worst investment returns the market offers.
The majority of LTIP’s assets are equity-type investments. LTIP is broadly diversified, with an asset allocation as of June 30, 2023, as follows:
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38.3% public equity
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24.3% private equity
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14.4% fixed income
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13.2% real assets
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9.8% opportunistic investments
Over the last year, public equities (+1.1%), real assets (+2.9%), and opportunistic investments (+0.5%) increased slightly, and private equity (-2.6%) and fixed income (-1.9%) decreased slightly as a percentage of total LTIP market value.
Additional Reports
