UW Foundation

Investments

Fiscal year 2024 marked significant strategic progress for the UW Foundation investment portfolio, particularly in enhancing income-driven returns. While our overall return of 7.7% did not meet the 9% cost of capital objective, we successfully increased the portfolio’s income yield to 2.4%, up from 1.5% in 2019, by building on the strategic shifts implemented in 2023. The 2.4% income yield represents 26.6% of our 9% cost of capital, which translates to greater stability of returns to support the University of Wyoming. Our goal in the coming year is to achieve a 3% run rate of contracted income in the endowment by employing the strategies described below while remaining within the fixed income policy allocation approved by the foundation’s board.

As capital allocators, we are always on the lookout for places where capital is moving to or in this case from. Opportunistic credit and private debt are key areas for institutions like ours to bridge the capital void left by banks exiting certain credit relationships due to increased regulatory burdens. We anticipate this opportunity will continue, if not intensify, as banks face ongoing capital constraints and adopt more conservative risk appetites in response to regulatory pressures. Opportunistic credit and private debt investments provide attractive yields with a high degree of income stability due to their contractual nature. By targeting senior secured loans, real estate lending, and specialty finance, our investment managers have been able to capture yields that significantly exceed current market interest rates.

Another area where capital retreat has created an investment opportunity is fossil fuel energy infrastructure. While this may seem unrelated to emerging technologies like artificial intelligence, AI applications significantly increase energy consumption. For instance, AI-powered Google search queries use ten times more energy than traditional searches. McKinsey & Company estimates that the United States will need an additional 50 gigawatts of electricity by the end of the decade to accommodate this trend. Where will this power come from? The answer is that this power will have to come from every available energy source that currently feeds the electrical grid. As a picks-and-shovels approach, we have allocated public equity capital to natural gas transportation infrastructure. These midstream companies are a vital backbone of the energy economy and will benefit from increased energy demand in the United States.

Alongside our focus on areas where capital is retreating, we are committed to directing investments toward sectors that drive growth and technological innovation. Our internal analysis indicates that leading technology firms—Microsoft, Apple, Nvidia, Amazon, Meta, and Alphabet—contributed half of the S&P 500’s returns this fiscal year. Investors drove this result because they believe that these companies can generate excess returns through the development and application of large language models and AI across various business sectors. Admittedly, our public equity portfolio managers did not have an oversized exposure to these large technology companies. which resulted in performance for our public equity allocation being less than we would like. However, we have benefited from the rise in AI, just not in the same manner as expressed by the leading public market indices. The coming year will require judgement and perhaps a bit of luck to position our public equity investments to better participate in transformative technological change while maintaining a conservative posture.

For a snapshot of our allocation ending on June 30, 2024, please see the FY24 Asset Allocation graph (page 61). Compared to last year, this graphic shows a slightly higher allocation to private debt (areas where capital is retreating) and a slightly higher allocation to real assets (areas benefiting from technological growth). The UW Foundation Investment Team—in collaboration with our board of directors and our consultant Meketa Investment Group—updates the allocation targets every year in response to an ever-changing financial landscape.

In summary, we remain pragmatic in positioning fund investments within our allocation framework. Our focus remains on reducing complexity and fees while we continue to seek areas where capital is retreating or needed to fund future technological growth. We seek to earn greater than our cost of capital of 9%, to the ultimate benefit of the students at the University of Wyoming.

INVESTMENT ALLOCATION

The UW Foundation investment team continually evaluates asset allocation with special attention to the investment objectives and cash-flow needs of the endowment and the university. The liquidity profile of the pool remains strong in meeting the needs of UW for multiple years, even during turbulent markets. The UW Foundation investment team updates the allocation targets every year to help address an ever-changing financial landscape as the result of conversations between our Board of Directors and our consultant, Meketa.

To learn more about how the UW Foundation proactively and effectively manages investments, see the UW Foundation’s Investment Policy.