Investment Highlights from 
Charles A. Kennedy, Chief Investment Officer

Overview

Carnegie Mellon University’s mission seeks to shape the future for the greater good by providing transformational research and education focused on advancing knowledge and understanding in science, technology, the humanities, business, and the fine arts. Carnegie Mellon’s endowment is a key strategic asset in achieving this mission. Created largely through incredible acts of philanthropy and augmented by careful financial stewardship, the endowment stood at a market value of $3.2 billion as of June 30, 2024.

By providing a permanent and consistent source of funding for scholarships, professors’ salaries, laboratory equipment, and other important needs, the endowment enables our faculty and students to fulfill the university’s mission. Critically, endowment support for tuition assistance allows Carnegie Mellon to attract and retain a highly qualified, diverse, and talented student body. With its perpetual life, the endowment is uniquely situated to provide funding today, tomorrow, and for future generations to advance the university’s mission and to help our students and faculty achieve their goals and aspirations.

Strategy and Allocation

The endowment’s portfolio of investments is managed with a long-term, growth-oriented view and is evaluated by its effectiveness in achieving — over time — two fundamental objectives: (1) generating steady and substantial financial support for students, faculty, and programs; and (2) balancing current demands for support with the goal (at a minimum) of maintaining the endowment’s real purchasing power for future generations (i.e., preserving intergenerational equity). To maximize long-term expected returns within acceptable levels of risk and liquidity, Carnegie Mellon designed its policy asset allocation using a combination of academic theory, quantitative analysis, and informed market judgment.

To achieve the objectives stated above, Carnegie Mellon targets broad portfolio exposure of 85% in equity investments for long-term growth and appreciation, and 15% in fixed income investments to provide stability and liquidity. Fiscal Year 2024 (FY24) marks the 20th anniversary of the university’s decision to shift the equities focus from traditional, publicly traded investments to private investments, utilizing private equity funds globally. We believe that over the long term, private equity investment returns, including those from emerging markets funds, will exceed the returns generated from investing in public securities. We recognize that this strategy will generate unsteady returns in the short term due to variable influences such as macroeconomic forces, the level of initial public offering activity, and the volume of mergers and acquisitions. However, our goal is focused not on short-term swings, but on achieving strong long-term performance. 

Environmental, social, and governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, regulatory regimes, asset classes, and through time). Attention to ESG issues by investors and company management teams encourages accountability, transparency, forward-looking perspective, and ethical behavior in business practices, which may lead to reduced exposure to various risks, sustained financial performance, and improved long-term value creation. Importantly, the university does not pursue ESG investing as a strategy distinct from its central investing focus. Carnegie Mellon integrates ESG factors into its multifaceted investment analyses and expects investment managers to do the same. We gain insight into our managers’ ability to persistently improve the operations of their portfolio companies by monitoring their incorporation of ESG initiatives into value creation strategies.

Given return dispersions that can persist for extended periods of time across asset class categories, Carnegie Mellon updated its asset allocation model during Fiscal Year 2022. The updated model allows more flexibility to concentrate capital with managers pursuing themes and strategies with multigenerational return potential while maintaining ample portfolio liquidity. Figure 1 details asset allocation targets and actual allocations as of June 30, 2024.

Figure 1: Asset Allocation – Actual Allocations and Policy Targets

As depicted in Figure 1, the endowment is at its 85% equities target and well within other policy constraints. As we mark the 20th anniversary of the university’s long-term strategy, Carnegie Mellon’s investment program is maturing. However, the nature of private equity investing and the growth of Carnegie Mellon’s endowment necessitate a continued focus on expanding our best private equity relationships and identifying the next generation of top tier managers. Fortunately, Carnegie Mellon’s endowment is of a size that permits new, reasonably sized commitments to value-creating investment managers that will be meaningful to the endowment’s asset allocation and investment return.

Investment Performance

The university’s net investment return for FY24 was 6.6%. More significantly, given the long-term goals of the investment strategy and the “noise” (versus signal) often associated with short-term equity results, Carnegie Mellon’s three-, five-, and 10-year returns were 2.0%, 9.8%, and 8.7%, respectively.

Endowment Attribution

The endowment’s market value increased to $3,232.0 million as of June 30, 2024, from $3,118.7 million as of June 30, 2023. This net increase of approximately $113.3 million reflects the collective impact of $67.8 million from gifts and other sources, plus $195.1 million from net investment gains, less $149.6 million of distributions to support the university’s operations.

As depicted in Figure 2, for the 10-year period ended June 30, 2024, the endowment’s market value increased approximately $1,981.5 million (from a beginning market value of $1,250.5 million), reflecting the collective impact of $1,145.3 million from gifts and other sources, plus $1,769.0 million from net investment gains, less $932.8 million of distributions to support the university’s operations.

Figure 2: Endowment Bridge
(dollars in millions)

As previously noted, cash distributions from the endowment (i.e., the draw) provide a key source of support for various university activities and programs in need of consistent funding ranging from general operations to scholarships and professorships. During the last decade, the draw from the endowment has grown from 5.0% of the university’s operations to 9.4% for FY24. Overall, the draw grew both in absolute terms and relative to the operating budget of the university (which grew 4.0% annually over the decade), while following a consistent draw policy in place since 2004. Even with the higher level of support, the university’s endowment contributes only about one-third of the relative operating support received by many academic peers from their endowments. This variance leaves Carnegie Mellon more dependent on tuition and sponsored research than its peers. Consequently, Carnegie Mellon remains focused on growing the endowment to assure the financial resources and flexibility exist to successfully pursue its long-term research and education mission.

The historical activities of the endowment, including the draw and its support expressed as a percentage of annual operations, are summarized in Figure 3.

Figure 3: Endowment Values and Attribution

The Dietrich Foundation

The Dietrich Foundation, established by Pittsburgh industrialist and long-time university trustee William S. Dietrich II, was created to manage in perpetuity his gift of approximately $500 million in assets intended to benefit the university and other higher education and charitable institutions. The Dietrich Foundation’s assets are not reflected in the university’s financial statements. The university’s share of the annual distributions from The Dietrich Foundation is 53.5%. If this percentage is applied to the estimated value of The Dietrich Foundation’s assets of $1,430.0 million as of June 30, 2024, and the result added to Carnegie Mellon’s endowment of $3,232.0 million, the combination would total $3,997.1 million. Annual distributions from The Dietrich Foundation over time equal 3.0% of the value of the foundation’s net assets as measured on January 1 of each year. The Dietrich Foundation’s gift added to Carnegie Mellon’s endowment for FY24 was $24.3 million, and cumulative gifts since the initial gift in Fiscal Year 2013 have totaled $186.1 million.

A Leading Light

On March 16, 2024, we lost a leading light and beloved member of our university community with the passing of Dr. Jared L. Cohon, who served as Carnegie Mellon’s eighth president from 1997 to 2013.

Dr. Cohon’s vision for expanding scholarly pursuits and opportunity at Carnegie Mellon included positioning the endowment for steady, long-term growth to ensure it can fulfill its critical role of supporting the university. Beginning in 2005, target allocations to alternative investments, particularly private equity, were increased significantly. The updated asset allocation has served the endowment and the university very well, consistently delivering attractive long-term returns.

Carnegie Mellon is the institution it is today — a world-renowned hub for innovation, talent, and creativity — in part because of his leadership at such a pivotal time. Dr. Cohon’s remarkable legacy is woven into the (Tartan) fabric of Carnegie Mellon and remains ongoing.

At a celebration of life event on September 9, President Farnam Jahanian announced the establishment of the Dr. Jerry Cohon Memorial Fund to provide support for areas and disciplines that were close to Jerry’s heart.

Summary

Carnegie Mellon’s endowment provides an important and permanent source of financial and operational stability, which helps university leadership perpetuate academic and research excellence in a rapidly changing and increasingly competitive world. The enduring generosity of alumni and friends, combined with an investment program focused on compounding net returns for the long term, should continue to increase the value of the endowment over time. Thus, Carnegie Mellon’s endowment will continue to provide ongoing support for the university’s operating needs, while preserving purchasing power to support future generations of students and faculty.

Sincerely,

Charles A. Kennedy
Chief Investment Officer
October 30, 2024