Strategic Investing

New Investment Plan Yields $7 Million

With an annual operating budget of $2.4 billion, IU, like all universities, has peaks and valleys in its cash flow throughout the year. But by implementing a new investment strategy, IU has been able to maximize its return on investments during the past year, yielding $7 million in additional funds for IU operations.

“Our challenge was to increase the return on IU’s large operating portfolio while maintaining an adequate level of reserves without increasing the level of risk,” says MaryFrances McCourt, treasurer of the university. The first step was an in-depth analysis of the university’s cash needs over a typical business cycle. The treasurer’s office used this analysis to establish a minimum level of funds needed to meet IU’s cash requirements when cash balances are typically lowest—those periods right before the large influx of tuition payments each semester. The university could then move any excess cash into longer term, typically higher yielding investments.

“We used modern portfolio theory to study the correlation of risk and return among asset sectors and asset allocations to design an optimal portfolio in compliance with Indiana State Statute,” says McCourt. This indicated that IU could achieve a higher rate of return with a lower overall risk. “The next step was to select investment managers whose styles complemented rather than replicated each other,” explains McCourt. The office carried out a thorough due diligence review to ensure that prospective managers had strong performance records, deep bench strength, and high-quality management practices.

The result of the new investment strategy is $7 million in additional funds for IU. “Although volatile market conditions will make it tough to replicate these results in the near term, we are well positioned for the future,” says McCourt.

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