ISN'T a 20 percent return on investment something that happened back in the dot-com days, never to be seen or heard from again? Who in the world wouldn't, say, eat a handful of earthworms for that?

Of course, it might help the little wigglers go down if you are managing $1.7 billion in endowment funds. And it helps, too, if you are the University of Washington (UW), with steady sources of income and professional fund managers who know their way around a spreadsheet.

The managers are, after all, just doing their job. Which is to make the UW's endowment make money. But they are also doing a heck of a job at it. A 20 percent return (which is, technically, the endowment's increase in market value plus dividends less manager fees) would delight most average Joe and Jane investors. The entire Dow Jones Industrial Average during the past year, ending March 31, saw only a 6.8 percent increase in value (and that was before its hemorrhaging in the spring of '06). The NASDAQ Composite Index gained 17.8 percent; the Standard & Poors 500 earned 10.4 percent.

An "endowment"? is defined simply as a "gift of money or property to a specified institution for a specified purpose." The rub is in the details. Endowments are direct or indirect, large or small, immediate or pledged. Put thousands of them together over time, and the job of keeping track of their growth (or decline) gets huge.

The UW's endowment funds are used university-wide. In fiscal 2005, for instance, endowment distributions were as follows: faculty support, 48 percent; student support, 31 percent; program support, 13 percent; and unrestricted, 8 percent.

THE PERPETUAL FUND
Known in financial circles as a "perpetual fund,"? an endowment can be compared to a mutual fund. The UW's Consolidated Endowment Fund (CEF), which holds the bulk of the school's endowment funds, is a commingled fund of individual endowments, generally arriving at the UW as gifts from individuals, foundations or corporations. Each individual endowment maintains its own identity and owns units in the fund. Although the CEF is still many times smaller than many mutual funds, $1.7 billion is still $1.7 billion.

It is managed by about seven people, led by chief investment officer Keith Ferguson, who joined the group in January 2005. Those officers are largely involved in strategy development, portfolio research and analysis, supported by a back-room staff and Ph.D.s in statistics, as well as by general advice from industry leaders/alumni who sit on the Board of Regents. The actual buying and selling of securities is done by outside managers.

Despite their ivory tower image, the half-dozen-plus endowment folks at the UW are not at all unique in the bigger picture. A comparison to other major public and private universities shows that UW, in fact, lacked the increase in market value of endowment assets achieved by a number of other U.S. schools.

Based on a slightly different fiscal year (ending June 30), monster endowments at private Ivy League Schools such as Harvard, Yale and Stanford, which have been in place for many more years than the UW's fund, are as much as 17 times larger than the CEF and achieved returns of 15 percent to 23 percent, with Stanford taking top honors, according to an annual study by the National Association of College and University Business Officers (NACUBO).

But the UW's 13.2 percent gain (based on a fiscal year ending June 30) is no paltry performance compared to the national college and university average one-year return rate of 9.3 percent, figured for all 746 U.S. and Canadian schools that participated. And, among the top schools in the Pacific Northwest, "U Dub"? was topped only by Seattle Pacific University, at 28.4 percent, and Centralia College, with 16.8 percent. SPU's enormous growth during that year "was the result of both strong investment returns and endowment fundraising success," explains Gordon Nygard, vice president and treasurer of the SPU Foundation.

Among public universities across the country, the UW's endowment assets stood 10th at the end of 2004, a separate NACUBO study shows. "We have taken cash, realized and unrealized gains and losses. That number is the total return,"? explains UW Treasurer Vella Warren. "That is how we value investments. That is the NACUBO number."

FOR THE LONG TERM
So what's the secret? Do the funds managers at the UW have some insider track that most of the rest of the investing world lacks? According to Warren, the answer is in the nature of the investment. The endowment funds are invested for a long term, which can generally draw a higher return than short-term investments.

What's more, Greg Sheridan, the UW's associate vice president for constituency programs (fund-raising), warns that the 20 percent return for the year ending March 31 can be misleading. "You have to be careful of what you can do with year-to-year comparisons. Like businesses doing quarterly profit reports, that [return for the March 31 year] is not a sustainable business plan," he says.

Warren, too, likes the longer-term approach. "Over a 10-year period [also] ending March 31, the return was 11.6 percent. Our expected return on an endowment is 10 to 12 percent over the long term."

The decline this past spring in the markets should bring an end to the CEF's impressive results for last year. "We don't get 20 percent every year. ... The market will be declining in May. At the end of the year, we don't expect to get 20 percent," predicts Warren.

Is the endowment a key source of income for the UW? Yes and no. "It is important to us because it provides us a margin of excellence, allows us to do things we couldn't do otherwise,"? says the UW treasurer. But on the flip side, endowments at Ivy League colleges (and at oil-income-supported Texas schools and the University of Michigan) can provide from 20 percent to 40 percent of revenues. "Those endowments are very indicative of how they support themselves," she says.

That higher rate of return, however, points to the difference between the endowment's 20 percent return and the 7.9 percent return on a second group of UW investments, identified as "other"? investments, including non-endowed gifts, reserve balances and cash. Warren notes that these investments are largely in bonds (66 percent) and cash.

That group amounts to about $1 billion, bringing total investments management by the university to $2.7 billion. The second group essentially amounts to operating money, money that Warren identifies as "opportunity money."

It is used for more immediate needs than the endowment. "Some of the money is very short term," she explains. "For example ... when students pay tuition, that will be invested for a very short time before it is used to pay out expenses related to the education of that student. It will be invested maybe a month, maybe two months, maybe a few weeks. You clearly cannot put it into equity [stocks] and still be comfortable you can pay the salary of the faculty. That's 'opportunity money' - money paid to us for a particular purpose."

LOCAL AND NATIONAL FUNDING
As a state university, the UW also gets part of its total $3 billion in revenues from the state, which generally contributes 10 to 11 percent of revenues. For 2005, that total stood at $323.4 million. State money cannot be invested, by law, and is held by the government until the school needs it.

Federal funding comes mostly in the form of research grants, with the UW near the top among public universities. Much of that funding goes to health and life sciences, including biotech.

The school is currently raising money through its second major fund-raising campaign, led by William Gates Sr., who is a UW Regent, 1950 graduate of the UW law school and father of Microsoft chairman and former chief software architect Bill Gates. The campaign's goal: raise $2 billion over eight years, which started July 1, 2000. Already, it has raised $1.7 billion, or 85.3 percent of that goal. Corporations contributed the largest chunk: $372.5 million.

In the long run, though, it is the endowment that should always be there, the university's secure backbone. Much of what the UW accomplishes depends on the good will and preferences of its donors. "You are looking at a huge university here. You have to make sure it [the endowment] goes to what the donors want,"? says Warren.