Endowment

An endowment is some amount of money or possessions which were donated to organizations that further a social cause and provide a public benefit. The income that was obtained through endowment is used for a particular purpose. The endowment may mean the assets of money, which will be used for operations or programs that are designed according to the donor's hopes. This asset is also called “principal” or “corpus”. It’s common to plan endowments in such a way that the profit from the investment is used for charity and the main amount remains the same.

Organization of Endowments

The most common types of organizations of an endowment are private foundation, public charity or trust. Endowments may exist under different kinds of institutions such as colleges, museums, religious organizations, libraries, private secondary schools, universities, etc.

There are situations in which each year, it’s allowed to use some amount of the endowment's money. Thus, the money spent is a mix of principal and interest income, which differs from year by year.

Endowment policy

Every fund usually comprises components that control investments, withdrawals and usage.

Investment policy. The investment policy defines two aspects. The first is in what a manager is allowed to invest. The second is the degree of aggression with which the manager is allowed to be in order to achieve return targets. Often the legal structure of an endowment fund is incorporated into its investment policy. Thus, it may be considered as something long-term.

Usually big university’s endowment funds comprise hundreds or thousands of funds that aren’t so big. These small funds are prone to invest in different bonds and shares or asset classes (groups of financial instruments). Normally, in this field long-term investments are preferred, expressed in a defined rate of return. Thus, long-term investment goals and asset collocation are created in order to achieve long-term returns.

Withdrawal policy. The policy is determined by two things, the first is the fund or organization needs, the second is the amount of money the fund has. It controls that nobody withdraws from the fund more money than it was established. Every fund usually has its withdrawal limits. Sometimes there is a withdrawal limit of five percent of the total amount. It’s quite low because most endowment funds tend to last for a long time. Thus, spending allowed in a year is limited.

Usage policy. The policy monitors the movements of money. It’s important that funds spend endowments effectively for the appropriate purposes. Despite the origin of endowments, all of them may be spent on fulfilling different purposes. For example, it can be financial support of a department or a student in a difficult situation. It can be spent on awarding scholarships or fellowships. The endowment may be also spent on salaries for the chair positions or endowed professorships or on hiring new professors.

Types of Endowments

Endowments may be divided into four types:

• Unrestricted Endowment. This one comprises assets that the institution, which possesses it, may spend, save or invest it in any way it wants.
• Term Endowment. This one mustn't be spent before a certain period of time passes or an event happens.
• Quasi Endowment. This is money which is donated by a person or an institution that an endowment spends it on a particular purpose, defined by the giving side. The main amount usually is kept and the earnings either are spent or distributed per the purposes the donor has.
• Restricted Endowment. This money can’t be expended, it’s kept forever. However, the investing earnings may be spent at the donor's discretion.

Usually, only under the above circumstances endowments can be spent. However, there are exceptional cases in which it’s allowed to expend the fund’s endowments. For example, if the institution has declared its bankruptcy, it’s allowed to pay its debts with its assets. In this case it’s called “invading” or “endowment fund invasion”, the permission to spend money may be received via court.

Requirements for Endowments

The main target of any endowment fund is to grow its assets through investing, thus, endowments’ managers have an extremely difficult task to define interests, take advantage of funds and maintain endowments sustainably. In general, endowment management is exceedingly hard since beyond described tasks, it comprises the gathering of a management team, writing a payout policy, managing risks, determining people in charge of every field, etc.

In order to maintain a tax-exempt status, such foundations are obligated to spend their assets on charity. Thus, every year foundations pay out five percent of their investment assets. This works only for private nonoperating foundations, while for private operating foundations the percentage is rather higher. It’s eighty five or even one hundred percent of all their investment earnings. However, community foundations don’t have to take part in charity.

Advantages of Endowment

Endowments have several advantages:

• Perpetual sources. It’s usual for such funds to be kept for a long time, earning interest.
• Innovation and growing. In case an organization has a big endowment, it’s possible to develop its own research programs, hire much more prominent employees, etc.
• Reliability. Perpetual endowments help to create a good reputation, thus people who are likely to donate will definitely put their money in the organization since it seems financially stable.
• Opportunities for philanthropists. Endowments tend to be for an unlimited and an unspecified period of time, thus, it’s a great opportunity for someone who intends to leave the mark.

Disadvantages of Endowments

However, endowments may have such disadvantages as:

• Restrictions. Every endowment has the principal balance, but it can’t be touched without permission of the court or donor.
• Losing of real value. In case an organization expends all money that was earned via interests, the value will decrease due to inflation.
• Difficult to establish. To establish an endowment it takes money and time. Hiring the right people to manage the endowment and investments takes it as well.
• Criticism. Endowments may face criticism. Since endowment money can’t be spent entirely on some many people argue whether it’s rational to keep it in this way.

Endowments and universities 

In case a university possesses an endowment, it may reflect the institution's condition, the larger the endowment is, the better university state is. The largest endowments are held by the U.S. universities, such as Harvard University, Yale University, University of Texas System Office, Stanford University, Princeton University, Massachusetts Institute of Technology, University of Pennsylvania, Texas A&M University, University of Notre Dame, University of Michigan. Their endowments count more than tens of billions of dollars.