Understanding Endowments

An endowment is a donation of money or property to a non-profit organization, which uses the resulting investment income for a specific purpose. An endowment can also refer to the total of a non-profit institution’s investable assets, also known as its “principal” or “corpus,” which is meant to be used for operations or programmes that are consistent with the wishes of the donor(s). Most endowments are designed to keep the principal amount intact while using the investment income for charitable efforts.

Most endowments are designed to keep the principal amount intact while using the investment income for charitable efforts. Endowments tend to be organised as a trust, private foundation, or public charity.

Educational institutions, cultural institutions, and service-oriented organizations typically administer endowments. Endowments are typically organized as a trust, private foundation, or public charity. Many endowments are administered by educational institutions, such as colleges and universities. Others are overseen by cultural institutions, such as art museums, libraries, religious organizations, private secondary schools, and service-oriented organizations, such as retirement homes or hospitals.

In some cases, a certain per cent of an endowment’s assets are allowed to be used each year so the amount withdrawn from the endowment could be a combination of interest income and principal. The ratio of principal to income would change year to year based on prevailing market rates. Most endowment funds have the following three components, which govern investments, withdrawals, and use of the funds. The investment policy lays out which types of investments a manager is permitted to make and dictates how aggressive the manager can be when seeking to meet return targets. Many endowment funds have specific investment policies built into their legal structure so that the pool of money must be managed for the long term.

Endowment funds of larger universities can have hundreds, if not thousands, of smaller funds that invest the pools of money in various securities or asset classes. The funds typically have long-term investment goals, such as a specific rate of return or yield. As a result of the investment goals, the asset allocation (or types of investments within the fund) is designed to meet the long-term returns set forth in the fund’s objectives.

The withdrawal policy establishes the amount the organization or institution is permitted to take out from the fund at each period or instalment. The withdrawal policy can be based on the needs of the organisation and the amount of money in the fund. However, most endowments have an annual withdrawal limit. For example, an endowment might limit the withdrawals to 5 per cent of the total amount in the fund. The reason the percentage of withdrawal is typically so low is that most university endowments are established to last forever and, therefore, have annual spending limits.

The usage policy explains the purposes for which the fund can be used and also serves to ensure that all funding is adhering to these purposes and being used appropriately and effectively. Endowments, whether set up by an institution or given as a gift by donors, can have multiple uses. These include ensuring the financial health of specific departments, awarding scholarships or fellowships on the basis of merit to students, or providing assistance to students from a background of economic hardship.

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