Staying Focused on the Purpose of an Endowment Can Inform Smart Spending and Capital-Raising Decisions at Education Institutions
Reviewing the Role and Composition of Endowments Serves all Stakeholders Well
BOSTON (October 17, 2016) – With another academic year in full swing, questions may arise around university fundraising, and how – and for what purposes – their endowments are spent.
To address them correctly, it may help to revisit the true purpose, role and composition of an endowment – and to also be aware of common misconceptions – according to Tracy Filosa, head of Enterprising Advisory at global investment firm Cambridge Associates, which serves many institutions’ investment committees and officers.
- An endowment is a pool of permanent funds for the ongoing support of a nonprofit institution. “An endowment is meant to last in perpetuity, most often set up to consistently support generations of stakeholders. Therefore, it must be invested wisely, with a long-term focus,” she says.
- Annual spending from the endowment must be prudent. “Endowment spending is designed to make up for the gap between the cost of operating the institution and the institution’s other revenues sources, such as tuition. The bigger the endowment, the greater support it can provide to the school’s mission,” she says.
- Endowments strive to spend consistently year over year. “Smart endowment spending policies that determine the amount of the endowments that’s spent each year aim to distribute proceeds fairly across generations of beneficiaries. These policies take into account expansive times, when investment returns are high, and lean times, when they’re low or negative,” Filosa says. “A period of exceptionally strong returns should not translate to sporadic bumps in spending, just as low returns shouldn’t translate to corresponding drops.”
- Relatedly, volatility in annual spending can be damaging, as endowments typically cover ongoing costs, such as scholarship commitments and salaries. “Setting spending rates above reasonable long-term investment returns can deprive future generations of the benefits endowments provide,” she says.
- There are other pieces of a university’s financial puzzle beyond the endowment. “Having a diverse set of revenues – beyond just the endowment – can help a school spend more today. For instance, when planning capital campaigns, the savviest institutions think hard about the mix of gifts to solicit – say, how much for a construction project and how much for the endowment,” Filosa says.
Dispelling some of the common misperceptions are:
- Where endowment money is spent is not usually up to the school, or related to immediate needs. “Endowment donors have made a permanent investment in the institution, usually for a particular program or mission they’re passionate about. If the institution spends too fast or redirects funds, it has broken its contract,” she says. “In practice, a school’s endowment is really more a conglomeration of different funds than a single, nimble fund.”
- A large and growing endowment does not represent a hoarding of cash. “That an institution is ‘over-endowed’ is a myth. Because most education institutions have long-term annual spending policies that outline consistent spending rates – say, 5% of the endowment’s value – a growing endowment means that it can play a bigger role and support more of the school’s goals over the long term. Institutions can work more towards their mission and be less reliant on tuition,” she says.
- An endowment is not a reserve fund, rainy day fund or special purpose fund. Again, an endowment usually represents a series of contracts. “There are other revenue sources, such as a reserve fund or current-use gifts that can be used for more immediate or special purposes,” she says.
For additional insights on the role of an endowment in the larger enterprise and best practices for underwater endowments from Cambridge Associates’ Enterprise Advisory Practice, please visit the following:
- A Conversation with Tracy Filosa: Keeping the Focus on the Role of an Endowment
- Keeping Underwater Endowments Afloat (and the Programs They Support)
- Fundraising and Endowment Oversight for Public Universities
For more information, please contact Eric Mosher, Sommerfield Communications, Inc., at (212) 255-8386 / Eric@sommerfield.com.
About Cambridge Associates
Cambridge Associates is a global investment firm founded in 1973 that builds customized investment portfolios for institutional investors and private clients around the world. Working alongside its early clients, among them several leading universities, the firm pioneered the strategy of high equity orientation and broad diversification, which since the 1980s has been a primary driver of performance for these leading fiduciary investors. Cambridge Associates serves over 1,000 global investors – primarily foundations and endowments, pensions and family offices – and delivers a range of services, including outsourced investment (OCIO) solutions, traditional consulting services, and access to research and tools across global asset classes. Cambridge Associates has more than 1,300 employees – including over 150 research staff – serving its client base globally. The firm maintains offices in Arlington, VA; Boston; Dallas; Menlo Park and San Francisco, CA; London; Singapore; Sydney; and Beijing. Cambridge Associates consists of five global investment consulting affiliates that are all under common ownership and control. For more information about Cambridge Associates, please visit www.cambridgeassociates.com.
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