What are endowment funds: monetary donations well spent

What are endowment funds?

Endowment funds and endowment funds are a large market, especially in the USA, whose volume in 2020 — based solely on educational institutions — is 675 billion dollars Belief. However, such funds are not limited to universities or colleges. Churches, hospitals, museums, non-profit organizations and community foundations also have charity funds. Their assets are made up of donations from philanthropists, which are intended to make it easier for the university or foundation to fulfill its objectives.

Depending on the size of the Endowment Fund, it may cover part or even all of the organization's expenses. The institution can invest the fund's capital and then withdraw the income regularly. To this end, non-profit organizations that have endowment funds are developing investment strategies that are intended to increase the fund's performance and thus create sustainable growth.

What types of endowment funds are there?

Endowment funds come in four different types and sizes, which depend largely on the founder's wishes:

Unlimited foundation assets: These consist of assets that can be spent, saved, invested and distributed at the discretion of the institution receiving the donation.

Temporary foundation: This form of donation usually states that the capital can only be spent after a certain period of time or a specific event, such as the death of the donor. The duration or the triggering event is set in the fund policy in accordance with the donor's will. However, the capital can be invested to generate investment income.

Quasifoundation: This is a donation made by an individual or institution with the intention of directing the fund to a specific purpose. However, the capital is not held permanently. Instead, the Management Board may decide that the fund assets will be distributed at a later date for general expenditure purposes.

Purpose-based foundation: The capital of an earmarked foundation can only be used for specific purposes defined by the donor, such as scholarships. The assets are held permanently, while the income from the invested assets is used in accordance with the donor's instructions.

How do endowment funds invest?

Follow most endowment funds three guidelines, which are intended to ensure the achievement of usually long-term return or income targets:

Investment Policy: This Directive determines what types of investments a manager can make and what risks he can take. Foundation fund assets are usually invested or diversified in various securities or asset classes in accordance with the objectives.

Withdrawal Policy: It determines the amount that an organization may withdraw from the Fund within a specific period of time. Most foundations have a low annual withdrawal limit, as they are designed to last.

Usage Policy: It sets out the purpose of the fund and ensures that the allocation of foundation funds adequately and effectively fulfills this purpose. Endowment funds can have a variety of uses. This includes, for example, awarding scholarships, supporting students from economically weak backgrounds, or paying for chairs and professorships.

Non-profit organizations that have endowment funds develop investment strategies that increase the impact of the fund and create sustainable growth. Often with great success and double-digit returns per year, so that they became role models for large and small investors.

What is the performance of endowment funds?

With an impressive return of 65.1% in fiscal year 2021, Washington University in St. Louis is leading the List of the most successful university endowment funds in the USA on. In particular, the focus on emerging markets and private equity investments, which account for around 40% of the portfolio and achieved a return of 82%, were drivers of returns.

The excellent performance of university endowment funds is primarily due to an excellent diversification strategy. Many endowment funds invest broadly in stocks, bonds, private equity, commodities, real estate or hedge funds. In this way, even in difficult market phases, well-performing asset classes (such as currently real estate or commodities) can at least compensate for weaker investments (such as stocks currently).

Putting together a diversified, relatively market-independent portfolio is of course easier for large universities with billions in capital than for private investors. But investors with smaller financial resources can also learn something from the large endowment funds: A diversified portfolio consisting of cash, stocks, commodities, digitized real estate shares and other, alternative investments can avoid many turbulent market phases — or, at best, even turn crises into opportunities.