Each individual endowment owns units in the pool, revalue

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How Endowment Works at UCSD

• March 14, 2008

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What is an endowment?

• An endowment is created by a donor from a gift
  containing a legal stipulation that the original
  gift may never be expended.
• These gifts are held and invested in perpetuity
• Both The Regents of the University of California
  and the UCSD Foundation hold endowment
• Endowment generates a permanent expendable income
  stream (by using a portion of the annual
  investment return on the gift) for the purpose
  the donor desires. This is called endowment
  spending and is discussed later.
• Endowed gifts may be for restricted or
  unrestricted purposes and are particularly
  important due to their permanency. These gifts
  permit planning for programs into the far future.

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How is an endowment invested?

• The Regents and the Board of Trustees of the UCSD
  Foundation each have fiduciary responsibility for
  investment of their respective endowments.
• Both The Regents and the Foundation are guided by
  basic principles in endowment management as
  follows
• Maximizing long-term total return
• Preserving and enhancing the real purchasing
  power of the endowment
• Maximizing the stability and predictability of
  the endowment spending allocations from the
  return generated

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Total Return and Long Term Philosophy

• The Regents and the Foundation, like many large
  educational and non-profit organizations, invest
  their endowment for total return using
  diversified portfolios of assets comprised of
  primarily of equity, fixed income, and
  alternative asset classes (most of which are
  equity based).
• Most larger institutions recognize that while the
  equity markets can be volatile in short runs,
  over the long-term they produce the greatest
  total return.
• Total return in any given period
• cash earnings on investments (such as dividends
  and interest)
• realized or unrealized appreciation (or
  depreciation) in the market value of those
  investments

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Endowment Buy-In Using Unitization

• The actual mechanics of endowment investment and
  management are very similar to that of a mutual
  fund.
• Endowment, whether held by The Regents, or by the
  Foundation, is accounted for using a unitized
  investment pool.
• Each individual endowment owns units in the pool,
  revalued at each month-end.
• Only at month-end periods, using the month-end
  value of a unit, may new endowments enter the
  pool.
• New endowments buy into and receive a certain
  number of units in the pool given the amount
  being invested and the value of a unit on the
  buy-in date.
• As the value of a unit in the pool grows, new
  endowments purchase fewer units in the pool.

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Unit Values Over the Last 20 Years
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Example of a Buy-in Today

• Pool Market Value 10,000,000
• Units in Pool 100,000
• Mkt Value per Unit 100
• Buy in of new 10,000 Smith endowment
• 10,000 / 100 unit 100

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Buy-in and Unitization, cont

• The Smith endowment received 100 units today for
  10,000.
• The Jones endowment was created five years ago at
  a beginning value of 10,000, when the market
  value of a unit was only 50. That endowment
  bought in at 200 units, and is worth 20,000
  today due to the appreciation of the pool.

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How does endowment spending work?

• This is the amount made available to each
  endowment fund holder to spend from the annual
  endowment earnings
• It is generally a computation, predetermined by
  the institution, taking into account the best
  practices of other institutions, the investment
  mix, the age of the endowment pool and the amount
  of appreciation in it, as well as the market
  return environment.

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How does endowment spending work? cont

• Most use an averaging of the unit value of the
  pool over say five years, to smooth out
  fluctuations in any one year
• This smooths the spending and allows for a fairly
  steady, and growing rate of spending.

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Spending Rates

• The Regents and the Foundation have very similar
  spending policies to each other.
• The Regents policy is set at 4.75 of the
  60-month average unitized market value.
• The Foundations policy is the same, but uses a
  five-year average.
• Both entities spending policies include a fee of
  0.25 that is recovered for annual endowment
  administration costs incurred internally.

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Endowment Spending Calculation Example

• The actual spending for any individual endowment
  is computed annually using the following
  information
• the average value of a unit in the pool as
  computed over the averaging period
• the number of units EACH endowment owns in the
  pool and
• the spending policy rate as set by the institution

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Spending Calc cont

• Using the Jones and Smith Endowments above, lets
  compute the spending that would be made available
  to each endowment for 2008.
• The value of a unit in the pool today is 100 per
  unit, and the value of a unit five years ago was
  50 per unit. The overall total return earned on
  the pool over that five years has been positive.
  Lets assume the 60-month average value of a unit
  in the pool is 74.60. The computation for
  endowment spending for 2008 would be as follows
• Jones Endowment
• 200 units X 74.60 (5 yr. avg. unit value) X
  4.75 708.70 of endowment spending,
• less 37.30 (at .25 annually) of admin
  management fee
• net spending of 671.40

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Spending Calc cont

• Smith Endowment
• 100 units X 74.60 (5 yr. avg. unit value) X
  4.75 354.35 of endowment spending, less
  18.65 in admin management fee for a net of
  335.73
• Note that the spending calculation is NOT a pure
  4.75 of the ending market value of the fund.

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Spending Calc cont

• Five years ago, the Jones Endowment calculation
  for endowment might have looked something like
  this
• 200 units X 28.50 (5 yr. avg. unit value) X
  4.75 270.75 of endowment spending
• Comparing the Jones Endowment spending five years
  ago versus now, one can see that a conservative
  spending policy, coupled with a sound investment
  policy that achieves long-term maximized returns,
  will preserve and enhance the value and
  purchasing power of endowment spending in
  perpetuity.
• While it is true that there may be short-term
  fluctuations in both value, over the long-term,
  endowments will grow and achieve the donors
  purposes, and the averaging mechanism will
  provide a smoother increase in spending, and
  smooth any decreases, should market value be
  affected by significant changes in overall market
  value of the fund as whole.

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Growth of Market Value
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Growth of Spending
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Other information

• Note that endowed gifts are assessed
• 6 on the original gift as the UCSD gift fee
• Investment management fees which are netted
  from the market value and are about 10 to 50
  basis points per annum (.10 to .50 )
• Administrative fees of 25 basis points per annum
  (.25) taken from spending.

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Endowment Stewardship

• Endowment must be monitored annually to ensure
  the funds make available for spending are spent
• UCOP Policy
• http//www.ucop.edu/ucophome/coordrev/policy/PP091
  106-Guidelines.pdf
• http//www.ucop.edu/uer/instadv/fundraising/princi
  ples.pdf

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Questions?