Endowment 101 National Press Foundation

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Endowment 101National Press Foundation

• William T .Spitz
• Vice Chancellor for Investments
• Vanderbilt University

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Definition

• An endowment is a perpetual fund, the income
  from which is used to support a particular
  project or purpose as specified by the donor.

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Key Attributes

• Perpetual time horizon
• Important source of support to the operating
  budget
• Restricted by the donor
• Governed by the Institutions Board subject to
  the Uniform Management of Institutional Funds Act
• Must preserve at least the original value of the
  gift
• Must be invested prudently
• Must pay attention to inflation
• Must consider both the short and long term

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Mechanics

• At Vanderbilt, more than 2,000 endowments
• Account for them separately using the same method
  as a mutual fund
• Quarterly NAV-New additions admitted at that
  price
• Quarterly dividend to provide scholarships, pay
  salaries, etc.

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Goals of Endowment Management (Primary)

• Provide a steady, predictable (and hopefully
  growing) stream of income to the operating budget
• At least maintain the inflation adjusted value of
  the fund in perpetuity (Known as generational
  neutrality or intergenerational equity)
• These may conflict-particularly over the short
  term

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Goals of Endowment Management (Secondary)

• Stability of corpus
• Achieve competitive returns for PR/fundraising
• Outperform peer institutions
• Maintain spending as a percent of the operating
  budget

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Specific Investment Goals

• Spending Rate
• Expected Inflation
• Required Rate of Return
• Typical Spending 4-5
• HEPI Inflation 5.5
• Target Return 9-11

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Cumulative Inflation
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Spending

• Typical formula-Spend 5 of a three year moving
  average of market value. Smoothes out annual
  payout
• Average spending rate 4.8

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How are Endowments Invested?
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How Have Endowments Performed? (Annual Return for
fiscal years ending 6/2005)
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Endowment Size (2005)
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Endowment Per Student
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Hot topics

• Are some endowments too big?
• Should they spend some of their riches today
  rather than hoarding capital?
• Are large universities too aggressive in the way
  they manage their endowments?
• Will they be able to earn their required returns
  going forward? (Is 9-11 realistic?)
• Are endowment investment officers paid too much?

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Hot Topics (Continued)

• Should endowments be subject to socially
  responsible investing principles?
• Should endowments engage in targeted economic
  development?
• Does the endowment governance model work?