Endowments (In General)

2011-07-03T00:34:00.001-07:00

An endowment, or more commonly, financial endowment, is basically just money given as a gift for a cause or project of some sort, which is intended to act as a source of continuous income to further the goals of the project. The vehicle for this transfer is generally organized as a charity, trust fund, or some other tax haven for which people are prone to give money. The main aspect of an endowment is that the principal is almost always left untouched, with just the percentage earned spent towards the organizations maintenance and goals. In the best-case scenario, year after year, the initial size of the endowment grows larger as some of the annual return is simply reinvested, thereby also yielding more and more money annually.

Endowments are usually associated with the huge funds established for institutions such as universities, hospitals, museums and just about every significant non-profit organization that expects to persist. Indeed, an endowment is what usually allows a non-profit to exist at all; a philanthropist leaves a large sum of money in a fund, and the principal remains untouched, while providing usually greater-than-5% return annually – the Alfred Nobel Prize, left by the inventor of dynamite, is such an example. This money is used to drive the organization’s goals forward.

For the private individual with enough money, an endowment can even be used for the personal benefit of her children; for example, she might establish a summer vacation home for the family, which will benefit her offspring long after she is gone. However, the maintenance of such a home, especially considering property taxes, could be a financial burden on these children eventually. By establishing an endowment of sufficient size, the fund may either earn enough to cover all costs associated with the summer home, or at least enough to reduce the costs significantly. For example, a half-million dollar endowment fund, earning a conservative 5% - although in truth, an endowment should be managed by a hedge-fund manager that can consistently outperform the S&P 500, (else why not just invest in the latter?!) so 10% is more realistic – will yield $50,000 annually for the summer home’s insurance, taxes, and other costs. Such an endowment would greatly lessen the financial burden on the heirs, particularly those who aren’t as well off as their siblings.

It is easy to see why an institution such as Harvard or Yale can persist with such a high standard of education – which is directly related to the money they have! – through the centuries. For example, Harvard University’s 26 billion dollar endowment, earning 10% annually, would leave the educational giant with 2.6 billion dollars to spend on all of the great university’s expenses each year. This includes the gas bill, the establishment of new colleges, the equipment necessary to continue riding the crest of academic research, and much, much more. Note that with a historical endowment return of over 10%, much of the money the principal earns is simply reinvested, which is the cause of some controversy, with critics complaining that so much of that money could be used actively for other things, such as a significant reduction in tuition.

A similar use of the endowment is for the occupation of named chairs within the university system, as well as fellowships. For example, the British Physicist Stephen Hawking holds the Lucasian Chair of Mathematics, which is an endowed chair (and which also means he always gets paid!); so is the Rhodes scholarship – an endowment for the scholar. An upper endowment figure for a university professor’s chair is about three million dollars; if this endowment earns 7% annually, then the holding professor makes a handsome $210,000 yearly, none of which has to come from the university’s operating budget. What better way, truly, is there for an establishment to persist through foreseeable financial calamities than an endowment?

Examples of University Endowments and Institutions (U.S.)

Harvard University - $27.5 billion endowment

Yale University - $16.7 billion endowment

Princeton University - $14.4 billion endowment

Stanford University - $13.9 billion endowment

Massachussetts Institute of Technology - $8.32 billion endowment

University of Chicago - $5.6 billion endowment

Brown University - $2 billion endowment

Bill & Melinda Gates Charity - $36.7 billion endowment

Howard Hughes Medical Institute - $14.8 billion endowment

Ford Foundation - $13.8 billion endowment

J. Paul Getty Trust - $10.1 billion endowment

Robert Wood Johnson Foundation - $10 billion endowment

W.K. Kellogg Foundation - $8.4 billion endowment

Andrew W. Mellon Foundation - $6.1 billion endowment

MacArthur Foundation - $6.1 billion endowment

The California Endowment - $4.4 billion endowment

Rockefeller Foundation - $3.8 billion endowment

Quite generally, there are three main kinds of endowments:

v The most popular kind of endowment, and the one we’ve been talking about, is a so-called True Endowment fund; the characterizing stipulation for this type of endowment is that the principal cannot ever be spent; only the amount of money yielded annually can be used. It is intended to last pretty much forever. So, for the summer home, it is meant to be kept in the family for as long as the land itself persists, with the annual return spent on taxes and maintenance and whatever else; any leftover money can be reinvested, enlarging the principal, and therefore yielding a greater amount of income year-after-year. Often, money is reinvested to help combat future inflation.

v A similar kind of endowment is the Term Endowment. Basically, it is exactly like a True Endowment fund, except for a limited amount of time, as specified in the Will. As pertains to the summer home example, say, after 20 years (or the 3^rd generation of children), the principal can start to be used, if the current owners so desire.

v A Quasi-Endowment fund is more restrictive than the previous forms of endowments; it stipulates that the funds MUST be used for the very specific mandates of the benefactor, leaving no leeway with leftover endowment funds.

Best Endowment Policy HQ - Ensuring the Future

Endowments (In General)

Examples of University Endowments and Institutions (U.S.)