According to Investopedia, endowments are a financial asset donation made to an institution or non-profit group in the form of investment funds or other property, and they are aimed to keep the principal amount intact while using the investment income from dividends for charitable efforts.
While maintaining the core endowment principal intact to fund future years of scholarships, endowments provide benefits from earnings in a market rate of interest, or whatever efforts the donor sought to fund. In certain cases, a percentage of the assets are allowed to be used each year.
So a combination of interest income and principal could be the amount pulled out of the endowment and the ratio, based on prevailing market rates, of principal to income would change year to year.
For example, conferring Bogle 2011, Yale’s portfolio is structured using informed market judgment and a combination of academic theory. The theoretical framework relies on an approach developed by Nobel laureates James Tobin and Harry Markowitz and implies a mean-variance analysis, both of whom conducted work on this important portfolio management tool at Yale’s Cowles Foundation.
Yale employs mean-variance analysis to estimate return profiles and expected risk of various asset allocation alternatives and to test the sensitivity of results to changes in input assumptions, using statistical techniques to combine variances, expected returns, and covariances of investment assets.
Frontier Investment Management LLP Research (2013) refers to its study about “Investing like the Harvard and Yale Endowment Funds” that University Endowment funds contribute towards the future funding requirements of colleges and universities and are non-taxable vehicles. Their funding comes from a combination of gifts, legacies, and investment returns where there is the advantage of a long-term investment time horizon which permits them to invest a portion of capital in illiquid tolerant market volatility.
In 2012 in the US, the largest endowment fund was Harvard University with $30.7 billion under management (National Association of College and University Business Officers Report, “NACUBO”, 2012). The US has an average size of $488 million in endowment funds (about 831), while in comparison with the UK university endowment funds, which are smaller.
At the end of 2011, the Oxford University’s central endowment fund was managing £937m (the Oxford Endowment Fund Annual Report and the Audited Financial States, 31st December 2011), in 2012 the Cambridge University Endowment Fund managed a total of £1.7 billion.
The reasons of examining the strategies of the US Endowment Funds are:
- US Endowment Funds have diverse portfolios with significant exposure to alternative asset classes and exposure to multiple asset classes, looking to meet their personal long-term investment objectives. This diversification can provide inspiration for smaller investors;
- US Endowment Funds have consistently achieved superior investment returns. Such is the case of the largest Endowment Funds with assets greater than $10 billion and have achieved 4.1 percent higher returns than the traditional US equity/bond portfolio (60/40), with an average 10 year annualised return of 10.1 percent (40% Citigroup Broad Investment Grade Bond Total Return Index, 60% S&P500 Total Return Index from July 2002 – June 2012);
- US Endowment Funds have stable strategic asset allocations over time and long-term investment horizons.
Bogle, J.C, 2011, “The Lessons of History – Endowment and Foundation Investing Today”, The Vanguard Group, Before The NMS Investment Management Forum Washington, DC, September 12, 2011;
Frontier Investment Management LLP Research, 2013, “Investing Like the Harvard and Yale Endowment Funds”
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