Short Endowment Primer for Financial Planners.

Investment Endowment Fund Primer

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Endowment funds are much different than investment portfolios held by individual and institutional investors.

Endowment funds differ because their purpose is to provide a perpetual stream of inflation-adjusted income to meet never-ending, and always increasing, funding needs.

Some Unique Characteristics of Endowments

• An endowment has a perpetual life, and an indefinite time frame.

• There is a minimal need for liquidity.

• Most are not subject to taxes as long as certain legal conditions are met.

• There is minimal regulation.

• The personal characteristics of the Board are not relevant to allocation of the endowment.

• The portfolio should be crafted to carefully balance growth and an income stream that will keep pace with inflation over an indefinite time horizon.

There are two phases to an endowment fund’s life cycle: Accumulation and Distribution.

During the accumulation stage, the investment portfolio should be invested for high growth and minimal income. Investments should be mostly low dividend paying stocks offering high growth potential. Dividend paying stocks and fixed income securities should not exceed 30%. Risk minimization should be accomplished by using a broad asset allocation mix. As many asset classes offering high growth should be used as practically possible. New contributions should be immediately allocated to asset classes that are below their target ranges. Market timing and Dollar-cost-averaging techniques should not be utilized.

Once the endowment grows to a size sufficient to meet income-funding needs, the accumulation phase ends and the distribution phase usually begins. At this point, a reasonable amount of annual funding should be drafted into an Investment Policy Statement (IPS).

Historically, annual distribution amounts over 5% have led to erosion of principal over the long-term.

Portfolio allocation should be changed from the high growth of the accumulation phase, to a total return approach consistent to meeting the funding needs. Income will come from interest income, dividends, capital gains distributions, and principal sales.

About endowment investing.

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