How Should Endowment Money be Invested and Managed?

For an endowment to serve its long-term purpose, it needs to yield a predictable level of earnings. But as with any investment, there is always some risk that the investment won’t earn as much as is needed, or may actually lose money. In weak economic times, nearly all investments can expect disappointing results. Even in periods of general economic strength, a given mix of investments may still perform poorly. Therefore, how funds are invested can have a profound effect on the effectiveness of an endowment or endowment-like grant.

Four main principles:

• Balance the need for safety and growth.
• Monitor the performance of investments carefully and consistently.
• Adjust the investment plan in response to performance results, changing market conditions, and changing institutional needs.

Initial Decisions:

• Spending policy. The size of the endowment or endowment-like grant will have been based on a calculation of how much a given amount of capital is likely to earn in a typical year. The grantmaker and grantee will also need to agree on when the endowment is “activated” — that is, the point at which the grantee will have access to the earnings. ...for instance, if the organization receives substantially more contributions to its endowment, or if a given year brings an unusually high or low return on investment. Such questions should be addressed explicitly, in advance, and the process for arriving at answers should be part of a written policy.
• Asset allocation and time horizon. In establishing its investment plan and policies, the endowed organization should consult its advisers and decide on the percentages of the endowment funds (within reasonable ranges) that will be invested in the main classes of assets — most commonly stocks, bonds, and cash. These percentages may vary according to the purpose for which the funds are invested, the level of risk that the organization can prudently tolerate, and, if the fund isn’t meant to be permanent (as in an “endowment-like grant”) the amount of time that the asset is intended to last.