Many people think about universities when they hear news about endowment funds. That’s not surprising, as the market value of the endowment funds of colleges and universities is $927 billion.
Much of this has to do with a growing number of university alumni contributing to endowment funds as years pass, as well as prudent investments.
However, such funds are not restricted to educational institutions. Universities, churches, hospitals, nonprofit charities and community foundations also have this type of charitable fund.
An endowment fund, quite simply, is money set aside (invested) to earn revenue to fund some type of charitable activity. Unlike a typical investment fund, the beneficiary of an endowment fund is a nonprofit organization instead of individual investors.
The principal value of the endowment fund is kept intact, while the investment earnings can be distributable dollars used for charitable grants to nonprofits. Thus, an endowment fund can be held permanently, allowing donors to support causes they care about in perpetuity.
Donations to endowment funds are tax deductible. Donors often set up endowment funds so they can receive charitable tax benefits immediately upon making their donation, while maintaining the social-good grantmaking power for the long-term.
Institutions and individuals can donate both cash and non-cash assets – such as stock, mutual funds or real estate – to fund the endowment.
Charitable organizations that have endowment funds build investment strategies – typically steered by investment committees – that increase the fund’s impact and create sustainable growth. Assets are invested into investment portfolios to maximize performance and charitable dollars.
University Endowments vs. Nonprofit Endowments
While university and nonprofit endowments serve charitable purposes, there are critical differences in their structures and objectives.
University Endowment Funds
Colleges and universities often rely on endowment funds to support various academic and operational initiatives. These funds are typically fueled by contributions from alumni, investments, and sometimes, major fundraising campaigns. The primary goal is to ensure the institution’s long-term financial stability. The funds may be allocated to scholarship programs, faculty positions, research endeavors and facility enhancements. The management of university endowments often involves a dedicated team, including financial experts and investment committees.
Nonprofit Endowment Funds
On the other hand, nonprofit organizations such as charities, hospitals, and community foundations establish endowment funds to secure sustained financial backing for their charitable activities. Donors contribute to these funds to support specific causes or the organization’s overall mission. Nonprofit endowments may focus on community development, the environment, education or social services. The investment strategies for nonprofit endowments are crafted to align with the organization’s goals and ensure a lasting impact.
Understanding these distinctions is vital for donors and organizations, as it influences the strategies for managing and growing endowment funds.
Endowment Fund Policies
Most endowment funds have the following three components:
- Investment policy: Outlines types of investments allowed and investment manager restrictions in meeting return targets
- Withdrawal policy: Establishes the amount an organization or institution is permitted to take out from the fund at each period or installment based on the needs of the organization and the amount in the fund.
- Usage policy: Identifies the fund purpose and ensures grantmaking is adhering to these purposes, both appropriately and effectively.
Three Types of Endowment Funds
Endowment funds come in three different shapes and sizes:
- Restricted endowments: The most common type of endowment, a restricted endowment has a principal that is held in perpetuity, while the fund’s investment earnings are granted per the donor’s recommendation, such as with a donor-advised fund.
- Term endowments: The principal of the endowment can be granted, but only after a certain period of time or a certain event.
- Quasi-endowment: Also known as “board designated endowments”, quasi-endowment funds are funded by the nonprofit organization itself, and their principals may be used or granted at the discretion of the board.
Penalties may apply if endowment terms are violated.
Learn More
In addition to managing non-endowment funds, San Diego Foundation manages more than 1,300 endowment funds of more than $840 million.
Our assets, including endowments, are professionally invested based on specific fund types to maximize return, strengthen grantmaking and create sustainable growth.
If you want to learn more about endowment funds or how to maximize your philanthropy with endowed donor-advised funds, contact our Development & Stewardship team at (619) 814-1332 or DonorServices@sdfoundation.org.
