Endowment funds arise from contributions made to charitable or educational institutions. Rather than immediately spending the funds, the organization invests the money for the purpose of providing a future stream of income to the organization.
The investment policy of an endowment fund is the result of a “tension” between the organization’s need for current income and the desire to plan for a growing stream of income in the future to protect against inflation.
To meet the institution’s operating budget needs, the fund’s return objective is often set by adding the spending rate (the amount taken out of the funds each year) and the expected inflation rate. Funds that have more risk-tolerant trustees may have a higher spending rate than those overseen by more risk-averse trustees.
Because a total return approach usually serves to meet the return objective over time, the organization is generally withdrawing both income and capital gain returns to meet budgeted needs. The risk tolerance of an endowment fund is largely affected by the collective risk tolerance of the organization’s trustees.
Due to the fund’s long-term time horizon, liquidity requirements are minor except for the need to spend part of the endowment each year and maintain a cash reserve for emergencies. Many endowments are tax exempt, although income from some private foundations can be taxed at either a 1 percent or 2 percent rate.
Short-term capital gains are taxable, but long-term capital gains are not. Regulatory and legal constraints arise on the state level, where most endowments are regulated.
Unique needs and preferences may affect investment strategies, especially among college or religious endowments, which sometimes have strong preferences about social investing issues.
No comments:
Post a Comment