What Determines Endowment Performance?

Endowment performance depends on the investments made with the endowment, necessary payouts, and how well a manager handles the funds. Endowments are designed to provide a perpetual source of funds, renewed by investment of the money in the endowment to grow it over time and supported with infusions of fresh funds from outside sources. The manager maintains detailed records and can provide annual reports on the performance of the fund for the benefit of interested parties. In some cases, this information is open to any member of the public who wants to ask.

Managers tend to lean toward conservative investments when they handle endowments. An endowment loss could be very risky, especially when the funds are necessary for activities like funding scholarships and other benefits. One thing that can impact endowment performance is how conservatively the manager handles the funds. Managers with an excess of caution may generate low returns with minimally risky investments. The endowment might not be able to recover from disbursements and wouldn't grow well over time.

A risk-taking manager can also generate poor endowment performance by making unwise investments or failing to anticipate problems with investments. In this case, high risk investments are made with the goal of big returns, but instead the endowment takes a loss. If the mixture of investments is diverse and backed with conservative investments to keep the endowment stable, the loss may be relatively small. If the fund is not diversified or it lacks a backing of strong core investments, it may shrink in an economic downturn.

Paying out too much can also diminish endowment performance. While the goal of the fund is to make money available, paying out excessive amounts will deplete the amount available for investment. If the economy is poor and the fund needs to pay out more to provide appropriate levels of assistance, it may start to shrink or it will stop growing. This can contribute to problems in the future, as endowments count on growth to keep pace with inflation. If the fund remains static, the money will be worth less over time and it will not be able to provide the same level of economic support.

Reports on endowment performance should give information about the percentage of growth over the course of the year, with comparable figures from prior years to use as a frame of reference. If the endowment drops, the manager should be able to explain why. Unexpectedly large growth should also be discussed so concerned parties understand its origins. If the endowment didn't pay out very much in the year, for instance, it might have grown more than expected because of the available funds for investment, not because the manager did anything special.