What Is an Endowment Investment?

An endowment investment refers to an investment undertaken by institutions, such as colleges, universities, hospitals and libraries. This type of investment is generally made possible by donors who donate funds or other property, called endowments, to the institutions. Essentially, an endowment investment is governed by specific policies that address issues like the different assets in which funds should be allocated and how investment gains are going to be expended. An endowment investment may be restricted by the donor who dictates certain conditions for providing the funds, or it may be unrestricted when the donor allows discretion to the recipient of the funds. Moreover, there are different types of endowments, such as permanent, quasi and term endowments.

When established, the endowment investment may be set up as a foundation, a trust, or a public charity. Institutions that have been endowed with funds to invest may utilize part of the returns produced by the investment in order to finance portions of their activities. For universities or colleges, for example, the endowment investment may be the source of revenue for scholarships awarded to specific students, among other needs.

Permanent endowments, also known as true endowments, require that the donated funds be invested forever, and only the income derived from investments may be spent. Quasi endowments are normally set up with funds from both external donors and the institution itself. These types are established for specific purposes, and the income produced from their investments can only be used to serve the given purposes. Finally, term endowments are similar to permanent ones with the exception that they have an expiration date, where all or part of the funds may be spent.

Moreover, donors have a great say in regards to how their endowments are to be invested. Recipient institutions, however, may also set minimums in order for the endowments to qualify as permanent, quasi or term endowments. For example, a university may set a minimum of $10,000 US Dollars (USD) for the establishment of a permanent or true endowment.

Furthermore, endowment plans and investments are mainly overseen by a board of trustees and/or professional fund managers hired for the task. The team managing an endowment has to adhere to the policies prescribed and follow a strict plan. For instance, the allocated weights of an endowment portfolio must be proportionally maintained according to the institution's investment objectives. The proportional weights of a particular endowment portfolio, for example, may be as follows: 25% bonds, 35% US stocks, 20% European stocks, 10% precious metals, and 10% emerging market stocks.