What is an endowment?
The Ohio State University requires substantial, consistent, and permanent funding and, by receiving such funds, the university can continue to provide strong academic programs and innovative technology. Endowment funds meet such a need. An important objective that guides the investment of endowment funds is to preserve and maintain the real purchasing power of the principal. Gifts are invested in perpetuity, and distribution from the invested contributions is used to fund important programs and activities. A portion of the distribution may be reinvested in the fund at the request of the donor or department to further enhance the fund’s buying power over time. All endowed fund gifts at Ohio State are pooled together with other long-term university assets to form the Long-Term Investment Pool (LTIP). Within this pool are well-diversified U.S. and international investments that include:
- Fixed Income
- Real Estate/Natural Resources
- Private Equity
- Absolute Return/Hedge Funds
Who manages the endowment?
The Office of Investments is responsible for managing the endowment. The university strives to earn the highest possible return from interest, dividends, realized gains, and market value increases while maintaining an appropriate level of risk. To do this, the services of external investment managers are utilized. The Office of Investments closely monitors the performance of the endowment portfolio, with reallocation occurring as needed.
How is a fund established?
New named funds are established by the Board of Trustees upon receipt of a gift of $50,000 or more for an unrestricted endowed fund and $100,000 for a restricted endowed fund. Endowment descriptions are approved by the donor, the university department that is proposed to administer the fund, and the Board of Trustees. The endowment operates much like a mutual fund. Each named fund owns a number of shares in the LTIP based on the value of gifts to that fund. Representing a uniform portion of the pool, the number of shares owned is used to calculate the distribution to each named fund.
Determining the value of a share
The value of a share is determined by dividing the total current market value of the assets in the LTIP by the number of shares outstanding. Example: If the LTIP was worth $2,000,000,000 on a given date and there were 400,000 total shares, each share would be worth $5,000. Note: This value is determined monthly by the Office of Financial Services and will increase or decrease in direct relation to investment performance and expenses. New shares are issued monthly when gifts to new or existing endowed funds are received from The Ohio State University Foundation. Example: If a donor gave $50,000 to start a new named fund, the fund would own ten shares ($50,000/$5,000), and the total number of shares would increase to 400,010.
Named fund administration
The endowment description, authorized by the University Board of Trustees when the fund is established, states each named fund’s purpose. Each fund is administered by the college or university department designated by the donor(s) and the Board of Trustees. It is the college dean’s or the department chair’s responsibility to make expenditures from the fund under directions set forth in the endowment description. If distributions are not used in a given fiscal year, the college or department may carry the balance forward into the next fiscal year for purposes specified in the endowment description; or the unused distribution may be reinvested to principal, thereby securing additional shares. To obtain additional shares, some endowment descriptions automatically require unused distribution or a portion of annual distribution to be returned to principal.
It is the university’s policy to make a distribution to each fund at the beginning of each fiscal year. The annual distribution equals 4.50% of the average market value-per-share of the endowment during the past seven years. Example: If over the last seven years, the LTIP averaged a monthly market value-per-share of $6,000, the spendable distribution for the upcoming year would equal $270 per share ($6,000 x 4.50%). A fund with ten shares would thus receive $2,700 ($270 x 10 shares) in distribution.
If annual endowment earnings exceed annual distribution, the excess is retained in the LTIP, increasing the pool’s market value (the base upon which the distribution is calculated). This, in turn, enhances future distributions for each individual endowment fund and helps compensate for inflation. Therefore, an individual endowment fund’s principal and number of shares do not increase, but the market value will increase with excess returns. While there is no guarantee this method will keep the endowment ahead of inflation, the strategy is intended to help preserve the purchasing power of the endowment and ensures that the purposes for which any named fund was established are carried out indefinitely.