Endowment Fund

What Is an Endowment Fund?

An endowment fund is an investment fund established by a foundation that makes consistent withdrawals from invested capital. The capital or money in endowment funds is often used by universities, nonprofit organizations, churches, and hospitals. Endowment funds are typically funded by donations that are deductible for the donors and are used for specific purposes.

Key Takeaways

  • Endowment funds are investment portfolios where the initial money is provided by donations to a foundation.
  • An endowment fund will have an investment, withdrawal, and usage policy governing how it is run.
  • Some university endowment funds in the U.S. have more $30 billion in assets with hundreds of millions paid out in scholarships.

Endowment Fund

Understanding Endowment Funds

Financial endowments are typically structured, so the principal amount invested remains intact, while investment income is available for immediate funding for use to keep a nonprofit company operating efficiently. Most large donations to endowment funds are structured, so a portion of the principal is released for use only after a period of time. The delayed use of the donations has an impact over a longer period of time. However, the delayed use of the funds also encourages the endowment fund management to grow the income from the fund to ensure that operational needs are covered.

Endowments also may be given with specific uses stated by the donor, further complicating disbursements. Most large endowment funds are professionally managed by investment managers that have clear investment goals and allocate the money into a variety of investments.

Policies of Endowment Funds

Most endowment funds have the following three components, which governs investments, withdrawals, and usage of the funds.

Investment Policy

The investment policy lays out what types of investments a manager is permitted to make and dictates how aggressive the manager can be when seeking to meet return targets. Many endowment funds have specific investment policies built into its legal structure so that the pool of money must be managed for the long term.

Endowment funds of larger universities can have hundreds, if not or thousands, of smaller funds that invest the pools of money in various securities or asset classes. The funds typically have long-term investment goals, such as a specific rate of return or yield. As a result of the investment goals, the asset allocation (or types of investments within the fund) is designed to meet the long-term returns set forth in the fund's objectives.

Withdrawal Policy

The withdrawal policy establishes the amount the organization or institution is permitted to take out from the fund at each period or installment. The withdrawal policy can be based on the needs of the organization and the amount of money in the fund. However, most endowments have an annual withdrawal limit. For example, an endowment might limit the withdrawals to 5% of the total amount in the fund. The reason the percentage of withdrawal is typically so low is that most university endowments are established to last forever, and therefore, have annual spending limits.

Usage Policy

The usage policy explains the purposes for which the fund can be used and also serves to ensure all funding is adhering to these purposes and being used appropriately and effectively. Many endowments support research, teaching, public service, scholarships, and fellowships. Much of the money in an endowment fund has been already allocated to specific programs, such as sports or a particular school of study. For example, some endowments might be limited to using the funds for the oceanography program or the business school of a college or university.

Types of Endowment Funds

There are several types of endowment funds, which typically stipulate how and when the funds can be disbursed.

Term Endowment

Term endowment funds have a built-in stipulation that either part or all of the principal may be used only after a pre-established period of time has passed or until a specified event has occurred. The term depends on the wishes of the donor.

Restricted and Unrestricted

Unrestricted funds may be used in any way the recipient chooses. Restricted endowment revenue may have limitations put in place by the donor to serve a specific purpose. A common example is a university scholarship that is restricted to students pursuing a career in a certain field.


Quasi-endowment funds are earmarked by the governing board of an organization instead of being restricted by donors or some other outside agency. These endowment funds are to be invested to generate income for a lengthy, unspecified period.

Real World Example of an Endowment Fund

Harvard University had the largest endowment in the U.S. with $40.9 billion as of the fiscal year ending on June 30, 2019. However, Harvard’s endowment size trails other educational institutions on a per-student basis, according to the school's annual report.

Distributions from the endowment provided $1.9 billion or 35% of total revenue for the school year, and another 9% of revenue came from current gifts of philanthropy. Cash gifts to the endowment totaled $613 million in 2019.

Investment Performance & Allocation

At the end of the 2019 fiscal year, the annual return on the endowment was 6.5%. There are thousands of specific funds within the overall endowment fund for Harvard. The funds' asset allocation was spread out through various types of investments, including:

  • Equities: 26%
  • Hedge funds: 33%
  • Private equity investments: 20%
  • Real estate: 8%
  • Bonds: 6%

Payout Rate and Restrictions

The endowment's annual payout rate is typically capped. Harvard's payout rate was 5.1% in 2019, which totaled $1.9 billion.

The use of the funds within the endowment is restricted. Approximately, 70% of the annual distribution is restricted to specific departments, programs, or other purposes. In other words, the funds need to be spent according to the terms established by the donors. Only 30% of the fund can be used by Harvard for flexible spending.

Financial Aid

In 2019, Harvard paid $193 million from the endowment to undergraduates for scholarships. Approximately 54% of the students receive need-based scholarships and pay, on average, $12,000 per year to attend Harvard. Of the students that receive scholarships, 20% pay nothing to attend Harvard College.

From an investment perspective, Harvard's endowment fund has consistently produced strong returns over the long term, although ongoing infusions of capital in the form of new endowments also drives total growth.

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  1. Harvard University. "Financial Report Fiscal Year End 2019." Accessed Aug. 28, 2020.