Understanding endowment management: A guide

Built through the strategic investment of philanthropic donations, endowments are a critical element in ensuring the financial stability of higher education institutions, healthcare organizations, and nonprofit entities. As a sustainable, long-term source of funding, endowments support an organization’s ongoing mission and allow for financial resilience in changing economic climates. 

An endowment is only as good as the policies, strategies, and teams that oversee it, however. As an investment-based asset, endowments require thoughtful monitoring and management. 

This guide provides an overview of endowment management, its key components, and best practices for institutions looking to maximize their financial resources.

Endowment management: An overview

An endowment is a financial asset, usually gained in the form of a donation, that is invested to generate ongoing income for an institution. In most cases, the principal amount of the endowment is preserved within the fund, while some or all of the earnings are withdrawn annually to fund institutional initiatives.

Unlike an outright donation, an endowment is a dynamic asset. Endowments must be continually monitored and managed to ensure that the funds are invested and used effectively. Endowment management, therefore, includes all activities related to the establishment, investment, and use of an endowment fund. 

Effective endowment management involves creating and implementing policies to guide investment decisions, risk management, governance policies, and compliance with donor restrictions. A good endowment strategy also incorporates regular performance monitoring, thoughtful spending policies, and transparent reporting to stakeholders.

What is meant by an endowment fund?

An endowment fund is the total pool of money (both principal and revenue) that has been set aside and invested in order to generate revenue for an institution’s ongoing activities. These funds are strategically invested in a mixed portfolio that balances risk and return to ensure consistent growth.

How are endowment funds used?

Endowment funds can be used for any purpose as directed by the donor and agreed upon by the organization. Endowments are often established to support ongoing programs, including:

• Scholarships and Financial Aid: Higher education institutions often use the revenue from endowment funds to provide annual scholarships to students.
• Faculty and Research Support: Endowment funds can be used to pay for research initiatives and faculty salaries at a college or university. An endowed chair, for example, is a faculty position paid for by an endowment.
• Infrastructure and Facilities: The investment revenue from an endowment can help to pay for the long-term physical needs of the institution, including maintaining and expanding campuses, hospitals, or nonprofit facilities.
• Community Programs: Endowments often provide ongoing income to outreach initiatives and charitable activities, ensuring that these programs are sustainable and well-funded over the long term.

What is an example of an endowment fund?

Perhaps the most famous example of an endowment fund is found at Harvard University. Harvard’s endowment is the largest in higher education, valued at more than $53 billion USD in FY2024.

The Harvard endowment has been built over a period of 385 years, starting shortly after the university’s founding in 1636. It is made up of more than 14,000 separate funds, all of which are earmarked to fund the university’s education and research initiatives.

The Harvard endowment supports faculty, students, scientific research, and other academic initiatives. In FY2024 alone, the fund contributed to more than $749 million in scholarships and financial aid for Harvard students.

Types of endowments

Endowments can be categorized into four unique types. Each type of endowment comes with its own restrictions for management and use:

• Restricted Endowment
• Unrestricted Endowment
• Term Endowment
• Quasi-Endowment

Restricted endowment

A restricted endowment is similar to a traditional restricted gift in that the donor determines how the funds can be used. In most cases, the principal of a restricted endowment (the original gift amount) remains permanently untouched in the endowment fund. The investment income can be used as it becomes available, but only as designated by the donor in their original gift agreement.

Unrestricted endowment

With an unrestricted endowment, the funds can be used at the discretion of the institution for any purpose that aligns with its mission. Depending on how the endowment is structured, the organization might only be allowed to utilize the investment revenue, or they may be able to dip into a portion of the principal on occasion.

Term endowment

A term endowment establishes a temporary or semi-temporary endowment fund. The typical term endowment structure allows the institution to access and utilize the principal and/or interest balance once a set of donor-designated terms have been met. Those terms may call for a particular passage of time or a specific event to occur.

Quasi-endowment

In a quasi-endowment, a set amount of funds are generally treated like an endowment, but are not intended to stay in a long-term or permanent endowment fund. The use of quasi-endowment funds, including how and when to release the principal balance, is directed by the institution’s board of trustees. This makes a quasi-endowment the most flexible option of the four. However, it does not contribute to the long-term sustainability of the institution in the same way as the other three endowment types.

The role of the investment committee

The investment committee plays a crucial role in endowment management. They decide on the institution’s investment goals and asset allocation while monitoring performance and ensuring compliance with both legal and ethical requirements. This includes following the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which oversees the investment and use of institutional funding. The committee may also hire external fund managers to assist in the oversight of endowment investments.

As with any investment, risk and reward are closely correlated when it comes to endowments. A key role of the investment committee is to define the institution’s risk tolerance and return expectations, and then use those definitions to invest the funds accordingly. This includes balancing long-term sustainability with short-term financial needs.

It is common to invest endowment funds into diversified portfolios to generate steady returns while minimizing risk. Endowments often utilize a wide range of investment vehicles, including stocks, bonds, real estate, and alternative assets. These investments should be monitored closely with adjustments made as needed to achieve the defined goals.

How to create an endowment spending policy

The money invested in an endowment isn’t just set aside for the future; it’s a living fund to support your institution’s ongoing needs. A robust endowment spending policy ensures that funds are spent consistently and efficiently—and in accordance with donor wishes—while also preserving the principal for future generations.

Three key items to consider when creating an endowment spending policy for your institution include:

• Setting a spending rate
• Balancing growth and stability
• Defining eligible expenses

Spending rate

Institutions must balance mission-focused use of endowment growth funds and smart investment and growth strategies. The more the endowment grows, either through new investments or investment revenue, the more money it can theoretically produce. A spending rate of 4%-5% of the endowment’s market value is common.

Growth & stability

Endowments depend on a system of investments, which don’t always perform as expected. Endowment managers must consider and account for adjustments necessary for inflation and market fluctuations, ensuring that the overall value of the fund increases over time.

Eligible expenses

Whether determined by the donor, the board, or the organization at large, it’s critical to outline the purposes for which endowment funds can be used. Some endowments may be more flexible than others, but endowments, in general, are typically intended for programmatic or mission-driven activities—in short, more impactful expenses than ensuring that the supply room has enough staples.

Spotlight on higher education endowments

Higher education institutions rely heavily on endowments to support their academic and operational needs over the long term. A well-managed higher education endowment provides stability to the institution, enabling universities to weather economic uncertainties—which often impact both enrollment revenue and fundraising—while supporting valuable education and research initiatives. 

Endowments in higher education may be used for any purpose, depending on the donor’s wishes and the type of endowment established. They are most often utilized to fund:

• Professorships and faculty chairs
• Student scholarships and fellowships
• Campus improvements and infrastructure projects
• Special research initiatives

Increasing the endowment through additional donations is a priority for many colleges and universities. Endowment fund donors have the benefit of knowing that their one-time gift supports the institution for a long time.

While Harvard University boasts the largest university endowment in the United States, endowment funds can be found at colleges and universities of all sizes. University endowments are utilized by both private and public institutions ranging from large state schools to small liberal arts colleges. Depending on the structure of the university and its fundraising arm, university endowments may be directly managed by the institution, by an associated foundation, or by another entity as designated by the institution. 

Managing an endowment at your institution

The establishment and management of an endowment is essential for the long-term financial health of higher education institutions, healthcare organizations, and large nonprofits. By understanding the types of endowments, establishing a strong spending policy, and leveraging investment expertise, your institution can ensure their financial sustainability while fulfilling your mission. An effective endowment management plan provides lasting benefits, empowering your institution to support future generations through strategic financial planning and stewardship.

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Carolyn Wynnack

Carolyn is a nonprofit-focused writer with more than 10 years of experience in non-profit and higher education event management, program development and management, prospect development, training, and data analysis.