Endowment

What Is an Endowment?

An endowment is a pool of money or other assets given to an institution, such as a university, hospital, museum, or charitable foundation, with the expectation that it will be invested for many years. The original gift, called the principal, is generally preserved, while investment returns are used to fund the institution's ongoing work. Because the goal is to last indefinitely, endowments are managed with a long time horizon.

How It Works

Donors often attach conditions to their gifts. Some are restricted, meaning the income must support a specific purpose, such as scholarships or a research position. Others are unrestricted. The institution's governing board sets a spending policy that determines how much of the fund can be withdrawn each year. Many policies spread withdrawals over several years to smooth out market swings. The aim is to provide steady support while keeping the fund large enough to keep pace with inflation, which gradually reduces what money can buy.

Endowments are typically invested across a broad mix of assets, such as stocks, bonds, real estate, and private investments. This practice of spreading money across different asset types is known as asset allocation.

Why It Matters to Investors

Endowments are a useful example of long-term investing. Because they do not need to be spent all at once, they can accept some short-term volatility in exchange for the potential of higher long-term growth, and they usually rely on diversification to manage risk. Individual investors can learn from this approach, but the strategies used by large institutions involve trade-offs, such as limited liquidity in some holdings, that may not suit every person's circumstances.

The word also has other meanings. In insurance, an endowment policy is a life insurance contract that pays a sum on a set date or at death, whichever comes first. In behavioral economics, the endowment effect describes a tendency to value something more simply because one owns it.