Endowment Funds
What is an endowment?
An endowment is a fund created by gifts totaling at least $10,000 that are permanently set aside by Appalachian State University Foundation, Inc. to provide benefits to students, faculty or programs year after year, generation after generation.
For endowed funds, the principal (endowment corpus) must be invested and only a portion of the income may be expended to carry out the donor’s purpose. To guard against the eroding consequences of inflation, the remaining portion of investment return is then added to the earnings reserve. The goal is to ensure that the fund maintains its purchasing power over time to support future generations.
Note on minimum funding of endowments: Contributions exceeding $10,000 (including additional contributions made in the years following fund establishment) are added to endowment principal unless designated for current use in writing by the donor.
Why are endowments important to Appalachian State University?
An endowment creates financial stability, allowing Appalachian to be less dependent on unpredictable sources of revenue, such as state appropriations and research sponsorship. Endowments allow for a rich variety of activities such as scholarships and fellowships for talented students, support for distinguished and dedicated faculty members through professorships and chairs, support for research and other programs.
What legal requirements regulate endowments in North Carolina?
In 1985, North Carolina adopted the Uniform Management of Institutional Funds Act (UMIFA). (See Chapter 36B of the NC General Statutes) This act prohibits invasion of the endowment corpus. Total return on the endowment investment (i.e. capital appreciation as well as income) can be spent. The amount available to award for spending is currently limited to the lesser of 4% of the three-year average of the fund’s net assets, or 65% of the endowment’s earnings reserves. If no net earnings exist, regardless of the size of the endowment, no awards for spending can be made.
Do other states have the same legal requirements for endowments?
With various modifications, UMIFA has been adopted by 46 states and the District of Columbia. As a result of the state-by-state modifications to UMIFA, legal requirements for endowments in other states may differ from North Carolina.
Who will oversee my endowment in support of Appalachian State University?
Appalachian State University Foundation, Inc.’s Board of Directors and its Investments Advisory Committee are responsible for endowment oversight.
How are endowment investments managed at Appalachian State University Foundation, Inc.?
Endowments are invested by Appalachian State University Foundation, Inc. according to the asset allocation policy referenced in question seven below. Ten investment managers, selected by the Foundation’s Board of Directors, manage the Foundation’s endowment assets. Merrill Lynch provides investment advisory services to the Foundation’s Investments Advisory Committee and the Board of Directors.
The Foundation strives to preserve both the corpus and the spending power of the endowments. Asset allocation is the cornerstone of the endowment’s investment policy and a key responsibility of the Investments Advisory Committee of the Foundation’s Board of Directors. The strategic asset allocation policy should set the course for endowment investing for many years to come.
The overall investment objective is to earn a total net return equal to the sum of inflation plus the spending rate.
What is asset allocation?
Asset allocation is the manner in which endowment funds are distributed among the various long-term investment options. Asset allocation is a major factor in maximizing portfolio return and should take into consideration an acceptable risk level.
Currently the strategic asset allocation for the Appalachian State University Foundation, Inc. is:
Equity Investments – 52%
Large Cap Growth – 12%
Large Cap Value – 14%
Small Cap Growth – 4%
Small Cap Value – 6%
International Growth – 7%
International Value – 9%
Fixed Income Investments – 18%
Intermediate Fixed –18%
Alternative Investments – 20%
Real Estate Investments – 10%
How is spending determined? What is the relationship between overall investment return and the “spending” on an endowment?
The spending policy is set by the Investments Advisory Committee of the Appalachian State University Foundation, Inc. Board of Directors. Endowment spending is generally computed on a three-year average of net assets as of June 30 in order to smooth out changes in market value. The spending rate is currently four percent.
How soon will new endowments start to spend for programmatic purposes?
New endowments must be invested for at least one year to be eligible for spending. However, funds must first have earnings reserves to support spending.
What happens to any “excess returns” in the endowment?
Any earnings beyond the amount needed for scholarship/programmatic spending are added back to earnings reserves to promote growth and protect against inflation for future programs. These excess returns may also provide available funds in down periods.
What happens when investment returns are negative?
An endowment can spend from prior years’ excess returns (also referred to as earnings reserves). If there are no earnings reserves available, there can be no spending.
What is an “underwater” endowment?
This is an endowment which, through declining market performance, has used all accumulated earnings and has eroded so that the fund’s net asset value is less than the original gift value, or corpus. We also refer to “underwater” endowments as endowments with eroded corpus.
How will spending occur if an endowment is “underwater”?
Spending will not occur in “underwater” endowments, as required under UMIFA (NCGS 36B). See question three above regarding legal requirements for endowments. A donor may make a current gift to support program or scholarship spending if an endowment fund is underwater.
Can an endowment be designated for a specific purpose?
Absolutely - as with any gift to the Appalachian State University Foundation, an endowed gift offers alumni and friends the opportunity to have their names, or the name of a loved one, linked to an area of the University in which they have a special interest. Examples include:
- Some donors create unrestricted endowments, recognizing that the needs and challenges of the future will differ from those of today. Unrestricted gifts are used for the highest priority needs on campus, and provide the most flexibility as these needs change.
- Many donors create undergraduate scholarships or graduate fellowships to aid deserving students majoring in a course of study within a specific college.
- Other donors choose to direct their gifts to areas or programs of special concern to them, knowing that these additional funds provide an opportunity for those programs to grow and excel.
There are many ways to fund an endowment within the Appalachian State University Foundation, Inc. For more information, please contact the Office of Gift Planning at (828) 262-3192.
