Investment Strategies for Endowment Funds
Endowment funds are received from a donor with the restriction that the principal is not expendable. Quasi-endowment funds are established by the University Comptroller to function like an endowment, but may be totally expended at any time at the Comptroller's discretion. All but a few endowment funds are pooled for investment purposes.
There are a few endowment funds that are separately invested because either the gift is non-marketable or the donor has stated that the fund may not be commingled. Endowments that must be separately invested are invested to emulate the endowment pool investment program adopted by the Board of Trustees while adhering to the special restrictions prohibiting participation in the pooled investment program. Each separately invested endowment fund is reviewed periodically to determine if it may be included in the endowment pool. The endowment funds investment policy is reviewed at least annually by the Board of Trustees. University Treasury Operations prepares quarterly investment and performance reports for review by the Board of Trustees.
The University is subject to and complies with the State of Illinois Uniform Prudent Management of Institutional Funds Act, 760 ILCS 51 (2009) when investing its endowment funds. Separately-invested endowments are to follow, as nearly as possible, the endowment pool investment program adopted by the Board of Trustees while following the special restrictions prohibiting participation in the pooled program.
Investment returns on the endowment pool are compared with the following:
- A weighted-average of the returns of broad market indices that represent the asset classes in the target asset allocation in the investment policy for the endowment pool established by the Board of Trustees
- Returns of a universe of funds with similar policies
- A measure of relative purchasing power
The investment policy recognizes the long-term nature of endowment funds and seeks to balance present and future support. The target allocation the Board of Trustees deem appropriate for a fund is displayed in the chart under "Investment Objective." The endowment pool investments are distributed to a number of asset classes to minimize investment risk (through diversification) and to provide enhanced investment performance.
The investment objective is to preserve the real value, or purchasing power, of the endowment pool assets and the annual support they provide for an infinite period. The endowment pool investment policy embraces the total return concept. The following spending rate formula summarizes the factors involved in the endowment pool investment program:
Real Asset Growth Rate equals Total Investment Return minus Rate of Purchasing Power minus Spending Rate
The investment program attempts to balance current need and future support so that in the future an endowed University program will receive the same value of annual financial support as is currently provided.
Spending Policy – The purpose of the spending rate formula is to provide a stable income stream that keeps pace with inflation and does not degrade the real value of the endowment over time. The spending formula and spending rate for an endowment is determined by the University president before the beginning of each fiscal year. The President notifies the Board of Trustees of the spending rate.
Allocation Of Assets – The chart below illustrates the target asset allocation deemed appropriate for the endowment portfolio by the Board of Trustees:
Diversification –The endowment portfolio is broadly diversified across and within asset classes to minimize the impact of losses in individual investments. Multiple investment managers and indexed investments are used to achieve this objective.
Derivative Securities – For the purposes of this policy, a derivative instrument is defined as any contract or investment instrument performance, risk characteristics or value is based on any asset, interest rate or index value. Derivatives are permitted to be used for the following purposes:
- To gain broad stock or bond market exposure in a manner that does not create the effect of leverage in the overall portfolio.
- To convert financial exposure in a given currency to that of another currency (for example, to hedge Japanese Yen exposure back to the U. S. dollar).
- To adjust the duration of a bond portfolio in a manner that is consistent with the accepted approach of the manager and other policies and guidelines provided to the manager.
- To make other portfolio adjustments that are consistent with other elements of the University's investment policies and guidelines and that, when viewed from a total portfolio standpoint, do not increase risk or expected volatility of rate-of-return in the portfolio.
All other uses of derivatives are prohibited unless specifically approved by the Board of Trustees.
Use of Pooled Funds – Investments in pooled funds, such as mutual funds and common trust funds, are permitted provided their investment guidelines do not violate the Board of Trustees' endowment investment policies and guidelines.
Liquidity – The University advises investment managers of any anticipated need for liquidity. Investment managers presume no liquidity needs other than those provided to them by the University.
Rebalancing – The endowment portfolio is rebalanced at least quarterly to keep asset classes within the allowable ranges. The purpose of rebalancing is to control risk and maintain the policy asset allocation within the ranges approved by the Board. Endowment cash flow is used to implement rebalancing activities to minimize transaction costs.
Performance Evaluation – The total endowment pool rate of return is compared with all the following:
- A weighted-average of the returns of broad market indices representing the asset classes in the target asset allocation established by the Board of Trustees
- The returns of a universe of funds with similar policies
- A measure of relative purchasing power
The weighted average benchmark referred to above is:
The universe of comparison is the Hewitt EnnisKnupp Endowment Fund Universe. The primary inflation measure used to determine purchasing power is the Consumer Price Index. The University evaluates performance on a net-of-fees basis.
Last Updated: March 17, 2011 | Approved: Senior Associate Vice President for Business and Finance - November 2010