Endowment funds, which consist of individual donations, carry the stipulation that the organization receiving the gifts may never spend all of the money they contain. They are common at colleges and universities, for which they provide operating capital and funding for ventures like scholarships and specialized programs. Organizations unitize endowment funds for varied reasons.
Unitizing Endowment Funds
The process of unitizing endowment funds entails creating a single pool of capital from all of an organization’s endowments. A unitized endowment works something like a mutual or hedge fund in that the money in the pool contributed by each individual endowment still belongs to that endowment even though it helps to fund the total. The money in a unitized endowment fund takes the form of units. For example, if a fund possesses an overall value of $1 million and contains 10,000 units, each unit holds a real value of $100. If Endowment A contributes $50,000, it lays claim to a total of 500 units.
Investing in Unitized Funds
Organizations invest endowments as a means of earning interest and capital on them. This helps ensure that the money invested through an endowment is never completely expended. Pooling all endowment money in a unitized endowment fund allows organizations to invest this money in a diverse portfolio of commodities, stocks and bonds, and at greater volume rather than choosing a small volume of commodities in which to invest each endowment.
Returns on Investments
Each unit in a unitized endowment fund holds the same value of all other units. If investments produce returns on capital, the value of the pool increases and along with it the value of each unit. For example, if a pool with 10,000 units and $1 million of capital in June were to produce a 10 percent return on capital in a six-month period, the value of the fund in December would be $1.1 million. Despite the increased value of the fund, it would contain the same number of units. In June, each unit would hold a value of $100, while in December each would hold a value of $110. An endowment holding 500 units in the unitized fund pool as of June, would see the value of its investment increase from $50,000 to $55,000 by December. Unitized endowments allow all endowments to receive equal return percentages and increase their total value together.
Purpose of Unitizing Endowment Funds
The primary purpose of unitizing endowment funds lies in the notion of liability protection. Common investing wisdom stresses the importance of diversification. Maintaining a diverse investment portfolio protects investors against situations in which the value of a holding falls drastically or exhibits other unpredictable behavior. If an organization invests the capital of a single endowment narrowly and the investment vehicles fail, the endowment fails. If an organization pools its endowment funds and places them in a large, diverse number of investment vehicles, the success of some investments offsets the failure of others and helps maintain financial balance within the fund. When a pooled fund experiences success, all endowments grow together. This protects against the vast expansion of some funds and the complete vanishing of others.
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