Tested. Trusted.
Get Enlightened About Endowments
Best Practices for Your Non-Profit
Debbie Patrick
Garst Reese, CFA, CIC
www.boysarnold.com
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Tested. Trusted.
Part I :: Do We Need an Endowment?
• What is it?
• How can it help my non-profit?
• How do I start one?
• Policies
• Due diligence in finding the right investment counselor and other
professionals
• Reaching out to donors
• Who do I ask?
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Types of Endowments
1) True endowment (also called Permanent Endowment). In a true
endowment, the donor states that the gift is to be held permanently as an
endowment, either for general purposes or for specific programs as identified in
a written agreement.
2) Quasi-endowment (also known as Funds Functioning as Endowment - FFE).
Reserve funds, financial windfalls, or unrestricted gifts that the board elects to
put into endowment are quasi-endowments. The principal may be spent.
3) Term endowment. An endowment created for a set period of years or until
a future event (such as the death of the donor) is known as a term endowment.
After the term runs out or the event takes place, the principal may be expended.
The endowed funds in the organization's endowment must be clearly labeled as one
of these three types for accounting purposes. Each of the three types may be used
for designated or undesignated gifts - for general purposes or to benefit specific
projects.
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Should You Establish an Endowment?
An endowment may not be appropriate for every organization.
• If your purpose is to solve a problem and then dissolve, you
should not build an endowment.
• If you are new or do not have a solid donor base, you should
focus on building infrastructure and developing supporters
rather than on establishing an endowment.
• Consider if a donor advised fund through your community
foundation is a more fitting solution.
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Should You Establish an Endowment?
• Endowments are most appropriate for organizations that are
reasonably established and have stable income from
contributions and other revenue sources and that plan to be
in existence for the long term.
• Before starting an endowment, the organization should have
adequate non-endowed reserve funds to allow it to meet
unexpected challenges or to absorb major, non-annual
expenses.
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Establishing Your Program – Step One
• develop a comprehensive endowment action program
• board resolution
• integrate into the organization's strategic plan
• include the purposes of the endowment and what the
board intends that the endowment will provide for the
organization in the future
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Establishing Your Program – Step Two
• the case for support, measurable goals, strategies and
tactics to reach the goals, and the time frame, as well as
staff and budget requirements.
• include plans for prospect research, management and
investment of gifts, donor and volunteer stewardship and
recognition, marketing, and evaluation.
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Establishing Your Program – Step Three
• include the identification of potential endowment
champions and donors.
• the board of directors must embrace the value of an
endowment to the organization and must be willing to
commit the resources and time necessary to develop the
endowment.
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Endowment Policies
• Written policies
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•
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ensure the trust and confidence of board and staff members, prospective donors, and
professional advisors.
protect the organization and its board of directors from their own and staff's mistakes
and lack of knowledge.
engage financial and legal advisors in drafting policies for approval by the board.
• Purpose of the funds and how the organization will use both the
income and principal
•
•
How to handle the limits and conditions of contributions designated by the donor for a
particular purpose.
Any acceptable alternative application of the funds.
• Uniform Management of Institutional Funds Act (UMIFA) approved
in 1972
•
•
provides some alternatives for giving the donor and the organization influence in
defining future uses of an endowment.
provides a process for releasing restrictions that are no longer appropriate by mutual
agreement between the organization and the donor.
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Endowment Policies
• Other issues:
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•
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minimum funding levels
guidelines for gift acceptance
allowable restrictions
provisions for investment
oversight and reporting of endowment funds
spending rules (the percentage of principle to be distributed annually
if the organization chooses not to use only interest/dividends)
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Ideas for success - Manager
My Red Flags
• “The endowment model”
There isn’t one
• “All weather portfolio”
There isn’t one
• “Low volatility, but up side capture”
We all want
• Pitchbooks with more product than questions
Firm, not client focus
Wall Street Sells, But Not Always What You Need
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Manager Selection
• Personal Qualities
• Some you want to spend time with & trust
• Not a vendor, a partnership
• Organization
• Organization
• How long has it existed?
• Team or star
• Employee turnover….not just managers
• ADV
• Edge
• Process information
• Quantitative managers
• Private equity
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Manager Selection
• Transparency
• Easy - Vendors, documents, etc.
• Harder - Investment thoughts and rationale
• Capacity
• Are they closed
• Can they give personal attention
• Performance
• On the second page for a reason
• Fees
• Transparent
• Aligned
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Who do I ask?
• Analyze current donors and giving habits to create strategies
• Board members
• The Passionate
• Annual Donors
• Planned Gift Donors
• Major Gift Donors
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Part 2 :: Benefits of charitable contributions
• Am I Robbing Peter to Pay Paul?
• Selling your organization
• Marketing
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Are Other Fundraising Efforts Jeopardized?
• It is critically important to integrate the endowment program into all of
the organization's fundraising programs and activities and ensure that
organizational resources are devoted to promoting and supporting it.
• It is a myth that raising endowment funds will diminish funds for other
fundraising efforts such as the annual campaign or special events.
• Annual gifts usually come from current income and are dedicated to the
operating support of the organization. Most endowments are built
through planned giving.
• Endowment building might be part of a capital campaign that involves
bricks-and-mortar projects - to provide financial stability for the long-term
maintenance and upkeep of new facilities.
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Build It
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build familiarity with the organization
encourage donors to "think big"
push annual giving to new levels
build volunteer leadership
increase the organization's visibility among stakeholders and
the community
• enables donors to pledge over several years, which allows
them to consider giving larger amounts of money
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Marketing the Endowment Program
The purpose of endowment marketing is to give prospective donors reasons
to contribute - either through outright or planned gifts. Important elements
of a successful marketing strategy are consistent promotion, personal
contact, and positioning the organization's mission. Some goals might
include:
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•
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Creating visibility for the organization and the people it serves
Increasing awareness of the endowment and its purposes
Identifying potential endowment donors
Educating prospective donors about the various ways to make
endowment gifts
• Generating donor inquiries about endowment and planned giving
information and services
• Recognizing endowment donors
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Marketing the Endowment Program
Key concepts to emphasize:
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Naming opportunities
Fulfillment of mission
Permanence (long-term support of the organization)
Memorial (contributing to a fund to honor an individual)
Specific purpose (e.g., scholarship, program support)
Funding flexibility (endowment can be funded by various
combinations of outright gifts and planned gifts)
• Developing and implementing the endowment marketing plan
should involve staff, board members, and volunteers, and it should
be an integral part of the organization's strategic plan. All
appropriate departments should incorporate endowment
marketing into their work plans.
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Part 3 :: We Have an Endowment Already!
• When it stalls
• Maximizing your success
• Risk Management
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Why it goes wrong
• Lack of diversification
• Lack of liquidity in stressed times
• Lack of inflation protection
• Events change more quickly than governance
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Ideas for success
• Culture
• Governance
• Time horizon
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Ideas for success - Culture
• You solve problems
• The organization
• The income beneficiaries
• The donors
• Think strategically
• Goal of the endowment currently and how it may change
• How do investment decisions effect the income beneficiaries?
• What are the donors trying to accomplish?
• Helping the organization
• Taxes and income
• Which type of asset makes the most sense to use
• How to balanced needs/wishes of the three entities?
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Ideas for success - Culture
Fiduciary thinking
• What’s best for the organization
• Reputation
• Funding: Both short-term and long-term
• Align with strong partners
• Board & Fundraiser
• Professionals
• Attorney
• CPA
• Investment Manager
• Vendors
Single Team
• Tolerate short-term volatility
• Don’t manage by CNBC or Bloomberg or Salespeople
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Ideas for success - Governance
• Real time and dynamic
• Open mind
• Goals that are flexible, but with direction
• Who is on your investment committee
• Transparency and accountability
• Investment committee
• Manager/consultant
• Focus on net returns and alignment
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Ideas for success – Time Horizon
• Indefinite?
• Long-term investing requires careful risk management
• Short-term decisions are amplified over 20 or 30 years
• Manage cash flows years in advance
• Know the future cash flows and match the portfolio to
meet them
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The world has changed
• Twenty years of cheap credit and leverage is over
• Tail winds of declining bond yields are gone and so is absolute
yield
• Events change more quickly than governance
• Price of investor capital has gone up
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Endowment – Risk Management
• Define a diversified portfolio
• Asset classes
• Long/Short strategy
• Long only
• Too much diversification
• Fixed vs. variable obligations
• Drawdown and how it effects the end beneficiary
• Liquidity
• Income Investments
• Efficient Frontier
• Don’t get caught up in day to day market moves
• Can’t build an all weather portfolio
• Must use judgment (Quantitative vs. Qualitative)
• Long-Term Capital
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Investment Policy Statement
• Goals and Objectives
• Return & Risk
• Required return to meet goals
• Risk
• From a portfolio focus
• From an organization focus
They must agree in the end
• Constraints
• Time
• Taxes
• Liquidity/Income
• Regulatory
• Unique
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Practical Application
• ABC Endowment
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Endowment size
Institution’s inflation
Current Spending Rule
Distribution as % of budget
Management Fee
$50,000,000
3.25%
4.00% of previous year’s ending market value
5.00%
1.00%
Year Ending 31 Market Value of
December
Endwoment
2007
2008
2009
2010
2011
4% Spending Allowance
for the Following Year
$49,000,000
$53,000,000
$49,500,000
$55,000,000
$50,000,000
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$1,960,000
$2,120,000
$1,980,000
$2,200,000
$2,000,000
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Debbie Patrick joined Boys Arnold & Company as the Director
of Business Development in April 2012. Debbie is a native of
Dallas, TX and graduated from the University of Texas at
Austin with Bachelor of Science degree in Communications.
She has enjoyed careers in real estate, information
technology, sales and fundraising development. Debbie lives
in Hendersonville and has volunteered her time with many
non-profit organizations, currently serving on the boards of
the WNC Chapter of the Association of Fundraising
Professionals, Hendersonville Country
Club, Pardee Hospital Foundation, the
Asheville-Mountain Area Chapter of the
American Red Cross and is a member of
Chapter BF of PEO.
Garst Reese joined Boys Arnold in August of 2005 and is an
investment counselor, serving on the company’s Investment
and Financial Planning Committees, and working as a research
analyst for the firm. A native of Johnson City, Tennessee,
Garst received a BA degree in Business Administration from
Lenoir-Rhyne College and worked nine years as a financial
consultant in the investment industry before receiving an
MBA from the Babcock Graduate School of Management at
Wake Forest University. Garst has achieved the designation of
Chartered Financial Analyst (CFA)
and is a member of the CFA
North Carolina Society.
Debbie Patrick dpatrick@boysarnold.com
Garst Reese greese@boysarnold.com
www.boysarnold.com
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