Endowment Management Spend Policy Jeff Sobers Senior Product Marketing Manager

Review of Distribution Basics

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The Endowment Process

Endowed Fund

Create

Fund

Invest

Earn

Distribute

Spend

Income Distribution Methods

Proportional Unitized

Proportional Distribution Example $5,000 investment earnings

A; 22,500; 23%

B; 29,250; 29%

C; 38,250; 38%

D; 10,000;

10%

Endowment Balance

A; $1,125.00;

23%

B; $1,475.00;

29%

C; $1,912.50;

38%

D $500.00

10%

Earnings

Review of Unitization

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Definition According to Investopedia: A unitized endowment pool is a form of endowment investing that has mechanics similar to a mutual fund. A unitized endowment pool allows multiple endowments to invest in the same pool of assets. Each endowment owns individual units in the unitized investment pool, and the units are generally valued monthly. New endowments entering the pool can buy in by receiving units in the pool that are valued as of the buy-in date.

Benefits of Unitization

Relatively simple to distribute earnings Pool total return / pool total units = return per unit Return per unit * units per endowment = return per endowment

Mutual fund is a familiar concept to most endowment donors

Drawbacks of Unitization

Adds complexity for no reason Dollars must be converted to units and back again Additional piece of information to track, usually in spreadsheet

Often donors aren’t even aware of the units their fund owns

Final Thoughts on Unitization

Unitization is a simple way to calculate earnings distributions, but it can be

time-consuming to manage unit calculation and upkeep for distributions and additions.

Final Thoughts on Unitization

Because the earnings per unit is calculated on the last day of the

earning period, unitization unfairly rewards late additions that weren’t earning income the entire period.

Spend Policy

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What is Spend Policy?

• Defines how much each endowment can spend as a percentage or dollar amount

• Dependent on how the endowment is invested • For example, if investments are limited to government

issued notes and bonds, it is unlikely ever to be able to generate sufficient returns to permit a 4% annual payout.

• Also establishes rules for whether returns may be used should the organization face a financial crisis (which also should be defined).

Why Have a Send Policy?

• Dampen the volatility of spending • Maximize the endowment’s value

over the long-term • Preserve purchasing power over time

on par with mission support

Spending Under UPMIFA

Spend as much as the board deems prudent, based on: • the duration and preservation of the endowment fund • the purposes of the institution and the endowment fund • general economic conditions • the possible effect of inflation or deflation • the expected total return from income and capital

appreciation • other resources of the institution • the investment policy of the institution

Optimal Spend Policy

• Inflation-Based Rules • Inflation-Protected • Banded Inflation

• Smoothing Rules • Moving Average • Spending Average • Stabilization Fund

• Hybrid Rules • Alpha-Beta Approach • Yale/Stanford Rule

Demonstration

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Speaker Follow-up Slide

Jeffrey.Sobers@Blackbaud 843.654.3088 (optional) @jeffsobers For more information, resources, and conversations, visit: blackbaud.com/research npEngage.com

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Save the Date!

October 6 – 8, 2014, Gaylord Nashville, TN

About Blackbaud, Inc. Serving the nonprofit and education sectors for 30 years, Blackbaud (NASDAQ: BLKB) combines technology and expertise to help organizations achieve their missions. Blackbaud works with more than 28,000 customers in over 60 countries that support higher education, healthcare, human services, arts and culture, faith, the environment, independent K-12 education, animal welfare, and other charitable causes. The company offers a full spectrum of cloud-based and on-premise software solutions and related services for organizations of all sizes including: fundraising, eMarketing, social media, advocacy, constituent relationship management (CRM), analytics, financial management, and vertical-specific solutions. Using Blackbaud technology, these organizations raise more than $100 billion each year. Recognized as a top company by Forbes, InformationWeek, and Software Magazine and honored by Best Places to Work, Blackbaud is headquartered in Charleston, South Carolina, and has operations in the United States, Australia, Canada, Mexico, the Netherlands, and the United Kingdom.

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