Have you ever wondered how colleges, hospitals, and big charities manage to stick around for generations, weathering market crashes and financial curveballs? Well I have, and I guess that’s all that matters for the inspiration of this post!
The hidden engine behind it all is often a little-known financial tool called an “endowment fund.” Whether you’re a nonprofit hoping to build one, or just curious if you should donate to one, understanding endowment funds can help demystify how some of the world’s most resilient institutions plan for the future. In this post, let’s break down what endowments actually are, who’s using them, why they matter, and what you should know about their ups and downs… including why, sometimes, even the biggest funds struggle to keep up with a simple stock portfolio.
What Are Endowment Funds?
An endowment fund is a dedicated pool of financial assets (often donated) which is invested to generate income for a specific institution. The principal (the original amount contributed) is typically preserved and only the investment income is spent, which allows the endowment to support its intended purpose indefinitely. Endowment funds are most used by:
Universities and colleges, which hold some of the largest endowments globally
Nonprofit organizations, such as museums, cultural institutions, and hospitals
Religious organizations and foundations, such as churches and community trusts
Service-oriented or philanthropic groups
Endowment funds are established to:
Provide a steady, predictable source of income for an institution’s ongoing work and special initiatives, which serves as a cushion against economic downturns and unpredictable expenses to stabilize organizational finances
Allow for long-term stability and planning, independent of unpredictable fundraising cycles or annual donations, to encourage institutions to plan for the future, invest in new programs, and expand services thanks to reliable funding
Foster financial independence, allowing organizations to focus on their mission rather than short-term funding needs.
Encourage legacy and planned giving, since donors know their contribution can have an everlasting impact
Build donor confidence and encourage donor engagement (perpetually), signaling an institution’s intention to endure and plan for the future (donorbox)
Offer tax advantages for donors who typically receive tax deductions for their contributions
Fund Management
Endowment funds are managed by a combination of internal and external professionals, depending on the size and complexity of the fund. For many institutions, an investment committee, composed of board members and financial experts, sets the policies, oversees performance, and ensures compliance with donor and regulatory requirements. This committee may also decide to hire professional investment managers or consultants to manage the portfolio and optimize results. Ultimate responsibility for oversight and governance of the fund typically remains with the organization's board or governing body and the investment committee, which regularly reviews performance, risk, compliance and alignment with the institution’s goals (kindsight).
Different fund management models include:
Internal Management: Some organizations with the necessary financial expertise manage their endowment funds in-house, allowing for direct alignment with the institution's mission and objectives
External Management: Many funds, especially larger ones, use professional asset management firms for portfolio management, diversification, risk control, and regulatory compliance. Top endowment managers in Canada, for instance, include Fiera Capital, TD Asset Management, and BlackRock Asset Management Canada.
Blended Models: It's common for an investment committee to develop strategy and policy while hiring third-party managers or advisors for day-to-day management and specialized investments, sometimes utilizing an "Outsourced Chief Investment Officer" (OCIO) approach where almost all investment authority is delegated (AGB)
Fund Structure
Institutions such as universities, charities, churches, and cultural organizations often tailor their endowment funds with specific rules around withdrawals, restrictions, and investment strategies to match their mission and needs. A few real world examples are listed below (visualcapitalist):
University Endowment Structures
Harvard University: Harvard’s endowment, one of the world’s largest, features thousands of individual funds, each dedicated to purposes like scholarships, research, or professorships. Its structure incorporates multiple asset classes: stocks (11%), hedge funds (31%), private equity (39%), real estate (5%), bonds (6%), and cash/other (7%). The fund employs a capped annual payout rate (e.g., $2.2 billion in 2023) to balance income needs and principal preservation (investopedia)
Stanford University: Uses a similar multi-fund, multi-asset structure. Like Harvard, Stanford’s endowment is divided into restricted, unrestricted, and quasi-endowments, enabling diverse uses and maximizing returns via a sophisticated investment management company (visualcapitalist)
Church and Charitable Endowment Structures
Ensign Peak Advisors (Mormon Church): Manages an endowment fund with over $124 billion in assets. Its structure is designed for perpetual support of church activities, humanitarian projects, and expansion. Funds are invested for growth and maintained with strict internal controls and investment oversight (visualcapitalist)
The Nature Conservancy: Their $7.8 billion endowment supports environmental protection, using a mix of restricted and unrestricted funds to ensure ongoing stewardship of protected lands. The structure prioritizes inflation protection and steady annual payouts for conservation (malcolmburrows)
There are several endowment fund structures that exist for organizations to use, typically with varying levels of principal restrictions. A few examples of common structures are show below (visual capitalist):
| Structure Name | Description | Example Institution | Notable Feature |
|---|---|---|---|
| Unrestricted Endowment | Assets can be used for any purpose at the institution’s discretion | Many universities | Maximum flexibility |
| Restricted Endowment | Principal held forever; only returns can be spent for donor-specified purposes | Harvard, Stanford | Donor-driven missions |
| Quasi-Endowment | Board-designated funds that operate like endowments but can be liquidated if necessary | Stanford, museums | Internal flexibility |
| Term Endowment | Principal used only after a preset period | Hospitals, scholarships | Time-limited purpose |
Downside Risks
For those of you who frequently read my lessons, you know that it wouldn’t be a complete post without me highlighting the contrarian view of the topic at hand, in this case, the risks associated with endowment funds. Afterall, these are managed funds subject to faulty investing decision making and the volatility of public and private equity markets.
First and foremost, what I think is the biggest risk is the potential for fund mismanagement. This happens all the time, and you’ve probably seen a story like this mentioned in the news in the past. Endowment funds require skilled management, oversight, and adherence to regulations. Poor investment decisions can jeopardize the fund’s ability to generate income. There are ample examples of endowment funds underperforming public and private equity markets over a defined period of time (cfainstitute, institutionalinvestor, grossmendelsohn, richardennis).
| Example/Group | Underperformance vs Public Equity | Primary Cause |
|---|---|---|
| Large U.S. university endowments (2024) | 9.1% below market benchmark | Illiquid alternatives, return smoothing, high fees |
| College/university endowments (2009–2016) | 1.89% below 60/40 portfolio | Complex strategy, high costs |
| Private foundation (anonymous, case study) | Missed market rebounds | Excess cash, poor oversight, lack of policy |
| Endowments as a whole (post-GFC, 2008–2024) | 2.2–2.5% below passive basket | Heavy alternatives, expensive managers, strategy drift |
Another key risk with endowment funds is restricted cash. If the principal is permanently restricted, organizations may have substantial funds but can’t use them for urgent needs, creating cash flow problems if other funding sources decline. Additionally, larger or highly restricted endowments can limit an institution’s ability to respond quickly to emerging needs if non-endowment funds are low. Sometimes, seeing a large endowment can actually discourage donors from making new contributions, thinking the organization “doesn’t need help” (cfoselections).
In summary, endowment funds are powerful financial tools for institutions dedicated to long-term missions, providing income, stability, and donor engagement benefits. However, the structure of this hidden engine requires careful planning and management to ensure they fulfill their intended purpose without inadvertently constraining operational flexibility or deterring new donations.