Endowments and foundations on both sides of the Atlantic

Top universities such as Harvard, Yale and Cambridge may be the home to the most brilliant students of the world, very few who apply gets accepted and even less succeed in their studies and graduate. The graduates often move on to start careers as entrepreneurs or with high-profile companies. Behind most of these universities is a namesake foundation which manages the assets of the university. Endowments and foundations, a similar organization started by a company or individual, often own assets worth several billions.

Endowments refer to the permanent pools of capital owned by institutions such as colleges, universities, hospitals, museums and religious institutions. The idea behind an endowment is to maintain its assets in perpetuity and at the same time provide a stream of income. They are often started with a gift and maintain the nominal value of the gift, the endowment corpus, over its life while generating investment returns. The returns are then used for projects of various kinds, for the benefit of the university and other causes in line with the endowment policy.

Europe	€  (billions)	US	$   (billions)
University of Cambridge	5	Harvard University	32
University of Oxford	4	Yale University	19
ETH Zurich	1	Princeton University	17
University of Copenhagen	1	Stanford University	16
University of Zurich	1	Massachusetts Institute of Technology	10

Source: statisticbrain and wikipedia

Foundations are similar to endowments in many ways, the differences will be described later.  The five biggest in Europe and US ranked by approximate asset values are listed here.

Europe	€   (billions)	US	$   (billions)
Stichting INGKA Foundation (NL)	28	Bill & Melinda Gates Foundation	35
Wellcome Trust (UK)	17	Ford Foundation	11
Garfield Weston Foundation (UK)	6	J. Paul Getty Trust	10
Knut and Alice Wallenberg Foundation (SE)	4	The Robert Wood Johnson Foundation	9
Robert Bosch Foundation (DE)	1	The William and Flora Hewlett Foundation	7

Source: Foundation Center May 2013 and websites of mentioned foundations

The structure and purpose of foundations are of different types. Perhaps the foundation type most similar to endowments is the Operating foundation, where the income generated by the foundation is used to permanently fund an organization or project. Community foundations are focused on a specific geographical area, where the residents of that area are the recipients of the charitable distributions. The donations can be either direct or through other organizations in for example health-care, education, arts and culture. A large and wealthy corporation may also be the sponsor of a foundation and then it is called a corporate foundation. A fourth structure, the independent foundation is sponsored by a wealthy family or individual.

While endowments have a perpetual lifespan, foundations may only last for a limited number of years. The reason for this lies in the spending requirements for each of the structures. Foundations have a minimum annual spending requirement of 5% of its assets while no such requirement exist for endowments. This makes it harder for a foundation to exist in perpetuity. A foundation of often only receives funding at the formation while an endowment may accepts gifts at any time. Both structures have the privilege of tax exemptions where people who donate gifts to the structure receive a tax deduction and where the income generated by the endowment or foundation is also exempted from taxes.

The value of a foundation or endowment is ever changing and affected by a great number of factors. Some of the best portfolio managers of the world work for these organizations and they have formulated ground breaking ideas in asset allocation, maybe most notably David Swensen and his strong focus on alternative investments. 

I hope to write more about both endowments and foundations in the future. They are big part of the investment landscape and they support many important project and causes in our world.