Endowment Fund Activities and Investment
By David Winder
November 2000

David Winder is Director, Global Philanthropy & Foundation Building, The Synergos Institute.
 
This is text of a presentation by Dr. Winder at the Workshop on Financial Sustainability for Civil Society Resource Organizations in Indonesia, held in Yogyakarta, Indonesia, November 7-9, 2000
 
Ringkasan dalam Bahasa Indonesia

In my brief talk today, I would like to:

(Ringkasan dalam Bahasa Indonesia)

What is an endowment?

Endowments are permanent assets -- money, securities, or property -- that are invested to earn income that is used to support an organization's activities. There are numerous reasons why an organization would wish to create an endowment. These include:

Sustainability -- An endowment can enhance the ability to plan for the long-term and to meet the future needs of constituents.

Autonomy -- An endowment can increase an organization's independence from funding trends outside its control.

Leveraging -- An endowment can be used as a basis for acquiring additional funding.

Sources of Funding for Endowments

There are multiple places where organizations can turn in order to raise funds for an endowment. At the local level, there is potential for raising endowment funds from:

At the international level, endowment funding can come from:

 Government/Private Public Corporate Other
Local      National or local government Wealthy individuals, general public, membership fees Local corporations, corporate membership fees Earned income
International      Bilateral/ multilateral overseas development assistance, including grants and debt swaps International foundations and NGOs, wealthy individuals Multinational corporations 

Raising an Endowment

In some cases, endowments are created by the contribution of a single corporation, government agency, ODA agency, individual, family, or foundation. For example, as many of you may know, Kehati's endowment was created by a single, large contribution provided by the US Agency for International Development. In other cases, endowments are created through contributions from a wide number of donors.

We also find contrasts in the timing of when organizations create an endowment. In some cases, foundations are created with a major endowment grant. The Manila-based Foundation for the Philippine Environment, for example, was created as an endowed institution resulting from a $20 million debt-for-nature swap between the U.S. and Philippine Governments. Many other foundations and CSROs, however, embark on an endowment creation process only after the organization has been operational for some time.

Puerto Rico Community Foundation -- Puerto Rico

To learn something more about what an endowment-raising project might entail, I would like to speak for a few moments about the experience of the Puerto Rico Community Foundation -- or PRCF -- which is located on the Caribbean Island of Puerto Rico.

The founders of the Puerto Rico Community Foundation saw the establishment of an endowment as essential to sustainability. Although the leaders of PRCF will tell you that endowment building can be a long and painstaking process, they have largely been successful at this task. PRCF's endowment grew from zero in 1984, when the foundation was created, to over $20 million today. The foundation raised these funds from a large number of donors that included international foundations, multinational corporations, local business, and wealthy individuals. Here are some of the steps the Foundation took in order to build its foundation.

Let me draw attention to several lessons we can learn from the Puerto Rico Community Foundation's endowment raising experience. To raise an endowment, PRCF:

Investing an Endowment

If creating an endowment entails many special challenges, so does managing and investing it. Foundation boards and staff face many difficult questions about endowment financial oversight such as who should manage endowment funds, how to preserve principle while still gaining the highest rate of return, and how to use income from the endowment.

One particularly tough issue for endowed organizations is how much investment strategies should reflect an organization's mission. If a foundation is investing in stocks, should it screen out companies that are environmentally or socially irresponsible or should it only seek the highest return? Is there perhaps some way that endowment investment could reinforce a foundation's mission?

Foundation for a Sustainable Society, Inc. -- Philippines

The Foundation for a Sustainable Society Incorporated, or FSSI, in the Philippines has developed a unique response to these questions.

CSRO Endowments in Indonesia

Let's now turn briefly to the status of CSRO endowments in Indonesia. Of the 25 CSROs surveyed by my colleague Rustam Ibrahim, only eight had endowments. The size of endowments ranged from 300million Rupiah (Formasi) to about 190 billion Rupiah (Kehati).

Foundation Endowment % Income from Endowment
Forum Kerjasama Pengembangan Koperasi (FORMASI) RP 300 million -   
Yayasan Sintesa RP 600 million 5%
Yayasan Satunama RP 707 million 12%
Sekretariat Bina Desa (SBD) RP 1 billion 12%
Yayasan Indonesia Sejahtera (YIS) RP 1.2 billion 24%
Lembaga Penelitian, Pendidikan dan Penerangan Ekonomi dan Sosial (LP3ES) RP 1.4 billion 2%
Dana Mitra Lingkungan (DML) RP 4.1 billion 27%
Yayasan Keanekaragaman Hayati (KEHATI) RP 190 billion 88%

At present, endowment income accounts for only a small percentage of the total domestic revenue of CSROs in Indonesia. About seventeen percent of total domestic revenue sources comes from endowment income.


Composition of Domestic Revenue Sources of CSROs in Indonesia
Endowment Income 17% 
Other Earned Income/Fees 33%
National and Local Government 5%
Individual Donation 14%
NGOs 3%
Corporations 17%
Other 11%
Given that many of you may choose to embark on an endowment raising process, I wanted to draw attention to some questions we might want to consider in further discussions on endowments.

Creating an Endowment

  1. What is our vision on how an endowment will be used and managed?
  2. What resources do we have for an endowment raising effort? What funds or staffing can we dedicate to endowment building and how will this affect current programs? Will we need outside consulting services?
  3. What funding sources should we target? Domestic or international? Government or private? Individuals or organizations?
  4. Given that donors typically prefer to fund projects rather than endowments, how will we persuade donors that an endowment is necessary? What types of arguments should be developed to persuade different types of donors?
  5. What are possible ways of developing sources of earned income for an endowment?
  6. Do we want to develop 'donor-advised' or 'donor-designated' funds?
  7. What arguments can we develop to respond to critics of endowments who believe that:
    • endowments shield organizations from competitive forces, thereby reducing their responsiveness to constituents; and that
    • resources should not be set aside for future use when so many needs exist in the present.

    Endowment management

    1. What are the pros and cons of managing the endowment in-house as opposed to turning it over to professional fund managers?
    2. If fund managers are used, how can the foundation ensure responsible, high performance fund management? How do we monitor the performance of portfolios of the fund managers?
    3. Should a foundation's endowment investment strategy be linked to its mission? Should endowment funds be invested in companies that are considered to be socially or environmentally irresponsible?
    4. What is the appropriate mix of investments? What factors affect the decisions on the portfolio? Should the foundation invest in local or international stock markets?
    5. What role should the Board play in endowment investment decisions?
    6. What guidelines should we establish for the use of income from the endowment? How much of the income from the endowment should be allocated to existing programs? How much to new endeavors? How much to core costs? And how much to we plow back into the endowment so that it grows over time?
    7. How could we leverage a small endowment to make it grow?

    Endowment-building experiences from around the world

    Before moving on to a discussion of these critical questions, I wanted to share with you some of our findings about good practices in endowment building from CSROs in Asia, Latin America and Africa. I pose these not as definitive answers to the challenges of endowment building, but rather as points of departure for our later discussions.

    Our research points out that many foundations have found that:

    For some of you who are building an endowment, this may appear a formidable task. As we may see from later discussions, this may not be the case. Despite the challenges involved, organizations here in Indonesia and around the world are successfully taking steps towards creating endowments to serve as a key element of long-range financial sustainability. I look forward to an enriching discussion today.