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The NIU Foundation Answers Your Questions About Managing Endowed Funds   What are endowed gifts?   Endowed gifts given to an institution such as a university, foundation, hospital, or museum become permanent funds to be used for a specific purpose. The gift, or gifts, become the principal of the fund and are invested in perpetuity with distributions, from earnings, being expended for a charitable use consistent with the intentions of the donor. An endowed fund can be thought of as a type of investment account where the principal remains untouched by the charity while the earnings are used to achieve the objectives of the donor and charitable organization.   Why does Northern Illinois University, as a state-assisted university, need an endowment?   Some people believe that tax dollars provide total support for state universities. This is not the case for most state institutions and is certainly not true for Northern Illinois University. In fact, the state's contribution to Northern's budget has declined steadily over the past decade. In 2005, for example, less than 30 percent of Northern's total annual budget was provided by state tax dollars. This is why Northern and other state universities across the country view building their endowments as critical to sustaining the vitality of their academic programs.   What is the minimum gift needed to establish an individual-named endowment?   Effective July 1, 2003, the Foundation Board of Directors set $25,000 as the minimum gift level necessary to establish an individual-named endowed fund. The option of establishing a "growing to endowed" fund also exists and necessitates an initial gift with an agreement that the donor has three years to grow that fund to the necessary $25,000 level.   In addition, there are other very meaningful gift opportunities to accommodate gifts of all sizes. These options include gifts to a pooled scholarship fund, existing endowed scholarship or program funds, or expendable scholarship or program funds.   What are the NIU Foundation's investment philosophy and growth strategy?   The foundation's overriding goal is to help reduce the widening gap between state support and the increasing needs of faculty and students. And, because NIU's endowment is small for a university its size, growing Northern's private support is particularly important.   The foundation's investment strategies are similar to those of an individual or couple just beginning to build assets for the future. Like them, the foundation must think long term, making investment decisions based on growth objectives for an uncertain future. Endowments are intended to last forever...beyond our comprehension of what needs and opportunities will be.   How do the foundation's investment policies reflect this philosophy?   The NIU Foundation's endowment management policy is formulated to provide a current cash flow that benefits current students and faculty while preserving the endowment's spending power in perpetuity. This policy is both guided by and serves to balance the following objectives: to attain the highest possible total rate of return- including both income and capital appreciation- commensurate with the appropriate degree of risk acceptable to the foundation; to provide growth of the market value of the principal in excess of the rate of general economic inflation; and to generate a cash flow that helps meet the current needs of the university. How is the endowment portfolio's total return managed?   The NIU Foundation Board of Directors has appointed the Finance Committee to manage and oversee the endowment of the NIU Foundation. The Finance Committee has engaged an independent investment consulting firm, Fund Evaluation Group of Cincinnati, Ohio, to assist in reviewing investment objectives and determining asset allocation, selecting and evaluating fund managers, and reporting on investment performance.   The Finance Committee selects managers for each of the asset classes to execute the asset allocation strategy. Each quarter and on an ongoing basis, the Finance Committee evaluates the managers to determine if they remain consistent with the style they were hired to execute and for performance against benchmarks and peers.   How are endowment portfolio assets allocated?   The goal in setting the expenditure and asset allocation strategies for endowment funds is to maintain the spending power of the fund, in inflation-adjusted (real) dollars, over the long term. The NIU Foundation has an obligation to donors to manage their funds to provide support to their specified program in perpetuity.   Currently, the endowment portfolio is managed within the following allocation goals:   Equities   Domestic Equity-Large/Mid 28% Domestic Equity-Small 12% U.S. International Equity 10% Private Equity 5% REITS 5% Hedge Funds 20% Total Equities 80% Fixed Income   Core Fixed Income 15% Convertible Bonds 3% High Yield Bonds 2% Total Fixed Income 20% What is the endowment's investment return?   Over time, the combination of asset allocations and fund managers produce favorable returns designed to hold up in various market conditions. The NIU Foundation and the university have been pleased with the total rate of return of the endowment fund, which compares favorably with peer institutions of our size:   10.6 percent total return over one year, ending June 30, 2005 10.9 percent total return over three years, ending June 30, 2005 3.8 percent total return over five years, ending June 30, 2005   What is NIU's endowment expenditure policy?   Most donors to endowed funds enjoy seeing those funds grow over time. That is why the NIU Foundation's present expenditure policy for such funds allows for four percent of the fund's market value at June 30, based on the moving average of the three preceding years, to be expended. Earnings in excess of this four percent are added to the principal of each fund allowing growth to occur.   This same policy also limits expenditures from endowed funds to occur only when the market value of the fund exceeds the gift value on the June 30 valuation date. The Finance Committee of the NIU Foundation Board of Directors evaluates the investment and expenditure policies annually.   Why do funds sometimes remain unspent?   There are occasions when the criteria for expending a particular endowed fund, as agreed to in the donor's written endowment agreement, cannot be fully met.   Examples of this might be:   An endowed scholarship receives no student applications or has no applicants who meet the criteria for the award. An endowed program spends most, but not all, of the expendable available in a given year.   When expendable dollars remain wholly or partially unspent for reasons such as these, they are returned to the endowment pool to be reinvested for the future growth of that specific endowed fund.   When returns are higher, why doesn't the spending rate increase?   The foundation's spending policy must provide income in perpetuity. To do this, the foundation maintains balanced investment and spending strategies to provide steady, continuous income while allowing for inflation and market conditions over time, through both good times and bad.   In years when the endowment earns more that four percent, the excess is reinvested to build the principal value of each named fund.   Could the market value ever fall below the original gift value?   It is possible. Preserving spending power in perpetuity, which is the fiduciary responsibility of the NIU Foundation Board of Directors, requires investing in equities. Given the ups and downs of the stock market, savvy investors understand that a snapshot of a portfolio at a given point in time could reveal a dip below the gift value. However, over the long term, equity investments consistently have demonstrated growth.   How will the foundation's endowment management policies advance Northern's education goals over time?   Since the NIU Foundation was established in 1949, more than 367 endowed funds have been created to meet specific educational purposes identified jointly by donors and the university. The generosity and foresight of these individuals, foundations, and corporations have enabled the foundation to serve Northern students through scholarships, library resources, physical and technological improvements, faculty support, and a broad range of academic, athletic, and other student-focused programs.   The increase in the foundation's assets over its short history reflects the faith and vision of the university's donors and the capable direction of the foundation's Board and Finance Committee. Whatever the vagaries of state funding, market conditions, or the health of the economy, the foundation's investment strategies and policies are designed to sustain and build NIU's endowment. Steady growth over time will depend on continuing this disciplined endowment management approach.   In the final analysis, what really matters is what lies beneath: how the dollars managed by the NIU Foundation serve NIU's teaching, research, and public service goals. The NIU Foundation exists solely to help Northern meet student needs that would otherwise go unattended, to advance the university's quest for excellence, and to build upon its achievements to meet the needs of the future.