An endowment typically grows in two ways, including donations or gifts as well as gains achieved in the financial markets. Endowment investing involves allocating a portion of funds to the markets, which may include the purchase of stocks and bonds, for instance. The process of endowment investing may involve the adoption of proper risk and reward strategies that accommodate a charitable fund's purpose and design. It might also include the integration of expert advice so that assets have the highest chance of being protected and increasing.
Assets that are in an endowment must generally be protected from loss in order to prevent any type of diversion from the goal or purpose of the investment fund. One approach to this is to use a conservative style when performing endowment investing. Although it might be necessary to accept a degree of risk, there are ways to generate stable income without bracing for too many surprises.
One conservative approach in endowment investing is to allocate a percentage of assets to fixed income, or bond securities. The income stream generated from these debt instruments is generally low but there is similarly a small chance that the issuer will default. This is especially true if the issuer is a regional government. Consequently, the money that is exposed to fixed income is usually safe from being wiped out altogether and generally earns interest that exceeds a savings account for investors.
Some of the best returns in the financial markets can be earned by investing in equities, though these can also be quite volatile, adding to the risk that investors take on. One approach to endowment investing could be to seek the profits that are typically tied to stocks in another, safer asset class such as bonds. This may be accomplished by selecting bonds that are issued by corporations as opposed to the federal government. While corporate bonds tend to be riskier, they are also often rated by debt agencies. As a result, an investment staff on an endowment can selective decide which securities are worth the risk for the expected return.
Endowment investment funds may be overseen by volunteer staff or internal financial professionals. In either case, it might be prudent to engage a third-party consulting firm to support decisions. The markets tend to go through different cycles, and consulting experts might be able to help endowment officials to respond to changes in the most beneficial way. Also, consultants tend to have deep relationships with money managers and as a result they might be able to introduce new opportunities and strategies that might otherwise have gone unnoticed.