Higher Education

Endowment 101: What is it and how does it work at WashU?

Hillman Hall

Here at Washington University, we have a lot to be proud of.  We have incredible students, amazing faculty, talented and committed staff, exceptional facilities — all working together to drive forward our place of distinction in education, research, and patient care.

At WashU, we are also proud of our endowment — an aspect of our institution that comes up a lot in conversation.  In fact, when meeting on campus with our students, faculty, and staff and when traveling around the world to visit with our alumni and supporters, it’s always a topic of great interest.  That said, I think there is a real need to share the basics of our endowment, how it works, where it comes from, and how we use it to enhance the mission of the university. That’s what I hope to do in a series of several blog posts, starting with this one. 

First things first, what is an endowment?

Is it like a savings account? A retirement account? An insurance plan? A pension plan? 

The answers to all of these questions are…yes and no.  It’s a little like all of those, but it is also nothing like any of them — or any other type of financial account we might use for personal wealth management.  And that’s because, unlike sustaining an individual person or family just for their lifetime, an endowment is meant to sustain us — the university — forever! Yes, that’s right…for many many lifetimes (Fun fact: WashU’s endowment has been around since the mid-19th century!).  

It’s also different from your savings account in that the money comes from other contributors.  That money also usually comes with strings attached and restrictions on how much can be taken out at any given time (also known as a “payout”).  In addition, rather than eventually spending down the balance (say…once you hit retirement age), the goal is to grow the balance through careful investing, using the investment income to fund operations.  In other words, it’s not a “rainy day” account. In fact, far from it. Instead, it is an extremely powerful strategic engine used to support the university’s operations in perpetuity.

That is why our endowment is extremely important — and also extremely complicated.  With such a long-term horizon, it means we have a solemn responsibility to manage it well now and do our best to help it grow.  Because, if we don’t manage it carefully today, we have the potential to be at risk tomorrow. 

To further clarify, let’s put some numbers behind this (since I’m a “math guy” after all).  

In the most basic terms, if an endowment is worth $100 million and the resulting income of its investment is 6%, that produces $6 million in investment income.  But that doesn’t mean we have $6 million to use at our discretion.  

First, there’s our payout to consider — the amount we allow ourselves to take against the endowment each year to support the university. At WashU, that payout has historically been around 4.5%.  In other words, that $6 million in income becomes $4.5 million we can actually use. Bummer, right?!. Well, not really. The payout happens in good years and bad, and by taking less than the total return in good years, we’re able to grow the endowment over time.  In this example, $1.5 million would get added to the endowment corpus at the end of the year.

Second, much of that $4.5 million may already be earmarked by the donor who provided the funds for a specific and strategic purpose — things like financial aid, research, faculty and staff salaries, programs and initiatives, operating costs, capital projects, and more.

Third, we must continue to carefully grow the corpus of the endowment so that we can support the university in the future.   That means that, given an inflation rate of 3%, we actually need to grow our endowment by 7.5% each year (4.5% payout plus 3% inflation) in order to maintain our purchasing power and avoid depreciation.  In order to actually grow the endowment, the rate of return needs to be even higher. 

To paint a tangible picture of this, let’s say you have an account that operated by the same rules as our endowment, and you’ve done a decent job contributing to it over time.  Thankfully, your great aunt also put some money in the coffers and told you those funds could only be used to pay for your child’s tuition. Your grandpa also gave you some money but said you needed to use it for home maintenance.  Then, your super generous sister kicked in some cash, but said you could only use that money to pay your electric bill. All great news!  

But some not so great news — when factoring for inflation, the balance in your account today will depreciate in value (or purchasing power) by 3% next year…and the next…and the next.  So it’s important to invest the money, not only to cover the 3% depreciation because of inflation, but also to generate enough return to cover the 4.5% of the savings you could withdraw each year to fund your child’s tuition, home maintenance, and your electric bill (and nothing else, since the funds came with restrictions!).  This account isn’t a rainy day fund, but rather produces a stream of income to support just the things it is earmarked for.

In a nutshell, that’s how we treat our endowment at Washington University.  Here at WashU, we are extremely well-positioned with an $8.1 billion endowment — one of the strongest in American higher education.  With our annual payout, we’re able to do a whole host of extraordinary things in support of our mission — like fund cancer research, mitigate child malnutrition, find innovative solutions to climate change, uncover new ways to think about our humanity, discern our role as citizens, and more.  It’s important to note, however, that we still have significant work to do to grow our endowment, especially its capacity to fund the amount of financial aid we aspire to provide. Admittedly, we are not as well-positioned as our peers in that regard, and we need to double down in order to eventually practice need-blind admissions.

All in all though, we have a very good foothold, mainly because of our long and vibrant legacy of financial support from donors, corporations, and foundations who believe wholeheartedly in our mission and who have faithfully entrusted their resources into our care.  We wouldn’t be where we are today without their generosity and the tradition of philanthropy which serves as a defining quality of this great institution. And now, we have a significant responsibility to be the best possible stewards of those resources.

While state-of-the-art buildings and facilities are necessary to support our bold mission, more importantly, so are the people!  And that’s where our endowment plays the biggest role. It’s a solid and sustainable investment in our people — the exceptional students who are studying here because of scholarship support; the highly-talented endowed professors we attract to teach and conduct research; and the incredibly passionate staff who oversee some of our most impactful programs. Without it, we simply wouldn’t be able to achieve even a sliver of what we’re currently capable of accomplishing. 

Through this first blog post in a three-part series, I hope this gives you a bit clearer picture into what an endowment is and how we use it at Washington University.  In two more future installments, I plan to outline the history of the endowment, where it comes from, how the payout is spent, how the endowment is managed, and how our investments align positively with the university’s mission — including a deeper dive into our socially responsible investment principles.  Stay tuned!