endowment management: unitization

Endowment Management Unitization Jeff Sobers Senior Product Marketing Manager

Review of Distribution Basics

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The Endowment Process

Endowed Fund

Create

Fund

Invest

Earn

Distribute

Spend

Income Distribution Methods

Proportional Unitized

Proportional Distribution Example $5,000 investment earnings

A; 22,500; 23%

B; 29,250; 29%

C; 38,250; 38%

D; 10,000;

10%

Endowment Balance

A; $1,125.00;

23%

B; $1,475.00;

29%

C; $1,912.50;

38%

D $500.00

10%

Earnings

Unitization

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Definition According to Investopedia: A unitized endowment pool is a form of endowment investing that has mechanics similar to a mutual fund. A unitized endowment pool allows multiple endowments to invest in the same pool of assets. Each endowment owns individual units in the unitized investment pool, and the units are generally valued monthly. New endowments entering the pool can buy in by receiving units in the pool that are valued as of the buy-in date.

Example

A UEP with a market value of $100 million has 100,000 units that are worth $1,000 each. A new endowment with $20,000 can buy 20 units, which are

then added to the pool.

2012 A unitized endowment pool is established with three endowments, each contributing $100,000 to the pool. It is decided that the pool will contain 300 units. Therefore the initial value of a unit is $1,000. Each endowment will be given 100 units in the pool. 2013 The market value of the endowment is now $330,000. Each unit in the pool is now valued at $1,100. A new endowment is established at $100,000 and added to the pool. This endowment can buy 90.91 units, or shares, of the pool. The total market value of the pool is now $430,000 and contains 390.91 units.

Establishing Units and Value A Simple Example

In 2012, the pool returned $30,000. There were 300 units in the pool, so the return per unit is $100. As each endowment has 100 units, each endowment receives $10,000. At the end of 2013, the pool returns another $30,000, but now has 390.91 units. The return is therefore $76.74 per unit. This income is distributed as follows: Endowment A: 100 units * $76.74 $7,674.40 Endowment B: 100 units * $76,74 $7,674.40 Endowment C: 100 units * $76.74 $7,674.40 Endowment D: 90.91 units * $76.74 $6,976.80 TOTAL 390.91 units *390.91 $30,000.00

Income Distribution Continuing Our Example

Benefits of Unitization

Relatively simple to distribute earnings Pool total return / pool total units = return per unit Return per unit * units per endowment = return per endowment

Mutual fund is a familiar concept to most endowment donors

Drawbacks of Unitization

Adds complexity for no reason Dollars must be converted to units and back again Additional piece of information to track, usually in spreadsheet

Often donors aren’t even aware of the units their fund owns

To Unitize or Not to Unitize?

Example

Jones Endowment $100,000 100 units Smith Endowment $150,000 150 units Rivers Endowment $200,000 200 units Initial unit value: $1,000 Total endowment value: $450,000 Total units: 450

In all scenarios, a five day period will be used to demonstrate calculations and the investment income will be $10,000.

No Contributions/Disbursements Day 1 Balance

Day 2 Balance

Day 3 Balance

Day 4 Balance

Day 5 Balance

ADB Percent of Total

Amount to Allocate

Ending Balance

Jones $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 22.22% $2,222.22 $102,222.22

Smith $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 33.33% $3,333.33 $153,333.33

Rivers $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 44.44% $4,444.44 $204,444.44

TOTAL $450,000 $450,000 $450,000 $450,000 $450,000 $450,000 100% $10,000 $460,000.00

UNITS 450 450 450 450 450 450

No Contributions/Disbursements Day 1 Balance

Day 2 Balance

Day 3 Balance

Day 4 Balance

Day 5 Balance

ADB Percent of Total

Amount to Allocate

Ending Balance

Jones $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 22.22% $2,222.22 $102,222.22

Smith $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 33.33% $3,333.33 $153,333.33

Rivers $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 44.44% $4,444.44 $204,444.44

TOTAL $450,000 $450,000 $450,000 $450,000 $450,000 $450,000 100% $10,000 $460,000.00

UNITS 450 450 450 450 450 450

$10,000 return / 450 units = $22.22 return per unit

Jones: 100 x $22.22 = $2,222.22 Smith: 150 x $22.22 = $3,333.33 Rivers: 200 x $22.22 = $4,444.44

With no additions or disbursements, unitization

is exactly the same as proportional using average daily balance.

Additions/Disbursements Day 1 Balance

Day 2 Balance

Day 3 Balance

Day 4 Balance

Day 5 Balance

ADB Percent of Total

Amount to Allocate

Ending Balance

Jones $100,000 $110,000 $110,000 $110,000 $110,000 $108,000 23.79% $2,378.85 $112,378.85

Smith $150,000 $150,000 $150,000 $140,000 $140,000 $146,000 32.16% $3,215.86 $143,215.86

Rivers $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 44.05% $4,405.29 $204,405.29

TOTAL $450,000 $460,000 $460,000 $450,000 $450,000 $454,000 100% $10,000 $460,000.00

UNITS 450 460 460 450 450

Additions/Disbursements Day 1 Balance

Day 2 Balance

Day 3 Balance

Day 4 Balance

Day 5 Balance

ADB Percent of Total

Amount to Allocate

Ending Balance

Jones $100,000 $110,000 $110,000 $110,000 $110,000 $108,000 23.79% $2,378.85 $112,378.85

Smith $150,000 $150,000 $150,000 $140,000 $140,000 $146,000 32.16% $3,215.86 $143,215.86

Rivers $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 44.05% $4,405.29 $204,405.29

TOTAL $450,000 $460,000 $460,000 $450,000 $450,000 $454,000 100% $10,000 $460,000.00

UNITS 450 460 460 450 450

Addition on day 2 Disbursement on day 4

Additions/Disbursements Day 1 Balance

Day 2 Balance

Day 3 Balance

Day 4 Balance

Day 5 Balance

ADB Percent of Total

Amount to Allocate

Ending Balance

Jones $100,000 $110,000 $110,000 $110,000 $110,000 $108,000 23.79% $2,378.85 $112,378.85

Smith $150,000 $150,000 $150,000 $140,000 $140,000 $146,000 32.16% $3,215.86 $143,215.86

Rivers $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 44.05% $4,405.29 $204,405.29

TOTAL $450,000 $460,000 $460,000 $450,000 $450,000 $454,000 100% $10,000 $460,000.00

UNITS 450 460 460 450 450

Additions cause units to increase

Disbursements Decrease units

Additions/Disbursements Day 1 Balance

Day 2 Balance

Day 3 Balance

Day 4 Balance

Day 5 Balance

ADB Percent of Total

Amount to Allocate

Ending Balance

Jones $100,000 $110,000 $110,000 $110,000 $110,000 $108,000 23.79% $2,378.85 $112,378.85

Smith $150,000 $150,000 $150,000 $140,000 $140,000 $146,000 32.16% $3,215.86 $143,215.86

Rivers $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 44.05% $4,405.29 $204,405.29

TOTAL $450,000 $460,000 $460,000 $450,000 $450,000 $454,000 100% $10,000 $460,000.00

UNITS 450 460 460 450 450

Additions cause units to increase

Disbursements Decrease units

With hundreds of endowments this quickly becomes an overwhelming process to manage.

Additions/Disbursements Day 1 Balance

Day 2 Balance

Day 3 Balance

Day 4 Balance

Day 5 Balance

ADB Percent of Total

Amount to Allocate

Ending Balance

Jones $100,000 $110,000 $110,000 $110,000 $110,000 $108,000 23.79% $2,378.85 $112,378.85

Smith $150,000 $150,000 $150,000 $140,000 $140,000 $146,000 32.16% $3,215.86 $143,215.86

Rivers $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 44.05% $4,405.29 $204,405.29

TOTAL $450,000 $460,000 $460,000 $450,000 $450,000 $454,000 100% $10,000 $460,000.00

UNITS 450 460 460 450 450

$10,000 return / 450 units = $22.22 return per unit

Jones: 110 x $22.22 = $2,444.44 Smith: 140 x $22.22 = $3,111.12 Rivers: 200 x $21.74 = $4,444.44

Unitization penalizes endowments with disbursements

and rewards those with additions

New Endowment on Last Day Day 1 Balance

Day 2 Balance

Day 3 Balance

Day 4 Balance

Day 5 Balance

ADB Percent of Total

Amount to Allocate

Ending Balance

Jones $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 19.61% $1,961.78 $101,960.78

Smith $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 29.41% $2,941.18 $152,941.18

Rivers $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 39.22% $3,921.57 $203,921.57

Wilson $0 $0 $0 $0 $300,000 $60,000 11.76% $1,176.47 $301,176.47

TOTAL $450,000 $460,000 $460,000 $450,000 $750,000 $454,000 100% $10,000 $760,000

UNITS 450 450 450 450 750

Wilson establishes a $300,000 endowment on day five, the last day of the investment period

New Endowment on Last Day Day 1 Balance

Day 2 Balance

Day 3 Balance

Day 4 Balance

Day 5 Balance

ADB Percent of Total

Amount to Allocate

Ending Balance

Jones $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 19.61% $1,961.78 $101,960.78

Smith $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 29.41% $2,941.18 $152,941.18

Rivers $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 39.22% $3,921.57 $203,921.57

Wilson $0 $0 $0 $0 $300,000 $60,000 11.76% $1,176.47 $301,176.47

TOTAL $450,000 $460,000 $460,000 $450,000 $750,000 $454,000 100% $10,000 $760,000

UNITS 450 450 450 450 750

$300,000 buys 300 units, so the pool increases to 750 total units

New Endowment on Last Day Day 1 Balance

Day 2 Balance

Day 3 Balance

Day 4 Balance

Day 5 Balance

ADB Percent of Total

Amount to Allocate

Ending Balance

Jones $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 19.61% $1,961.78 $101,960.78

Smith $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 29.41% $2,941.18 $152,941.18

Rivers $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 39.22% $3,921.57 $203,921.57

Wilson $0 $0 $0 $0 $300,000 $60,000 11.76% $1,176.47 $301,176.47

TOTAL $450,000 $460,000 $460,000 $450,000 $750,000 $454,000 100% $10,000 $760,000

UNITS 450 450 450 450 750

$10,000 return / 750 units = $13.33 return per unit

Jones: 100 x $13.33 = $1,333.33 Smith: 150 x $13.33 = $2,000.00 Rivers: 200 x $13.33 = $2,666.67 Wilson: 300 x $13.33 = $4,000.00

Unitization unfairly benefits new endowment

that hasn’t been earning the entire time!

Conclusion

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In Conclusion

Unitization is a simple way to calculate earnings distributions, but it can be

time-consuming to manage unit calculation and upkeep for distributions and additions.

In Conclusion

Because the earnings per unit is calculated on the last day of the

earning period, unitization unfairly rewards late additions that weren’t earning income the entire period.

About the Presenter

Jeffrey.Sobers@Blackbaud Twitter: @jeffsobers Slideshare: jsobers1 For more information, resources, and conversations, visit: blackbaud.com/research npEngage.com Slideshare.net/jsobers1

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