endowment management: unitization
DESCRIPTION
In the first presentation of this series, we examined income distributions to endowments. In this presentation, we get even more specific and look at unitized endowment pools, including what they are, how they work, and the benefits and drawbacks of using them. And we answer the question, "To unitize, or not to unitize?"TRANSCRIPT
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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