Skip to main content

Frequently Asked Questions

Frequently Asked Questions about Endowed Funds at Michigan State University


What is an endowed fund?

An endowed fund is a fund in which:

  1. the principal (usually the original gift of a donor) is not spent, but rather is invested in perpetuity;
  2. a part of the investment income from MSU's investment of the principal is distributed so it can be spent on the donor’s restricted purpose (a program, scholarship, faculty chair); and
  3. the remaining investment income is retained as a hedge against inflation and to provide a reserve that can be drawn on when investment returns are low or negative.

MSU has a fiduciary responsibility to preserve the purchasing power of its endowed funds in perpetuity so that they will forever provide resources to important programs that donors have chosen to support through their generous gifts.  During good years, MSU retains a portion of each year's investment income from each endowed fund.  If the University distributed all the investment income every year, inflation would erode the purchasing power of our endowed funds and annual income distributions would be very unstable; we would see high income distributions in good years and no distributions in bad years.  

How are endowed funds invested?

As with a mutual fund, endowed funds are pooled and invested collectively in MSU’s Common Investment Fund (CIF).  Each gift to an endowed fund buys units in the CIF.   As the market value of the CIF increases (or decreases), the value of each CIF share increases (or decreases) -- and so the value of each specific endowed fund goes up or down. 

MSU’s Investment Office manages the day-to-day activities of the CIF investment portfolio. The investment objectives of the CIF are to achieve a total rate of return sufficient to generate the amount annually made available for spending by the endowed funds and still provide a modest increase in the inflation-adjusted unit value while assuming only moderate risk. 

The CIF is made up of many separate investments, diversified over many asset classes.  The investment policy for the CIF can be found here:

Why are endowed funds pooled?

Endowed funds are pooled and purchase shares in the CIF primarily for three reasons:

  1. There are thousands of endowed funds at MSU
  2. Endowed funds range in size from thousands to millions of dollars
  3. The endowed funds are established at different times, which results in different purchase prices

Though the pooled system may seem complex, there is no alternative method that is efficient and cost-effective for investing so many separate and differing funds.  Most universities employ this very efficient and productive “pooling” process to invest their endowed funds.

How is the spending policy determined?

Each year, the MSU Board of Trustees reviews the programmatic spending policy or the “spendable” percentage of the investment income that can be distributed to support endowed programs.  The current spending policy says that MSU will make available for programmatic spending 4.4% of the 20-quarter average market value of the CIF.  

Here is a simplified example:

Endowed Fund A                                                 $100,000 original gift

CIF Unit Value at time of gift                                 1 unit = $1.00

CIF Units purchased for Fund A                            100,000 units

Year 1 Investment Return                                      6.8%, or $6,800

Year 1 Spending Policy Distribution                       4.4%, or $4,400

Retained Investment Income                                 $2,400 ($6,800 - $4,400)

CIF Units Owned by Fund A - start of Year 2          100,000 units

CIF Unit Value - start of Year 2                               1 unit = $1.024

Note that the number of units this endowed fund "owns" at the start of Year 2 is still 100,000.  The value of the units increases, not the number of units, when investment income is reinvested.  The number of units can increase in one of two ways: 1) additional gifts can be made to the fund; 2) distributed income that has been left unspent at the end of the fiscal year can be used to purchase additional units for the fund.  

Note also that the Investment Return is finalized approximately one quarter after the close of the fiscal year.  Any adjustments to the unit value at year end is adjusted in the following quarter.

How does the department spend the income?

Departments must spend the income (i.e. the programmatic spending policy distribution) of an endowed fund according to what the specific endowment agreement says.  Endowment agreements are legal documents that have been carefully written and signed by the donor and MSU.  Agreements specify which MSU department is responsible for the administration of the endowment.  These departments have access to their endowment agreements and adhere carefully to donor requirements.   

Agreements also specify what to do with unspent spending policy distributions each year.  Some endowments require the unspent income to be reinvested into the principal account, purchasing additional units in the CIF, which generates more spending in the future.  Other endowments require the unspent income to be held for spending in the future.  

If a department has an unexpected shortfall and needs cash, can they use the principal?

Never!  Once an endowment has been established, that principal amount CAN NEVER be used for programmatic spending.  Only the spending policy distribution generated from the invested principal can be spent.

How often are units purchased and spending policy distributed?

On January 1, March 1, July 1, and September 1, we purchase units for new gifts received during the preceding quarter.  The units are purchased at the CIF unit value as calculated by the Investment Office. 

Programmatic spending policy distributions are also made quarterly, but the entire fiscal year amount may be spent at any time during the year.  The administering unit doesn’t need to wait for income to be distributed before spending it.  Because the number of units owned by an endowed fund doesn’t decrease, it is easy to estimate the annual amount of income that will be distributed over the year. 

Any new gifts added to the principal balance increases the income distributed in subsequent quarters.

Who is responsible for fundraising for the endowment?

University Advancement is responsible for fundraising in support of the mission of the university, its faculty and students.  Please visit for more information.