Endowment Policy

In recognition of its fiduciary responsibility, the Board of Directors of Lake Washington College Foundation (hereinafter the "Board") has adopted the following policies pertinent to the operation of the Endowment established by Lake Washington College Foundation (hereinafter the "Charity"):

Allocation of Funds to the Endowment by the Board

The Board may allocate any unrestricted gifts, bequests, or other funds to the Endowment. Distributions attributable to principal allocated to the Endowment by the Board shall be used for such purposes as the Board shall from time to time decide. The Board also reserves the right to invade this principal and use it for special needs, although the expectation is that this principal will be set aside for the long-term support of the Charity.

Minimum Gifts for Unrestricted Endowment and Named Endowed Funds

A donor may contribute any amount for unrestricted endowment or for a previously-established named endowed fund within the Endowment.

A minimum gift of $10,000 shall be required to establish a new named endowed fund, either for the Charity's general purposes, for a college scholarship, college program or for a more specific purpose subject to the consent of the Board Finance Committee.

The amount required for such a fund will depend on the objectives to be accomplished and will be negotiated between the donor and staff at the Charity.

Endowment principal deriving from gifts that donors have specifically designated for the Endowment shall not be invaded. Distributions shall be limited to those authorized pursuant to the Spending Policy for the Endowment.

Execution of Named Endowed Fund Agreements

A named endowed fund can be established either through a lifetime gift or by bequest. When it is created through a lifetime gift, the donor and Executive Director sign an agreement that sets forth the terms of the endowment. When the donor executes a will or a living trust agreement containing language directing that a named endowed fund be established, no other documentation is required, though the donor will be encouraged to execute an endowed fund agreement in addition to the will or the living trust agreement.

Contributions for existing unrestricted or restricted funds within the Endowment, but not for a new named endowed fund, require only a transmittal letter or bequest language stating the donor's intention.

General Investment Policy

The investment policy of the Charity is to enhance the value of the Endowment portfolio and at the same time provide a dependable, growing source of income that will be used to support various programs of the Charity. To enhance return and reduce risk, the portfolio shall be composed of diversified assets, including both equities and fixed-income investments (excluding state of Washington faculty endowments which are invested according to the State of Washington Investment Policy (attachment A)). The equities are intended to provide current income, growth of income and appreciation of principal. The fixed-income investments are intended to provide a predictable and reliable source of interest income while reducing the volatility of the portfolio.

In fulfilling this policy, the Charity shall endeavor to conform to the prudent investor standard. This standard requires the exercise of reasonable care, skill, and caution, and it is to be applied to investments, not in isolation, but in the context of the Endowment portfolio and as part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the Endowment.

Investment Objectives

The investment objectives for the Endowment are to manage contributions in a manner that will produce current income to support various programs of the Charity, thereby maximizing the benefits intended by donors, and to achieve growth of both principal value and income over time sufficient to preserve or increase the purchasing power of the assets of the Endowment, thereby protecting those assets against inflation.

Total return shall be the method for measuring the performance of the endowment. This refers to the combination of income (interest and dividends) and appreciation/depreciation in the fund's value for a certain period of time. The specific financial objective is for total return, less expenses and distributions of income, to equal or exceed the Consumer Price Index (CPI) for that period. Thus, achievement of this objective will result in real growth in the value of the Endowment. Although real growth will not be attained every year due to market fluctuations, it is expected to be attained over a period of time, as illustrated in the following example.

Endowment Growth and Management

Measurement of Real Growth of Endowment

(1) (2) (3) (4) (1)-(2)-(3)-(4)

Investment and Management


Year

Total
Return


Expenses


Distributions


CPI

Real
Growth

1

25.1%

1.0%

5.0%

5.1%

14.0%

2

15.0%

1.1%

5.0%

4.0%

4.9%

3

2.6%

1.2%

5.0%

3.8%

-7.4%

4

11.4%

1.1%

5.0%

3.7%

1.6%

5

9.2%

1.0%

5.0%

2.9%

0.3%

5 Year Avg.

12.7%

1.1%

5.0%

3.9%

2.7%

 

Investment Management

The Endowment shall be managed by the Finance Committee of the Board (hereinafter the "Finance Committee"), whose responsibilities in the area of investment administration are as follows:

  • To recommend to the Board policies for the management of the Endowment.

  • To make recommendations to the Board on the selection of portfolio managers.

  • To determine how assets are to be allocated.

  • To monitor the management of the Endowment portfolio in order to enhance return and control risk, and to keep the Board fully informed.

Portfolio Managers

The Board, upon recommendation of the Finance Committee, may appoint one or more portfolio managers and may allocate Endowment assets among them in whatever proportions it deems appropriate. One or more managers shall be given responsibility for equity investments, and one or more for fixed-income investments, or any manager may be given responsibility for both.

Portfolio managers and their performance will be measured over various periods and will be compared to appropriate market indices and to the performance of other endowments as published annually by a national reporting agency. A manager whose performance over a rolling three year period falls below eighty percent of the S&P 500 index with dividends reinvested for the equities portfolio and 100% of a generally accepted fixed income index appropriate to the risk and duration of the fixed income portfolio shall be a candidate for replacement.

It will be the policy of the Finance Committee to require that all portfolio managers report their performance in writing quarterly and their portfolio holdings monthly.

The Finance Committee may resort to the use of an independent performance evaluation service to ensure that all portfolio managers engaged by the Charity are competitive in the market and that their performance meets the needs and expectations of the Charity with respect to these guidelines.

Asset Structure

The funds within the Endowment shall consist of all named endowed funds, plus such other funds as the Board may from time to time establish. To facilitate investment and accounting, the Endowment shall function as a pooled fund. Each fund within the Endowment shall hold units as part of an overall investment pool. The initial value of a unit shall be $10.38763, and thereafter it will fluctuate with the changing market value of the investments held in the pool. The number of units assigned to each fund changes only when additions are made, usually by gifts. On the last day of each quarter, the unit value is determined by dividing the total market value of the Endowment pool by the number of units in the pool. On occasion, income may be capitalized and transferred to the principal of a fund.

When contributions for the Endowment are received, they shall be temporarily retained by the Charity in a holding account and added to the Endowment on the first day of the following quarter. The number of units assigned shall be determined by dividing the amount of the addition by the unit value as of the end of the immediately preceding quarter.

Asset Allocation

The general policy shall be to diversify investments within both equity and fixed-income securities so as to provide a balance that will enhance total return while avoiding undue risk concentration in any single asset class or investment category.

The monitoring and adjustment of the mix of assets among the investment classes is a major factor in achieving investment return. The Finance Committee shall carefully review the mix of assets in the endowment and periodically make, or instruct the portfolio managers to make, transfers within prescribed asset class limitations.

As a long-term policy guideline, equity investments will normally constitute 50 to 60 percent and fixed-income securities 40 to 50 percent of Endowment assets, though the Board may from time to time approve different asset allocations.

1. Equity Investments shall be limited to:

a. Mutual Funds and Common Stocks

The principal category of equity investments will be mutual funds or individual common stocks. In the case of stocks, primary emphasis will be on high-quality, investment-grade, and dividend-paying stocks in companies that are financially sound and that have favorable prospects for earnings growth.

Stock investments should be diversified in terms of industry, capitalization, and nation of origin.

b. Real Estate

Investments in real estate shall not exceed 20% of the endowment pool. Equity investments may include real estate investments in professionally managed, income-producing residential or commercial property.

A direct investment into other residential or commercial income producing property must be approved by the Finance Committee and Board.

Gifts of income-producing real estate may be included in the equity portfolio, provided they are consistent with these management guidelines. To the extent that such a gift of real estate would require a greater percentage of endowment assets to be committed to this asset class, or would constitute a negative cash-flow, or would be deemed by professional management counsel to constitute undue market risk, the gift shall be disposed at sale and the proceeds directed to the general endowment pool for the benefit of purposes consistent with the donor's intent for the gift.

c. Private Equity, Venture Capital, and Hedge Funds

The equity portfolio may also include private equity, venture capital or hedge fund investments. Such investments, however, ordinarily shall not exceed 5 percent of total Endowment assets and must be made through pooled funds offered by professional investment managers with proven records of superior performance over time. Any investment in this asset category much be approved by the Finance Committee and Board.

2. Fixed-Income Investments

a. Cash Equivalents

Fixed-income investments may include short-term money market securities. Of all investment vehicles, however, such securities have historically produced the lowest return. For this reason, investments in such securities shall be kept at the minimum level that the Finance Committee considers necessary to meet foreseeable short-term liquidity requirements. Such investments shall be made in U.S. Treasury securities, commercial paper, and money market securities issued by institutions with proven high-quality credit ratings or by pooled funds with demonstrably high-quality credit standards and proven records of superior performance over time.

b. Bonds, Certificates of Deposit, Fixed Income Mutual Funds

It is expected that the majority of fixed-income investments shall be invested in high-quality (primarily A to AAA rated) corporate bonds, U.S. Treasury securities, GNMA's, or CDs. In periods of high interest rates, bond funds will also be considered as an alternative..

Spending Policy

The spending policy, expressed as a percentage of market value of the Endowment, shall be determined on a year-to-year basis by the Board upon recommendation of the Finance Committee. In recommending a spending policy for a given fiscal year, the Finance Committee shall take into consideration total return and CPI for the immediately preceding year and projections for the year in question. While the spending policy may fluctuate within a narrow range, it is expected to average approximately 5 percent of market value.

It shall be the responsibility of the Finance Committee to review the spending policy periodically in light of actual returns in order to make adjustments necessary for the preservation of the purchasing power of the Endowment.

Interest and dividend distributions from the Endowment shall be made within 30 days after the close of each calendar year. The Finance Committee will recommend to the board additional distributions based on capital gains income up to the target of five percent of total earnings (interest, dividends, and capital gains).