The University of Cincinnati adopted a formal endowment policy in 1986. It is comprised of both an investment policy and a spending policy which must work in concert to achieve their stated goals.
The University of Cincinnati's endowment policy
evolves from the combination of its long history of almost 170 years, its
strategic planning, and the fact that its endowment is one of the largest in the
country and has been a part of the University for much of its existence. All of
these factors lead to a policy that treats our endowment from a long-term
perspective. We are entrusted with endowment gifts for the purpose of providing
permanent enhancements to the programs of the University. To meet this trust, we
must be prudent and diligent in three areas of policy - investments, spending,
and manager selection and review.
ENDOWMENT INVESTMENT POLICY
The University's endowment investment policy goal is to produce a total rate of return which is greater than, or equal to, the spending rate established by the University's endowment spending policy plus the rate of inflation (average result over 7-10 years). The purpose of this goal is to protect the real value of the principal by having it grow with inflation over time. In this way, the endowment's ability to produce spendable income at a rising dollar level is also protected.
To achieve this goal, endowment funds must be mainly invested in assets which have a record and potential of providing real returns above the level of inflation over a long period of time. The type of investments that have best performed in this way are common stocks, and the University's investment policy reflects this by allowing up to 75% of our endowment funds to be invested in equities (primarily common stocks).
Other protections built into our investment
policy are limits on the proportion of the endowment in any one company,
diversity by industry, diversity by type of stock (e.g., high income versus
growth), diversity by having multiple funds managers, and requiring bond
holdings to be in the investment grade (credit rating) categories.
ENDOWMENT SPENDING POLICY
In order to achieve the protection of real principal value described above, we have determined that endowment spending must be controlled to a level of about 5% of the average endowment principal value over the past 12 quarters. This level was determined by studying both total investment return levels for longer periods of the past, and by comparing spending policies at many other institutions. As stated above, our total investment return objective is this 5% for spending plus the rate of inflation. We believe that this total rate of return can be achieved. Thus, by having a 5% spending policy limit, we can insure a reinvestment in principal to keep pace with inflation and support rising dollar expenditures for University programs over the years.
In summary, we are committed to being able to permanently sustain the programs that our endowment donors support with their gifts. As the costs of endowed chairs, equipment, scholarships or research increase over time, we must be able to support those activities just as strongly as when the gift was first made. The key to this goal is to set spending levels so that they can be increased over time using the strength of an increasing endowment principal.
REFERENCE: University Rule 3361: 20-41-01