Is it time schools consider creating endowment funds for poor learners?

Back in May, Starehe Boys Centre was in the news for being in dire financial straits. Gradual withdrawal of financial support was cited as one of the main reasons behind the school’s financial predicament. Consequently, about 600 needy students were reported at risk of missing education.

Should the financial aid budget continue to dwindle, then Starehe’s efforts to open up its classrooms to bright students of low income background face a serious threat. That said, a range of standout options exist. Key amongst them is the Endowment Model.

In today’s article, I focus on the largest (and high-returning) school endowment — the Sh2.7 trillion Yale University’s endowment. And just maybe, some of our deficit-plagued schools, much like their university brethren, can consider this excellent way. Here are three main considerations.

One, embrace the endowment way. By encouraging gifts from generous donors and alumni, Yale has managed to fund its endowment fund for nearly 70 years.

Gifts of cash, securities and/or property are common. About 84 per cent of the fund constitutes true endowments — gifts restricted by donors to provide long-term funding for designated purposes which range from financial aid to needy students, books, maintenance, scholarships and prizes.

More crucially, the fund is tied to two main goals: to grow the principal and to generate income. This has allowed Yale to hold the principal in perpetuity and only pay out a small portion every year.

Takeaway: local schools need to organise alumni associations and court generous benefactors.

Follow-up by setting-up endowment funds complete with investment committees and mandates.

Schools can subsequently push for tax benefits for such contributions.

Two, establish a robust investment policy. Yale owes its long-term success to its investment policy which stands on three key pillars — broad diversification, an equity bias and an active management approach.

On diversification, the fund covers a wide range of asset classes; real estate, domestic and foreign equity, venture capital, fixed income, private equity and absolute return.

Last year, the endowment returned 11.3 per cent, net of fees, up from 3.4 per cent posted in the previous year.

For the 20-year period ending June 30, 2017, the fund produced a 12.1 per cent return, outpacing the 7.5 per cent return of the Wilshire 5,000 Stock Index, the 6.9 per cent return of a classic 60 US equity/40 US bond and the 5.2 per cent of the Barclays US Aggregate Bond Index. Takeaway: local schools can start-out with simple equity-bonds portfolios. Gradually, as their size grows, they can diversify into other non-traditional asset classes.

Three, agree on a conservative spending policy.

Yale has maintained a four to five per cent an annual distribution policy directed towards campus operations and programmes.

In 2017, it distributed Sh120 billion — 4.5 per cent of its endowment assets — back to the university knocking-off 33 per cent of the school’s operational expenses. This has greatly reduced its operational risk.

Takeaway: local schools may initially start-out aggressive —seven to nine per cent — due to urgent needs.

Gradually, the spending rate should normalise at no more than five per cent as the fund grows in size.

The idea is to eventually subsidise the cost of running these institutions.