Investment and Withdrawal Guidelines for Funds Functioning as Endowment (FFE)

New policy does not address term endowments; assume withdrawals per donor; or, if not specified, subject to the same withdrawal limits as other funds.

Background

The BoT has the power to authorize that expendable funds be treated as quasi-endowment or FFE, and to authorize that FFE be turned back into expendable funds. Historically, the BoT have delegated authority to convert expendable funds into FFE to a variety of university officers and to the provost and the CFO, acting jointly, to convert FFE of up to $5 million back to expendable funds. The most recent revision of these delegations was approved by the BoT in June 1999.

Nearly all FFE are invested in the Merged Pool (MP), the primary long-term investment vehicle for university investments. There are many different shareholders in the MP, including permanent endowment funds, FFE, the Expendable Funds Pool (EFP), school and department funds, donor advised and pending funds, living trusts and funds invested on behalf of others, like the Stanford Health Care and Lucile Packard Children’s Hospital.

Investors in the MP are expected to view their investments as very long term, if not permanent capital. This is what allows the Stanford Management Company to avoid holding cash and other highly liquid investments, and instead invest the capital of the MP in higher yielding asset classes. Schools and departments that expect to use their capital within a few years should not expose their funds to the MP’s near-term market risk.

Conversion of Expendable Funds to FFE

Expendable resources (both restricted and unrestricted per internal reporting definitions) may be converted to FFE at the request of any internal university unit (department, school). Requests from a school or academic department must be approved by both the dean or chair and the school’s senior financial officer. Requests from an auxiliary must be approved by a university vice provost or vice president. Requests from an administrative unit must be approved by the provost. Requests to approve the creation of FFE involving gift funding must also be reviewed by the Office of Planned Giving.

Minimum Investment Amounts, Lock-up Periods and Notification Requirements

FFE invested in the MP are expected to be viewed much like permanent endowment. Accordingly:

• The minimum investment in a new FFE is $1 million and the minimum addition to an existing FFE is $250,000.
• Any investment of capital made on or after September 1, 2016 is subject to a 7-year lock-up period, during which it cannot be redeemed.
• Any investment made prior to September 1, 2016 is subject to the previous 5-year lock-up period, during which it cannot be redeemed.

FFE invested in the MP after September 1, 2016 are also subject to an annual withdrawal limit, which is the greater of:

• $5 million or
• 10% of an individual fund’s market value

The 10% limit will be calculated as 10% of the fund’s market value which is eligible for withdrawal at the time the request is made, less any amount that has been redeemed or is pending redemption during the same fiscal year.

All requests to withdraw FFE are subject to the following minimum notification requirements:

• Up to $150 million: 90 days
• $150 million to $250 million: 150 days
• Greater than $250 million: 270 days

Fundholders may elect to reinvest payout in their FFE, even if the amount is less than the minimum for new principal investments.

Conversion of FFE to Expendable Funds

The provost and the university’s CFO are jointly authorized to approve FFE withdrawal requests which adhere to the withdrawal limits outlined above. Any redemptions which exceed the annual withdrawal limits require BoT approval.

The BoT’s Funds Functioning as Endowment Policy, adopted on June 9, 2016, sets forth guidelines for investments and withdrawals into and out of the MP. Specific procedures consistent with this policy are established by Financial Management Services (FMS) and Stanford Management Company (SMC). These procedures cover not only investment policies but also extend to the operating policies, such as valuation and computation of the per-share market value and income allocation established for the MP.

Schools and departments may have restricted or unrestricted funds for which a near-term use has not been identified. In order to earn a return and preserve the value of the funds, these funds may be invested as FFE in the university's MP. However, any unit considering this option should acknowledge the incremental risk associated with the commensurate return. Unlike funds within the EFP, no guarantee of principal exists for the FFE. To optimize investment returns, the university takes a long term perspective of its investments in the MP, which requires minimal unplanned cash flow volatility in the portfolio. Thus, the MP should not be used by individual fund holders to support short term needs. Under circumstances where these funds have to be withdrawn, they are subject to the following guidelines:

Lock-up Periods

• Any FFE investment made on or after September 1, 2016, is subject to a 7-year initial lock-up period, during which it cannot be redeemed.
• Any FFE investment made prior to September 1, 2016 is subject to a 5-year initial lock-up period, during which it cannot be redeemed.

If an FFE is created using a donor current-use gift fund, the donor restrictions for those monies apply to the new FFE.

Annual Withdrawal Limits

Once the lock-up period is met, FFE can be withdrawn under the following conditions:

• FFE invested on or after September 1, 2016 are subject to an annual withdrawal limit, which is the greater of: $5 million or 10% of an individual fund’s market value. The 10% limit will be calculated as 10% of the fund’s market value which is eligible for withdrawal at the time the request is made, less any amount that has been redeemed or is pending redemption during the same fiscal year.
• FFE invested prior to September 1, 2016 are governed by the previous FFE policy and are not subject to an annual withdrawal limit.

Required Approvals

As per Administrative Guide Policy 3.1.2: University Funds, FFE redemption requests will require the following approvals:

• Withdrawals in keeping with these guidelines may be transferred out of the endowment with the approval of the school financial officer, the CFO and the provost. Smaller amounts may be withdrawn only if the remaining balance is being withdrawn.
• Withdrawals outside these guidelines are typically not allowed and extraordinary exceptions require an action of the BoT. Requests must be made to the Office of the CFO by the first week in September for approval at the December board meeting; the first week in November for approval at the February board meeting; the first week in March for approval at the June board meeting; and the first week in July for the October board meeting.

Notification Periods

In order to provide the Stanford Management Company with sufficient time to divest assets, fully approved requests for withdrawals must be received by Fund Accounting based on the following minimum notification requirements prior to the anticipated month of withdrawal:

• Up to $150 million: 90 days
• $150 million to $250 million: 150 days
• >$250 million: 270 days

Investing FFE

• Requests for investment must be made in writing on the attached form and approved by both the dean or chair and the school’s senior financial officer. Fund Accounting will set up the appropriate fund, confirm investment and return a copy of the form to the investor.
• Funds must be invested for a minimum of 7 years (if established on or after September 1, 2016) or 5 years (if established prior to September 1, 2016) from the date of investment.
• To establish an FFE, the minimum investment amounts must be $1 million or more. The minimum addition to an existing FFE is $250,000.

As with true endowment, a fund functioning as an endowment acquires shares in the MP and receives a payout based on the number of shares owned. All unused payout may automatically be reinvested back into the principal of the fund at year end; however, this designation can only be made once during the formation of the fund, or when new investments of $ 1 million or more are made.

Withdrawals of each $500,000 investment, as well as the reinvestment of any unused payout in subsequent years, may be made 5 years or 7 years after the investment of each $500,000 tranche, depending on whether the fund was established prior to or after September 1, 2016.

Questions regarding investments or withdrawals into or out of the endowment should be referred to Fund Accounting.

The FFE investment and withdrawal request form must be completed, approved and sent to Fund Accounting.

Questions regarding investments or withdrawals into or out of the FFE should be referred to Fund Accounting.