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Appendix A: Commingled Investments and Unitization

Endowment unitization and commingling is a standard practice used by non-profit institutions to manage and invest multiple, individual endowment funds as a single, large investment portfolio. This pooled approach allows for greater investment diversification, reduced administrative costs, and higher potential returns than investing each gift separately.

Commingling: The initial pooling of funds#

  • What it is: The process of combining gifts from multiple donors into one large investment pool, rather than managing them separately.
  • Why it's done: Commingling allows the endowment to benefit from economies of scale. A larger investment pool has access to a wider variety of investment opportunities—including less-liquid assets, like private equity—that are not available to smaller funds. It also reduces management costs per dollar invested. Commingling also insures that all funds in the endowment receive the same rate of return.
  • The endowment rule: While commingling is illegal when a fiduciary mixes client money with their personal funds, it is standard and legal for endowment management when done according to the organization's stated investment policy.

Unitization: The tracking system for each gift#

  • What it is: A system of accounting that uses a "unit" or "share" similar to a mutual fund to track each individual endowment fund's ownership percentage within the commingled investment pool.
  • How it works:
    • Unit value: The market value of the entire investment pool is divided by the total number of units to determine the unit value, which is recalculated periodically.
    • New gifts: When a new gift is added, the donor receives a number of units proportional to the market value of their gift on the day it enters the pool. For example, a $100,000 gift to a pool with a unit value of $1,000 would purchase 100 units.
    • Distributions and gains: All investment earnings, gains, losses, and administrative fees are allocated to each individual endowment fund based on the number of units it holds. Distributions for spending are also based on the fund's units.
  • Why it's done: Unitization provides an accurate and transparent method for tracking the performance of each fund within the larger commingled pool. It ensures fair and proportional allocation of investment returns and spending distributions, regardless of when or how large a gift was.

An endowment investing example#

  1. Commingling: A university maintains an investment account for all the gifts it has received over the years. A new gift of $500,000 is accepted and invested in the commingled account.
  2. Unitization: Prior to the addition of the gift to the pool, the commingled pool's total market value is $50 million , and there are 1 million total units, giving each unit a value of $50.
  3. Gift units: The $500,000 gift "buys into" the pool at the $50 unit value, receiving 10,000 units.
  4. Growth and distribution: A year later, the commingled pool's investments have grown. The total market value is now $55 million, increasing the unit value to $55. All units, including the 10,000 from the new gift, have appreciated by 10%. When the university distributes endowment earnings, the new fund's distribution is calculated based on its 10,000 units.