This is the first in a two-part series of posts regarding unitization. Stay tuned for the next installment: An Overview of Unitization Models.
Question: What is an integral part of tracking endowment funds that does not muster the same attention as spending policy and investment management?
Answer: Unitization. The unitization model is the engine that keeps the endowment pool moving along. And like an engine, it is easy to forget about when everything is working well. If your car breaks down, you can bring it to a mechanic to have the engine repaired. However, if a problem emerges with your unitized pool, accountants do not have the same luxury. Endowment accountants need to be the mechanic. If you do not feel like a Certified Unitization Mechanic, hopefully this blog series will begin to move you in that direction.
Let’s begin with a basic definition of unitization:
Unitization is a method for tracking an endowment fund’s interest in an investment pool. Units and unit value are used to determine the value of each fund.
Here is the basic formula for a unitized pool: Units x Unit Value = Market Value
A common tool for understanding unitization is the mutual fund analogy:
A unitized pool has mechanics similar to that of a mutual fund. Each endowment fund owns individual units (shares) in the unitized investment pool, and the units are generally valued monthly. The unit value, or unit price, is similar to the share price that forms the basis for how many shares can be purchased in the mutual fund model. New endowment funds, and new gifts to existing funds, buy units in the pool based upon the current unit value. Funds withdrawn from an endowment pool sell units based upon the current unit value of the pool.
The units, which represent the fund’s share of a unitized endowment pool, form the basis for allocating endowment pool earnings. Endowment pool investment earnings are allocated to funds proportionally based upon their share (units) in the pool.
We have covered the basics of unitization. In the next blog in this series, we will take a look at unitization models.
If you are interested in taking a deeper dive into unitization, please check out our webinar Introduction to Endowment Accounting Part II.