Consolidated Investment Pool Valuation Methods

When evaluating methods for valuing consolidated investment pools (CIP), two approaches typically stand out: unitization and dollarization. Below is an excerpt from page 17 of the “NACUBO Endowment Fund Valuation Guide (Dollarization and Unitization Methods)” summarizing each method.

Unitization or Dollarization

Regardless of the valuation method chosen, when endowment funds are invested in a consolidated investment pool (CIP), the pool’s returns and expenses must be allocated fairly and equitably (“pro rata”) to all pool participants based on each fund’s respective share of the total pool market value.

Unitization

A unitized accounting system is one that accounts for a fund’s interest in a CIP on the basis of units or shares. Like shareholders in a mutual fund, each individual fund in a CIP holds shares or units representing its proportionate share of the pool’s investments. A unitized system establishes a procedure for determining the number of units a fund receives when it deposits money into the pool and the units redeemed when a specific dollar amount is withdrawn. Unit transactions are based on the unit value in effect at the time the transaction occurs.

Dollarization

The alternative to unitization is to record endowment funds at their full dollar value within the accounting system. The investment pool’s monthly investment returns are allocated and recorded directly to each fund based on its account balance and its proportionate share of the total pool. Application of spending rates and assessment of fees can also be calculated and recorded at the fund level. This alternative is often referred to as the “dollarized” method.

Breaking down the individual components of valuation methods, the following outlines each element.

Unitization

• Valuations – performed on a monthly or quarterly basis.
• Fund Ownership – unit based (deposits increase and withdrawals decrease units using the unit value).
• Allocations – investment returns and fees are allocated to each fund proportionately using units.
• Spending Payout – applied according to the institution’s policy, considering any fund level exceptions (complexities are introduced when unit adjustments are required to accommodate exceptions).
• Administration Fees – applied according to the institution’s policy, considering any fund level exceptions (complexities are introduced when unit adjustments are required to accommodate exceptions).
• Market Value – requires calculating a unit value each valuation period, tracking fund unit ownership, and multiplying the two together to determine each fund’s market value (ending fund unit ownership x ending pool unit value).

Dollarization

• Valuations – performed on a monthly or quarterly basis.
• Fund Ownership – market value based (deposits increase and withdrawals decrease market value).
• Allocations – investment returns and fees are allocated to each fund proportionately using market values.
• Spending Payout – applied according to the institution’s policy, considering any fund level exceptions.
• Administration Fees – applied according to the institution’s policy, considering any fund level exceptions.
• Market Value – removes the requirement of calculating a unit value each valuation period, tracking fund unit ownership, and multiplying the two together to determine each fund’s market value, since the sum of the parts makes up the fund market value (beginning fund market value + investment earnings allocations – spending payout – administration fees + deposits – withdrawals = ending fund market value).

Each valuation method delivers the same results; however, unitization requires additional steps of assigning and tracking units to funds while also calculating a unit value each valuation period. Endowment values are generally communicated to donors in dollars, not units or unit prices, therefore many institutions choose the dollarization valuation method.