Endowments Regain Ground With 12% Returns

January 27, 2011

A surging stock market helped produce an average return of almost 12 percent among college endowments in the 2010 fiscal year, partly reversing historic losses the year before, according to an annual survey released today.

Investment returns have climbed even more since last summer, but observers say it could take several more years for endowments and college finances in general to climb out of their recession-fueled funk.

The 12-percent return for the fiscal year ending in June represented a sharp turnaround from the minus 19 percent recorded in 2009, according to the study by the National Association of College and University Business Officers and the Commonfund Institute. The average endowment value among the 865 institutions in the survey grew by 8 percent, a year after falling by 23 percent. (The growth figures reflect gifts received and money spent from endowments.)

Since June, investment returns have averaged about 15 percent, said John D. Walda, president of Nacubo. On Wednesday the Dow Jones stock average crossed the 12,000 mark for the first time since June 2008.

Despite the good news, Mr. Walda and Commonfund officials pointed out that the values of most endowments in 2010 remained below their 2007 levels, many by more than 20 percent. The values probably will not fully rebound this year or next, even if financial markets continue to rise. And long-term earnings on endowments—which averaged just 3.4 percent over the past decade—are not keeping up with spending and inflation.

"We're still not out of the woods, and there are still many pressures on higher-education institutions," Mr. Walda said.

Among the biggest gainers last year were the endowments of Syracuse University, which rose 29 percent, to $849.2-million; Grinnell College, up 18 percent, to $1.26-billion; and the University of Texas system, up 16 percent, to $14.05-billion. Harvard and Yale Universities' funds again topped the list for overall market value, at $27.56-billion and $16.65-billion, respectively.

The 12-percent average return was about the same across all sizes of college endowments. Returns were in the black across all categories of assets, except for real estate owned by private-investor funds, which had losses averaging 16 percent.

Most endowment managers appeared to stick with their long-term investment strategies last year, Mr. Walda said. After the recession started, managers moved a larger share of endowment assets into cash, which in 2010 represented 5 percent of assets, up from 1 percent in 2008. That conservative move allowed managers to cushion blows from downward swings in the stock market, but at a cost: In most years, cash holdings earn lower returns than stocks do.

The 2010 returns were a relief for many colleges hit hard as gifts declined and state appropriations for public institutions tightened. Since 2008, many colleges have frozen salaries, laid off staff, and trimmed other costs.

Spending Rates Rose

To avoid or soften those impacts, many colleges dipped into their endowments: Nearly half of the surveyed institutions reported increasing the percentage of money spent from the endowment in 2010.

On average, the survey respondents spent 4.5 percent of their funds, up slightly from 2009. Within this total, however, was a clear split between the largest and small endowments. Many institutions with the smallest endowments, below $25-million, lowered their spending rates, for an average of below 4 percent. The largest endowments, over $1-billion, reported a rate of more than 5.5 percent, and 85 percent of them reported increasing the rate from the previous year. Although that reflects a response to their financial needs, the increases came after lawmakers in Congress had pressured the wealthiest institutions to raise their spending rates.

Many institutions complied, but even so, most institutions actually spent less from their endowments in 2010 than in the year before. That's because the payout in 2010 was based on the endowment's value in 2009. On average, 10 percent of operating budgets were financed out of endowments, down from 13 percent the year before.

Financial experts have advised colleges to ease overreliance on endowment income. But it remains to be seen whether this one-year decline will persist as stock and endowment values rise.

Princeton University was among the institutions that decided to increase the spending rate from the endowment to cope with a big drop in its value—but only temporarily.

The university said in October that it had raised its spending rate to 6.04 percent in 2010, slightly above its target range of 4 to 5.75 percent. Even so, the endowment's contribution to the operating budget was forecast to decline by 8 percent in 2010 and in 2011. Meanwhile the university planned to cut spending by $170-million over those two years.

Nacubo officials expressed concerns over colleges' increasing endowment payouts at a time when campus costs continue to rise. "I think it's obvious that those kinds of spending rates aren't sustainable," Mr. Walda said.

That worry is shared by Jonathan D. Hook, vice president and chief investment officer at Ohio State University. Its $1.87-billion endowment reported a return of 15.5 percent in 2010, with a spending rate of 5.375 percent.

"I think it behooves us to do a good job and make sure we're hitting our targets as best we can," Mr. Hook said. "Last year's numbers did that, but that is only one year. We hope to compound that going forward, but it will be a challenge."

College and University Endowments Greater Than $2-Billion

For complete data on college endowments in 2009-10, view The Chronicle's complete sortable database.

Rank Institution Market value, fiscal 2010 (in thousands) One-year increase
1 Harvard U. $27,557,404 5.4%
2 Yale U. $16,652,000 2.0%
3 Princeton U. $14,391,450 14.1%
4 U. of Texas system $14,052,220 15.5%
5 Stanford U. $13,851,115 9.8%
6 Massachusetts Institute of Technology $8,317,321 5.5%
7 U. of Michigan $6,564,144 9.4%
8 Columbia U. $6,516,512 10.6%
9 Northwestern U. $5,945,277 9.2%
10 Texas A&M U. system and foundations $5,738,289 12.9%
11 U. of Pennsylvania $5,668,937 9.6%
12 U. of Chicago $5,638,040 10.7%
13 U. of California $5,441,225 10.2%
14 U. of Notre Dame $5,234,841 9.2%
15 Duke U. $4,823,572 8.6%
16 Emory U. $4,694,260 8.5%
17 Washington U. in St. Louis $4,473,180 9.6%
18 Cornell U. $4,378,587 10.4%
19 U. of Virginia $3,906,823 9.2%
20 Rice U. $3,786,548 4.8%
21 Vanderbilt U. $3,044,000 6.2%
22 Dartmouth College $2,998,302 6.1%
23 U. of Southern California $2,947,978 10.4%
24 New York U. $2,370,000 13.2%
25 Johns Hopkins U. $2,219,925 12.3%
26 U. of Minnesota and affiliated foundations $2,195,740 5.3%
27 Brown U. $2,155,330 6.8%
28 U. of Pittsburgh $2,032,798 10.6%
Note: The figures include growth from gifts and returns on investments, as well as reductions from expenditures, withdrawals, and investment losses. The percentage-change figures do not represent the rates of return on investment. The association does not disclose rate-of-return figures by institution.
Source: Commonfund Institute, National Association of College and University Business Officers