The improving economy contributed to a second strong year in a row for colleges’ endowment returns, according to an annual study released on Thursday. Colleges’ endowments returned an average of 15.5 percent in the 2014 fiscal year, up from 11.7 percent in 2013, and far above 2012’s investment returns of negative 0.3 percent.
The 2014 Nacubo-Commonfund Study of Endowments examines data from more than 800 education institutions across North America with collective endowment assets of $516-billion. The data are collected by both the National Association of College and University Business Officers, which is known as Nacubo, and the Commonfund Institute, the education-and-research branch of the Commonfund, a nonprofit investment organization.
The study divides the 832 institutions into six cohorts, categorized by the size of their endowments. The colleges with the highest-valued endowments were all familiar names: Harvard University, at $35.9-billion; the University of Texas system, at $25.4-billion; Yale University, at $23.9-billion; Stanford University, at $21.4-billion; and Princeton University, at $21-billion. Those institutions were also the five highest-valued endowments in last year’s study. In the latest study, the Texas system took Yale’s place as the second-highest-valued endowment.
John D. Walda, Nacubo’s president and chief executive, said the study’s findings were signs of both an improving economy and smarter investing.
“From the S&P to the Dow to the World Index, all of them did well for this period,” he said. “And that’s where these assets are invested.”
The highest average return occurred in the over-$1-billion group, at 16.5 percent. The other five cohorts reported similar return rates, with just 0.3 percentage points separating the second-highest rate from the lowest. Despite that consistency, the cohorts differed in how colleges allocated their funds. For example, the colleges with endowments of more than $1-billion allocated 51 percent to alternative strategies, while institutions in the under-$25-million group allocated just 10 percent to that asset group.
This shows that institutions with less-diversified portfolios fared just as well as those with more-diversified ones, said William F. Jarvis, managing director of the Commonfund Institute.
The most successful asset class was domestic equities, with an average return of 22.8 percent—a product of “growth in value of the domestic stock market,” said Mr. Walda.
The study also documented a rise in the share of institutions that practice risk management in their portfolios. Fifty-seven percent of participating colleges employed those strategies, up seven points from 2013, the first year that the topic was included in the study. This means more administrators are appreciating the importance of monitoring risk, said Mr. Jarvis.
Another noteworthy finding in this year’s study was the rise in long-term returns for the participating colleges, calculated over three-, five-, and 10-year increments. Each cohort’s five-year net return was more than double the previous year’s rate. In 2013 the average five-year return for all colleges surveyed was 4.0 percent. This year, it was 11.7 percent.
Mr. Walda said in a news release that the rise in longer-term returns is beneficial to colleges seeking to serve a broader variety of students. It enables them to support their missions with a stable financial base, he said.
He also took it as a positive sign that 74 percent of the study’s respondents reported increasing spending from their endowments. Participating institutions reported that an average of 9.2 percent of their operating budgets came from their endowments, up from 8.8 percent last year. That means more money is being spent on the institution and the students in it, he said.
