As the stock market has soared to record highs, college endowments have been buoyed by strong investment returns. During the last fiscal year, college endowments returned an average of 12.2 percent, according to an annual survey released on Thursday.
The Nacubo-Commonfund Study of Endowments looks at data from more than 800 North American education institutions with endowment assets totaling $566.8 billion. The annual survey is compiled jointly by the National Association of College and University Business Officers, or Nacubo, and the Commonfund Institute, the research group for the asset-management firm Commonfund, which serves nonprofit institutions. The data represent endowment returns for the 2017 fiscal year, which for most institutions ended on June 30.
The new report shows a significant uptick in returns from last year, when endowment values dropped by 1.9 percent, badly underperforming the Dow Jones industrial average. The increase is largely a result of improved global market conditions, says Kenneth E. Redd, senior director of research and policy analysis at Nacubo.
But as colleges and universities see successful returns in the short term, the 10-year average return — which fell to 4.6 percent in the 2017 fiscal year — is still lagging below expectations. Most institutions set a goal of 7 percent to 8 percent.
Moreover, with news of national enrollment declines, pressure to freeze or cut tuition rates, and a new law that taxes some private-college endowments, many asset managers and administrators still face volatility in year-to-year revenue. So as annual finances fluctuate, 10-year projections will be a key figure.
Last year 65 percent of institutions in the survey increased spending from their endowments to support financial aid, research, and other needs.
That trend may not be sustainable for colleges whose long-term returns don’t reach their goals. If 10-year returns don’t make it to 7 percent soon, or if the global market doesn’t continue its recent upward push, some colleges would have no choice but to decrease spending, Mr. Redd says.
Different Sizes, Different Strategies
A few key points from the survey:
- The low 10-year returns were consistent across the board: Institutions with $1 billion or more in their endowments saw roughly the same rate of return as those with endowments of $25 million or less.
- Smaller endowments tended to allocate more money to lower-risk, lower-reward fixed-income investments. Because of that, the one-year rate of return for endowments under $25 million was 11.6 percent, lower than the 12.9-percent rate reaped by endowments of more than $1 billion.
- Universities with endowments exceeding $1 billion allocated more than five times as much to alternative investment strategies — private equity, venture capital, hedge funds, and commodities, for example — than universities with endowments of less than $25 million.
- The annual survey does not outline the exact portions that went to financial aid, research, and other categories, but the average increase in spending was above inflation rates. Mr. Redd says research from the Council for Aid to Education concludes that slightly more than half of endowment gifts, on average, goes to financial aid and faculty research, with financial aid being the largest recipient of these gifts.