Yale had the second largest endowment in 2015.

U.S. college and university endowments returned an average -1.9% net of fees in fiscal 2016, ended June 30, the National Association of College and University Business Officers and Commonfund reported Tuesday.

The 2016 NACUBO-Commonfund study of 805 endowments showed that the 10-year average annual return fell to 5% from the previous year’s 6.3%.

As in fiscal 2015, the year’s long-term return figure fell short of the median 7.4% that most institutions say they need to earn in order to maintain their endowments’ purchasing power after spending, inflation and investment management costs, the study said.

Despite the decline in investment gains, three-quarters of study respondents reported that they had increased spending from their endowments this year to support their school’s mission, a median increase of 8.1%, well above the inflation rate.

“In spite of lower returns, colleges and universities continue to raise their endowment spending dollars to fund student financial aid, research and other vital programs,” NACUBO’s president and chief executive John Walda, said in a statement.

“These substantial increases in spending from endowments demonstrate the deep commitment colleges and universities have to student access and success. Nonetheless, this year’s results are cause for concern. Continued below-average investment returns will undoubtedly make it much more difficult for colleges and universities to support their missions in the future.”

Commonfund Institute’s executive director William Jarvis said colleges and universities were responding to lower investment results by adjusting their average return expectations, which had become unrealistically high.

“At the governance level, the duty of boards and investment committees to balance current and longer-term demands, which is fundamental to the goal of maintaining equity among present and future generations of students, will be even more important in the next few years,” Jarvis said.

The annual endowment report analyzes return data and related information gathered from both private and public U.S. colleges and universities, as well as their supporting foundations.

The 805 schools that participated in the 2016 study collectively had $515 billion in endowment assets. The average endowment size was about $640 million, but nearly half of participants had endowments of $100 million or less.

Returns by Asset Class

Endowments’ highest FY2016 investment return came from fixed income, up 3.6% versus 0.2% last year. Short-term securities/cash/other were also positive at 0.2%, compared with 0.0% in 2015.

Three categories had negative returns:

  • U.S. equities were down 0.2%, compared with 6.4% a year ago
  • Non-U.S. equities were down 7.8%, versus -2.1% in 2015
  • Alternative strategies were down 1.4%, compared with 1.1% last year

Among alternative strategies, private equity non-campus real estate returned 7.1%, followed by private equity with a 4.5% return. Venture capital returned a paltry 1.5%, way down from its leading 15.1% return last year.

Returns for all other alternative strategies were negative, with commodities and managed futures at the bottom, down 7.7%. Marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives) returned -4.0% and distressed debt -0.6%. Asset Allocation

Asset allocation among participating endowments changed very little over the course of the fiscal year. Participating endowments reported the following dollar-weighted asset allocations:

  • U.S. equities, 16%; same as last year
  • Fixed income, 8%; last year 9%
  • Non-U.S. equities, 19%; same as last year
  • Alternatives, 53%; last year 52%
  • Short-term securities/cash/other, 4%; same as last year

The study found that the allocation to alternatives was correlated with endowment size, while for both U.S. equities and fixed income, the reverse was true, with the allocation growing as endowment assets declined in size.

The biggest schools in the study reported an average 58% allocation to alternatives, compared with just 10% for the smallest size cohort. Conversely, institutions with assets of less than $25 million reported an average 44% allocation to U.S. equities, versus 13% for institutions with more than $1 billion in assets.

The largest allocation to alternative strategies, at 20%, went to marketable alternatives, followed by 11% to private equity.

— Check out Why Yale Keeps Beating Harvard in the Endowment Game on ThinkAdvisor.