U.S. college and university endowments returned an average of 12.2%, net of fees, for the 2017 fiscal year, ended June 30, according to the latest NACUBO-Commonfund endowment study.
However, the 10-year average annual return, which many endowment managers target for long-range planning purposes, fell to 4.6% from 5% the year before after fiscal 2007’s robust 17.2% return dropped out of the trailing 10-year average.
The one-year return for endowments with more than $1 billion was 12.9%, while that for endowments with less than $25 million was 11.6%. In a teleconference preceding the report’s release, Commonfund Securities President Keith Luke said the difference in returns came down to bigger institutions’ ability to allocate more to illiquid asset classes.
NACUBO-Commonfund data showed that in fiscal 2017, the biggest endowments had a 57% average asset allocation to alternatives, compared with 11% for the smallest ones.
Despite lower long-term returns, two-thirds of endowment participants reported increasing spending to support student financial aid, research and other critical functions. Among all institutions that increased their dollar spending, the median increase was 6.5%, well above the inflation rate.
Institutions’ average effective spending rate rose to 4.4% in fiscal 2017 from 4.3% a year ago. Institutions with endowment assets of more than $1 billion led the increase, raising their effective spending rate to 4.8% from last year’s 4.4%.
“Continued substantial increases in endowment spending dollars, despite lower long-term investment returns, demonstrate the deep commitment colleges and universities have to student access and success,” NACUBO’s president and chief executive, John Walda, said in a statement.
“However, continued long-term growth of 5% or less, along with the coming changes to tax and charitable giving laws under the recently passed Tax Cuts and Jobs Act, will make it much more difficult for colleges and universities to increase endowment dollars to support their missions. Despite this year’s higher returns, we remain concerned about the continued long-term results for most endowments.”
In the teleconference, Commonfund’s president and chief executive, Catherine Keating, said it was impossible to know how tax law changes would influence charitable giving going forward, but that institutions could anticipate some decline this year.
Keating noted in the statement that “the goal of achieving real returns to cover spending has been a daunting task for higher education for more than a decade — and we don’t expect the challenge to get any easier.
“At the same time, with tuition discount rates at historic highs and inflation, as measured by the Commonfund Higher Education Price Index, at its highest level since 2008, the importance of endowments in the ecosystem of colleges and universities has never been greater.”
The study also identified continuing financial and other difficulties at a number of schools:
- Student enrollment declines, especially at some small private universities
- Increased pressure from policymakers to freeze or cut tuition while maintaining access and affordability
The annual NACUBO-Commonfund analyzes return data and a broad range of related information gathered from both public and private U.S. colleges and universities, as well as their supporting foundations. The fiscal 2017 study comprised 809 institutions, four more than last year. The participating schools had $566.8 billion in total endowment assets (as of June 30). The average endowment was $700.7 million, and the median was $127.8 million.
2017 Returns by Asset Class
Only fixed income among the five primary investment categories tracked in the study produced a lower return in fiscal 2017 compared with fiscal 2016: an average of 2.4%, down from 3.6%.
Non-U.S. equities generated this year’s highest return, 20.2%, up from -7.8% last year. U.S. equities followed, returning 17.6%, well ahead of last year’s -0.2% return.
Alternative strategies reported a 7.8% return, versus -1.4% in fiscal 2016, while short-term securities/cash/other returned 1.4%, compared with last year’s 0.2%.
Among various alternative investment strategies, private equity provided the highest return, 11.7%. Distressed debt returned 8.9% and venture capital 8.4%.
Hedge funds, private equity real estate, and energy and natural resources generated returns in the 7% range, while commodities and managed futures produced the only negative return, down 2.5%.
The study noted that asset allocations remained stable in fiscal 2017, with only two small shifts:
- U.S. equities: 16% (FY2017) vs. 16% (FY2016)
- Fixed income: 8% vs. 8%
- Non-U.S. equities: 20% vs 19%
- Alternative strategies: 52% vs. 53%
- Short-term securities/cash/other: 4% vs. 4%
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