College Endowment Returns Up Sharply in Fiscal 2017

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.

This compared with a negative return of 1.9% for fiscal 2016 and a gain of 2.4% for fiscal 2015.

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.