College Endowment Returns Fell in Fiscal 2018

U.S. college and university endowments returned an average of 8.2% (net of fees) for the 2018 fiscal year, ended June 30, according to the 2018 NACIBO-TIAA Study of Endowments, released Thursday. This compared with 12.2% for the preceding fiscal year.

The mission-critical 10-year average annual return increased by 1.2 percentage points this year to 5.8%, but still lagged the 7.2% average return institutions put forward as a long-term return objective.

The report said year-over-year performance fell short mainly because of a decline in U.S. and international equity markets.

The new study comprised 802 institutions, representing $617 billion in endowment assets. While the size of the median endowment was approximately $140 million, 41% of study participants had endowments of $101 million or less.

Participating colleges and universities reported spending upward of $21.6 billion from their endowments on campus operations in fiscal 2018. New data introduced in this year’s study show how institutions allocated their endowment spending dollars.

On average, schools used 49% of their total endowment withdrawals to support student scholarships and other financial aid programs, and 16% of withdrawals for academic tutoring and other related functions.

“The new endowment spending data from this year’s study clearly demonstrate the deep commitment colleges and universities make to support financial aid and student success,” NACUBO’s president and chief executive Susan Whealler Johnston said in a statement.

“These data show that students and their families are the ultimate beneficiaries of institutions’ endowed funds. We remain concerned, however, about the below-target long-term rates of return, which have made it much more difficult for colleges and universities to increase endowment spending to support their missions.”

Even though the long-term returns remain below 6%, institutions continued to increase their endowment spending dollars. In fiscal 2018, 66% of schools that participated in the study reported raising their spending, and among those institutions, the median increase was 6.6%, well above the 2.8% rate of inflation as measured by the Commonfund Higher Education Price Index.

“Endowments are playing a bigger role in institutions’ operations, funding an average of 10% of the operating budget in 2018,” Kevin O’Leary, chief executive of TIAA Endowment and Philanthropic Services, said in the statement.

“Given the role endowments play to fulfill institutional missions — and their sensitivity to policy and management decisions — a more comprehensive approach to endowment management has become pivotal to the success of higher education institutions.”

FY18 in Retrospect

According to the study, the average asset allocation in fiscal 2018 of the institutional participants showed very little change from fiscal 2017. For the statistics representing all participants organized by total endowment market value, the major asset class categorizations were all virtually unchanged from the prior year’s survey results in the combined statistics:

• U.S. equities: 16%
• Fixed income: 8%
• Non-U.S. equities: 20%
• Alternative strategies: 52%
• Short-term securities/cash/other: 4%

Returns were lower in fiscal 2018 for study participants compared with the previous year in four of the five primary asset class categories. Only alternative strategies provided higher returns: 8.3% vs. 7.8%.

Non-U.S. equities, which produced last year’s highest return, 20.2%, fell to 6.8% in fiscal 2018, the biggest year-over-year decrease in percentage points. U.S. equities returned 13.6%, down from last year’s return of 17.6%. Fixed income came in at 0.5%, down from 2.4%, and short-term securities/cash/other returned 1.3%, slightly less than last year’s 1.4%.

According to the study, larger institutions posted higher average returns than smaller ones in fiscal 2018, in part because they had meaningfully higher allocations to alternative strategies, particularly private equity and venture capital.

Colleges and universities in the study reported $9.9 billion in total new gifts to their endowments in fiscal 2018.  Median gift levels experienced positive growth in the last two years, up from $3.2 million last year to $3.7 million this year — ranging from $376,000 for smaller institutions to more than $50 million for those with $1 billion or more.

The median gift value of public institutions outpaced that of private institutions, at $5 million and $3.1 million, respectively.