U.S. college and university endowments and their affiliated foundations spent more from their endowments in fiscal 2020 than in the previous fiscal year, supporting students, faculty and their mission despite lower average returns, according to the 2020 NACUBO-TIAA Study of Endowments.
The study findings, released Friday, portend a long era of muted returns for higher education institutions, which will likely encourage them to have a fresh look at financial and investment strategies in order to meet critical return targets and sustain their mission of providing urgently needed support to students.
The new study was based on responses of 705 institutions representing $638 billion in endowment assets, and covers the fiscal year July 1, 2019, to June 30, 2020.
As of June 30, institutions in the study reported an average endowment of $905 million, up 1.6% from 12 months earlier. The median endowment among respondents totaled $165 million; 45% of endowments totaled less than $140 million.
“With data through mid-year 2020, the study captures the first several months of the higher education community’s experiences with the global COVID-19 pandemic; in next year’s report, the fiscal year 2021 findings will help complete the picture of how institutions and their endowments coped,” NACUBO’s president and chief executive, Susan Johnston, said in a statement.
“Even in this challenging year, higher education institutions reinforced their commitment to students and used their endowments exactly as designed: to provide ongoing, predictable — and even increased — support for their educational missions, a commitment that endowment leaders work to ensure will extend to future generations.”
Endowments’ average one-year returns were 1.8% as of June 30, compared with 5.3% for the previous fiscal year. The historical target return for endowments has been 7.5%, comprising spending requirements, but in recent years, endowments have been challenged to meet this target, according to the study.
Although 10-year annualized returns total 7.5%, five-year annualized returns total just 5.1%. Fifteen-year annualized returns are at 6.2%, and 20-year returns at 5.5%.
“The one-year performance figure reflects the reality that few market sectors were immune to the steep downturn in early 2020 and most markets had not fully recovered by the time the fiscal year ended on June 30,” Doug Chittenden, head of institutional relationships at TIAA, said in the statement.
“Investment markets rebounded strongly in 2020’s latter half, so the FY20 investment return figure likely understates the performance achieved by most funds in calendar year 2020.”
Chittenden noted, however, that endowments will have to consider ways to meet their targeted return rate. “An endowment can consider adopting more risk and exploring changes in portfolio construction, among other steps.”
COVID-19 and Other Challenges
The 705 institutions in the study collectively spent $23 billion from their endowments in fiscal 2020, a year-over-year increase of 4%. Seven in 10 schools increased spending from their endowments, with an average increase of about $3.3 million.
“This increase in spending reflects the success of governance policies focused on intergenerational equity,” Johnston said. “With solid fiscal management, endowments can consistently support institutions with more revenue each year than the previous year.”
Endowments’ average effective annual spending rate — the dollars spent from endowments divided by the endowment market value on July 1 — increased as well, to 4.6% in fiscal 2020, up from 4.4% the year before.
Financial aid to students represented 48% of endowment spending, the single largest percentage. An additional 17% of endowment spending funded academics, including teaching, tutoring and related support.