Colleges and universities were hit with increased costs due to coronavirus pandemic precautions just as revenue from enrollment dropped. As a result, many reached more deeply into their endowments to meet expenses during fiscal year 2020, which ended June 30, 2020, than they did in fiscal year 2019, according to the 2020 NACUBO-TIAA Study of Endowments.
The study, from Washington, D.C.-based National Association of College and University Business Officers (NACUBO) and financial services firm TIAA, found the academic institutions studied tapped their endowments for a total of $23.3 billion during fiscal year 2020, up 4% from fiscal year 2019’s level. Overall, seven in 10 institutions reported increasing spending from their endowments compared with fiscal year 2019. The average jump in spending was around $3.3 million.
“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,” NACUBO President and CEO Susan Whealler Johnston said in a statement.
NACUBO is a nonprofit professional organization representing chief administrative and financial officers at more than 1,700 colleges and universities across the country. This year’s study reflects the responses of 705 institutions representing $637.7 billion in endowment assets and covers the fiscal year July 1, 2019–June 30, 2020. The median endowment size was $164.6 million: 45% had endowments of less than $140 million.
The largest share of endowment expenditures went to student financial aid, which made up 48% of all spending, followed by 17% which supported a variety of academic functions, including teaching, tutoring and related programs, 11% for faculty positions and 7% for campus operations.
The increased spending comes at a time when academic institution endowment funds have been realizing lower returns than seen historically. The institutions surveyed realized an average return of 1.8% on their endowments during the 12 months prior to June 30, compared with 5.3% during fiscal year 2019. But even that was off the longer-term pace: The 10-year rate of return for endowments had been 7.5%, although this had slipped to 5.1% during the previous five years.
The drop in funding from investment income wasn’t the only financial blow colleges and universities suffered. More than 40% of respondents said their cash flow had dropped during the most recent year, reflecting lower tuition revenue, loss of income from on-campus services, and a 16% drop in new gifting, compared to fiscal 2019.
That said, there is hope for the coming fiscal year.
“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,” said Doug Chittenden, Executive Vice President and Head of Institutional Relationships at TIAA in a 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.”
The current economic struggles might cause some institutions to consider rebalancing their investment portfolio mixes. At the end of fiscal year 2020, the portfolios analyzed had one third of their funds in global public equities, 23% in private equity and venture capital, 20% in marketable alternatives, 12% in fixed income properties and 11% in real assets.
Smaller endowments had a higher position in fixed-income properties such as bonds, which are seen as a hedge against market volatility. Endowments under $25 million had 27% of their endowment in these, compared with 22% for funds with between $25 million and $50 million. The institutions with the largest endowments – in excess of $1 billion – had only 5.3% of their endowments in these.
While bonds may be safe, their conservative rates of return might be stymieing potential growth.
“Smaller endowments soon could feel compelled to re-examine their significant bond allocations given that currently interest rates have virtually no room left to fall – and, going forward, fixed income will likely not offer institutions the returns they enjoyed in past years,” Dimitri Stathopoulos, senior managing director at Chicago-based investment firm Nuveen, said via a statement.
Academic endowment investment strategies often give weight to considerations other than rate of return. As the events of 2020 put increased focus on social issues, investing strategies often included environmental, social and governance issues. Around 80% of academic endowment investment funds reflect these concerns at least partly in their strategies.
Additionally, when asked about diversity considerations in asset management, 6% of institutional representatives answering the question said their college or university had a formal policy regarding diversity and inclusion and investment management selection.
Done carefully, these considerations don’t necessarily impede investment success. “Market evidence increasingly indicates that a responsible investing approach can indeed deliver competitive returns,” Stathopoulos said in a statement. “The opportunity to more closely align investing and mission while also meeting return targets could encourage more endowments to consider these strategies.”