Investment returns for college and university endowments of all sizes soared in 2021 as managers expect to face stronger headwinds of higher inflation going forward.
For the 12 months ending June 30, 2021, endowments generated an overall average return of 30.6% (net of fees), light years ahead of the 1.8% overall average return in 2020. All endowment size cohorts saw returns greater than 20% for 2021. The gap in returns between the largest endowments (those with more than $1 billion in assets) and the smallest (those with assets of $25 million and below) was more than 13 percentage points.
The 2021 NACUBO-TIAA Study of Endowments®, released today, reflects the responses of 720 institutions representing $821 billion in endowment assets.
“This year’s results reflect strong market performance and good endowment management and more importantly, provide continued financial reliability for support of students, faculty, and academic programs,” Susan Whealler Johnston, president and CEO of the National Association of College and University Business Officers (NACUBO), said in a press release announcing the results.
The average size of endowments in the survey was $1.1 billion, up 35% from 2020, and the median endowment was about $200 million. More than half of participating endowments were less than $250 million and typically schools with smaller endowments don’t participate in the study, Johnston said.
Some 84% of the total market value was held by those endowments of $1 billion or more and two-thirds by private university and college endowments. Harvard University had the largest endowment in the study, with a total market value of nearly $52 billion.
Even though 2021 provided exceptional investment returns, endowments will continue to be challenged to meet their return targets going forward as endowment managers foresee inflation as a longer-term issue.
“Inflation will likely be a concerted focus of asset allocation discussions as endowments strive to maintain portfolio approaches best aligned with their core mission,” Doug Chittenden, head of client relationships at TIAA, said. “Fiscal year 2021 reflects a unique moment in time with exceptional circumstances,” said Chittenden. “Endowments benefited from a broad market recovery from volatility at the pandemic’s onset, but they also see more challenging market conditions ahead and have been adjusting their expectations.”
Historical data suggest that long-term returns will begin trending downward at a time when inflation and endowment spending needs are moving the opposite way. New gifting in 2021 increased significantly, rising 15% over 2020, with increases in gifting activity particularly strong among small and medium-sized endowments.
Endowments generally maintain a historical 7.5% target return level, reflecting spending requirements, inflation expectations, and fees and expenses. Return averages for the three-, five- and 10-year time periods exceed that target, but the 15-, 20-, and 25-year return averages all fall below it, and the target also appears to be increasing. Blockbuster returns have a limited impact on annualized longer returns, Ivy Flores, managing director at Nuveen, a TIAA company, said. “It’s an ongoing, key challenge to endowments,” she added.
“Holding the past two years in contrast is a good way to see the value of the conservative approach,” Wheeler said during a conference call announcing the results. “The spending rate did not drop last year in the face of low returns and has not risen this year in the face of high returns.”
In 2020, the primary components of endowments’ return targets totaled 7.51%. However, in 2021, that total jumped to 7.94%, driven by large increases in fees and expenses as well as long-term inflation expectations, which rose by 22 basis points, or 0.22%, in 2021.
During 2021, endowment values benefited from dramatic gains in several asset classes, including publicly traded equities, commodities, and high yield fixed income, all of which produced outsized returns compared to their historical averages. Nearly every asset class in the endowment investment universe had a positive return, with U.S. equities, up 31.5%, providing the best returns overall.
The average annual effective spending rate reported by endowments was 4.54% in 2021, consistent with 2020. More than half of endowments increased support for their institution’s operating budget in 2021. Student financial aid received the largest percentage of endowment spending, at 47%, followed by:
— Academic programs and research, 15%
— Endowed faculty positions, 11%
— Campus facilities’ operation and maintenance, 9%
In general, endowments’ asset allocations as of 2021’s close changed only slightly from the previous year. However, since rising interest rates and surging inflation were becoming more prominent around the end of the survey period and in ensuing months, endowments likely will be considering asset allocation adjustments reflecting tightening monetary policy in the U.S. and other key markets.
Larger endowments have considerably less exposure than smaller endowments to U.S. public equities and much higher allocations to private equity and venture capital. Marketable alternatives, primarily hedge funds, made up approximately 17% of survey respondents’ portfolios.