College and university endowments returned an average 8.2 percent in 2018, down from 12.2 percent in the previous year, according to the latest annual survey by the National Association of College and University Business Officers (NACUBO) and Teachers Insurance and Annuity Association of America (TIAA).
The 2018 NACUBO-TIAA Study of Endowments (NTSE) spans July 2017 to June 2018 for 802 U.S. colleges and university that participated in the survey. About 95 percent of the 809 schools from last year’s survey participated. The study is the first year of a new partnership between NACUBO and TIAA. Previously, NACUBO had partnered with Wilton, Conn.-based Commonfund Institute. The membership organization represents more than 1,900 colleges and universities nationwide.
Average returns were positive across the board:
- 8.2 percent, 1-year
- 6.2 percent, 3-year
- 7.3 percent, 5-year
- 5.8 percent, 10-year
One-year returns were solid and sufficient to fund current spending and recent inflation, said Susan Whealler Johnston, president and chief executive officer of NACUBO. The average 4.4 percent effective spending rate in 2018 remained the same as the previous year while two-thirds of institutions increased spending from the endowment, with median increase at 6.6 percent.
“The increases in spending combined with lower returns could have implications for future spending,” she said.
The study introduced new data on how institutions allocated endowment spending. Nearly half of endowment withdrawals went to support student scholarships and other financial aid (49 percent), followed by 16 percent that supported academic programs. Another 10 percent went toward faculty positions and 7 percent to campus operations, among the major categories tracked.
Even with the lowest year-over-year returns in a decade, the average 10-year return was up from 4.6 percent but still trailed the average long-term institutional target of 7.2 percent (inflation plus 5 percent).
All major asset classes saw positive one-year returns but fell short of 2017 returns:
- U.S. equities, 13.6 percent, down from 17.6 percent in 2017;
- Non-U.S. equities, 6.8 percent, down from 20.2 percent;
- Alternative strategies, 8.3 percent, up from 7.8 percent;
- Short-term securities/cash/other, 1.3 percent, down from 1.4 percent;
- Fixed income, 0.5 percent, down from 2.4 percent.
With little change in asset allocation, the drop in growth from 17.6 percent in 2017 to 13.6 percent in 2018 could be attributed largely to a decline in U.S. and international equities, according to Kevin O’Leary, chief executive officer of TIAA Endowment and Philanthropic Services. For the same period, July 2017 to June 2018, the S&P 500 returned 14.4 percent, and the Russell 3000 returned 14.8 percent, according to the study.
The NTSE data does not reflect the downturn that hit the markets in November and December 2018 that left all of the major indexes in negative territory. That timeframe will be included in next year’s report, covering July 2018 to June 2019.
Total endowment assets of those surveyed was $616.5 billion, as of June 30, 2018. The average endowment was $770 million, up from $708 million, with the median endowment of $140.2 million, up from $133 million. More than two in five participants reported endowments that were $101 million or less while the 104 endowments of more than $1 billion accounted for almost 77 percent of the total value. About two-thirds of those participating were private institutions.
Ten-year returns have ranged from 3.4 percent to 7.1 percent in recent years and the next year’s 10-year return could jump as the final year of the Great Recession (-18.7 percent in 2009) finally drops from the timeline, according to Ken Redd, senior director of research and policy analysis at NACUBO. A rising interest rate environment could create challenging headwinds for endowments to reach their long-term targets, he said.
The overwhelming trend is that as endowments grow larger, the better they tend to perform, Redd said. The highest overall average one-year return was found among endowments of more than $1 billion, at 9.7 percent, driven by more exposure to alternative strategies, almost 58 percent. Hedge funds (5.5 percent) continued to be a drag on the alternative strategies but venture capital (13.4 percent) and private equity (13.2 percent) helped boost the class, allowing larger endowments to outperform others.
The largest endowment in the survey was Harvard University at $38 billion, which saw a change in market value of 6.3 percent. The University of Texas system was the only other endowment with a market value of more than $30 billion, up 16 percent from 2017 to $30.8 billion.
The biggest increase in market value among the largest endowments was 27.4 percent by the University of California-San Francisco, which rose from $1.3 billion to $1.6 billion. Gambier, Ohio-based Kenyon College saw its endowment rise almost 74 percent, from $238 million to $414 million.
Only 35 of the 802 endowments in the survey reported a decline in market value. The average change in market value was 8.8 percent, with a median change of 6.3 percent.