College and university endowments earned 8.2 percent on average during the 2018 fiscal year, with the top performers earning an average of 11.6 percent, according to the annual study from the National Association of College and University Business Officers.
The study — conducted in partnership with TIAA this year instead of Commonfund — tracked the performance, asset allocation, and spending of 802 U.S. endowments over the year ending June 30. This fiscal year cut-off meant performance figures included the second half of the 2017 stock rally but not the precipitous market decline at the end of last year.
Endowments larger than $1 billion reported an average annual return of 9.7 percent, net-of-fees, outperforming smaller peers. TIAA executive Kevin O’Leary attributed the large funds’ advantage to their capacity for illiquid investments. According to the study, billion-dollar-plus endowments allocated 58 percent of their portfolios to alternatives such as private equity and natural resources, while the smallest endowments derived most of their returns from domestic equities.
Top performers in fiscal 2018 included the $25.9 billion Princeton endowment, which earned a 14.2 percent return, and the Massachusetts Institute of Technology’s $16.5 billion fund, which was up by 13.5 percent.
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Average returns for the peer group were down from last year’s 12.2 percent, but average 10-year returns increased to 5.8 percent for the group. The 2008 fiscal year has dropped out of decade window, which still recognized 2009’s 18.7 average loss.
Over the last decade, these institutions failed, as a whole, to meet their current long-term average return target of 7.2 percent. This continues a trend NACUBO chief executive Susan Whealler Johnston called worrisome for colleges and universities. “We remain concerned that the below-target long-term rate of return will make it more difficult for colleges and universities to increase spending to support their mission,” she said on a conference call with members of the press Tuesday.
According to the study, the average spending rate for endowments was 4.4 percent, unchanged from last year. The payout rate has varied little over the last decade, peaking at 4.6 percent in 2011.
New data tracked by NACUBO and TIAA this year revealed that academic institutions used almost half of their endowment spending to provide financial aid to students. Other uses of endowment dollars included academic programs, faculty positions, and campus operations.
Ten-year returns are expected to improve further next year, when they are no longer weighed down by the financial crisis, according to O’Leary, the CEO of TIAA Endowment and Philanthropic Services. However, he added that long-term return objectives will also likely increase as universities face rising interest rates and inflation. “That will make it even more challenging for endowments to hit their targets,” he said.