Endowment returns plunge into negative territory


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Dive Brief:

  • College endowment returns averaged -8% in fiscal 2022 as a slew of conditions that had been buoying markets turned stormy, battering public equities and bonds, according to a report released Friday.
  • Endowments of all sizes averaged negative returns, shows the report, from the National Association of College and University Business Officers and money manager TIAA. The largest group measured — endowments with over $1 billion in assets — performed best on average, with a still-dour return of -4.5%. The smallest, which have less than $25 million in assets, did worst, returning -11.5% on average.
  • The largest endowments’ market values tended to fare better than smaller cohorts, as well. Declines averaged 3.8% for the largest endowments, compared to a 9.6% average decline for NACUBO’s three smallest endowment cohorts.

Dive Insight:

Endowments sailed into the 2022 fiscal year on the strength of some of their highest-ever returns. In fiscal 2021, college endowment returns averaged 30.6%, the second-highest rate NACUBO has recorded in nearly 50 years.

Positive economic factors continued during the first six months of the new fiscal year, which starts for most colleges July 1. But after December 2021, factors like high inflation and economic disruptions started to harm investments.

“In the fiscal year’s first half, positive economic tailwinds drove equities higher,” Lynne Schaefer, NACUBO’s interim president, said during a video presentation with reporters to discuss the findings. “This was then followed by a crushing combination of inflationary pressures and other factors that pushed most major investment indices down sharply.”

Large endowments likely fared better than smaller ones because they tend to invest more in private markets, especially venture capital and private equity, according to NACUBO. Small endowments, on the other hand, skew their investments toward fixed income and public equities — both of which faltered in fiscal 2022.

The low returns weighed on endowments’ long-term performance metrics. Five-year returns now average 7.3%, and 10-year returns average 7.8%. Last year those markers were substantially higher, at 11.4% and 8.5%, respectively.

That’s important because endowments measure returns against long-term goals to determine whether they’re growing and spending at appropriate levels to maintain their wealth over time. 

NACUBO quotes a target return rate of 7.5% as being generally accepted. But it also suggested high inflation and questions about future equity performance may call that goal into question.

“For several years, many market commentators predicted that markets were entering a period of lower expected returns, against the backdrop of a decade-long bull run in equity markets and declining interest rates that pushed bond prices higher,” Jill Popovich, senior managing director and regional general manager at TIAA, said in a statement. “FY22 may represent an abrupt entry into this long-anticipated low-return environment, with fundamental portfolio design and management implications for endowments.”

NACUBO’s study included responses from 678 higher ed institutions with endowments worth a total of more than $800 billion. The average endowment was worth $1.2 billion, but the median endowment was worth a bit over $200 million — a gulf that shows endowment assets are heavily skewed toward the wealthiest institutions. 

Endowments with more than $1 billion in assets held 84% of all the market value of institutions covered in the study.

Spending from endowments totaled almost $25.9 billion. The average effective spending rate fell to 4.2%, down from about 4.8% the prior year. 

While the lower spending rates may represent caution amid uncertain economic conditions, wealthy colleges in particular have drawn flak for low spending in comparison to the large size of their endowments.

Almost half of all spending from endowments, 46%, went to student financial aid, NACUBO found. Academic programs and research received 15.6% of spending, endowed faculty positions received 11%, campus operations and maintenance drew 10%, and other purposes accounted for 17%.

Nearly 3 in 4 institutions used endowment spending toward their operating budgets. A median 5.3% of operating budgets were funded by endowments.

Giving to endowments increased by 22%, on average, across small and large endowments, NACUBO found.

“Across most institutions, strong gifting activity partially offset the loss in value caused by the market downturn,” Popovich said in a statement.

High giving likely reflected financial conditions that were strong at the end of 2021 as major donors closed out the tax year. Some two-thirds of giving was allotted for diversity, equity and inclusion efforts — much of it at institutions with endowments valued at $250 million or less.


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