The endowments of more than eight hundred U.S. colleges and universities returned an average of 8.2 percent, net of fees, in the fiscal year that ended June 30, 2018, a significant drop from the 12.2 percent recorded in FY2017, a report from the National Association of College and University Business Officers and TIAA finds.
According to the 2018 NACUBO-TIAA Study of Endowments, the decrease in year-over-year performance was driven largely by declines in the U.S. and international equity markets. And while the ten-year average annual return for endowments in the survey rose 1.2 percentage points in FY18, to 5.8 percent, it remained below the 7.2 percent annual return institutions target as a long-term return objective.
Despite the lackluster returns, colleges and universities in the survey reported spending a total of more than $21.6 billion from their endowments on campus operations, with 66 percent of respondents spending more than they did in FY17. According to a new analysis included in this year's report of how those funds were allocated, schools spent 49 percent of their endowment withdrawals on scholarships and other financial aid programs and 16 percent on academic tutoring and related services.
The study also found that larger institutions posted higher average returns in FY18 than smaller institutions, in part because they had higher allocations to alternative strategies such as private equity and venture capital — the only one of the five asset classes in the study with higher average returns in FY18 than in FY17 (8.3 percent, up from 7.8 percent). By contrast, returns for U.S. equities (17.6 percent to 13.6 percent), non-U.S. equities (20.2 percent to 6.8 percent), fixed income (2.4 percent to 0.5 percent), and from short-term securities/cash/other (1.4 percent to 1.3 percent) all fell.
"Endowments are playing a bigger role in institutions' operations, funding an average of 10 percent of the operating budget in 2018," said Kevin O'Leary, CEO of TIAA Endowment and Philanthropic Services. "Given the role endowments play to fulfill institutional missions — and their sensitivity to policy and management decisions — a more comprehensive approach to endowment management has become pivotal to the success of higher education institutions."