Returns on educational endowments fell sharply in FY20, study finds

Returns on educational endowments fell sharply in FY20, study finds

The endowments of more than seven hundred U.S. colleges and universities returned an average of 1.8 percent, net of fees, in the fiscal year that ended June 30, 2020, down from 5.2 percent in FY19 and 8.2 percent in FY18, a report from the National Association of College and University Business Officers (NACUBO) and TIAA finds.

According to the 2020 NACUBO-TIAA Study of Endowments, the average size of an endowment in the study was $905 million as of June 30, up 1.6 percent from a year earlier, while the median endowment size was $164.6 million. The report notes that educational endowments have seen long-term returns decline in recent years, with ten-year annualized returns meeting the historical target of 7.5 percent, five-year annualized returns of 5.1 percent, fifteen-year annualized returns of 6.2 percent, and twenty-year returns of 5.5 percent. The largest endowments (assets of more than $1 billion) and smallest (assets under $25 million) reported the highest average one-year return, 2.5 percent, while private institutions saw average returns of 2 percent and public institutions reported an average of 1.5 percent.

The study also found that total endowment spend by all institutions in FY20 increased 4 percent, to $23.3 billion, with 70 percent of institutions reporting a higher spend than in 2019. The average effective annual spending rate rose to 4.59 percent, from 4.36 percent in FY19, with endowments of between $51 million and $100 million reporting the highest rate (5 percent), and private institutions reporting a 4.9 percent rate. Nearly half of respondents reported increased operating spending in FY20, while more than 40 percent reported a decrease in cash flow, the likely result of a decline in tuition revenue due to lower enrollment and reduced revenue from on-campus services.

The study also found that while approximately 80 percent of endowment managers said ESG factors are reflected in their investment policy, endowments generally have not integrated responsible investing criteria into portfolio construction in a meaningful way. For the first time, the survey asked about diversity policies and found that 6 percent of respondents who answered the question said their institution had a formal policy addressing diversity and inclusion related to investment manager selection.

"Even in this challenging year, higher education institutions reinforced their commitment to students and used their endowments exactly as designed: to provide ongoing, predictable — and even increased — support for their educational missions, a commitment that endowment leaders work to ensure will extend to future generations," said NACUBO president and CEO Susan Whealler Johnston. "This increase in spending reflects the success of governance policies focused on intergenerational equity. With solid fiscal management, endowments can consistently support institutions with more revenue each year than the previous year

"In year punctured by pandemic, higher education endowments provide more than $23 billion to support students, mission." National Association of College and University Business Officers and TIAA press release 02/19/2021. "2020 NACUBO-TIAA Study of Endowments tables." National Association of College and University Business Officers and TIAA tables 02/19/2021.