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In what was a tumultuous year for markets, college and university endowments felt the sting of headwinds.
The 2015 NACUBO-Commonfund Study of Endowments (NCSE) shows that the average rate of return for endowments sunk to 2.4 percent in the 2015 fiscal year , a drastic drop from the last year’s 15.5 percent. In fact, annual returns hit a three-year low, dipping to levels last seen in 2012 when returns were -0.3 percent.
The study includes data from 812 US colleges and universities, which represent a total $529 billion in endowment assets, and reports significant declines across all investment categories, including domestic equities, alternative strategies, fixed income and international equities. Domestic equities yielded the highest returns at 6.4 percent, as compared to last year’s 22.8 percent. Alternative strategies returned 1.1 percent, down from 12.7 percent; fixed income returned 0.2 percent, well below last year’s 5.1 percent; and international equities returned -2.1 percent, as compared to 2014's 19.2 percent.
Breaking down alternative strategies, venture capital accounted for the highest returns at 15.1 percent, followed by private equity at 9.3 percent, distressed debt at 5.4 percent and marketable alternative strategies at 2.7 percent. Two alternative investment strategies generated negative returns: commodities and managed futures returned -17.7 percent compared to a 7.9 percent gain in 2014, and energy and natural resources returned -13.3 percent compared to a 15.3 percent in the previous year.
Most notably, 2015’s slide in endowment performance dragged down the long-term 10-year average annual return to 6.3 percent from 7.1 percent . Endowment managers use the 10-year annual return rate for long-range planning purposes and suggest a rate of 7.5 percent to maintain purchasing power after accounting for spending, inflation and investment management costs. Unfortunately, this year's low 10-year annual return may jeopardize schools’ abilities to afford important academic and operational expenses.
Source: NACUBO-Commonfund Study of Endowments (NCSE)
“Fiscal year 2015’s lower average 10-year return is a great concern,” John Walda, NACUBO President and CEO, said in an official statement. “On average, institutions derive nearly 10 percent of their operating funds from their endowments. Lower returns may make it even tougher for colleges and universities to adequately fund financial aid, research, and other programs that are very reliant on endowment earnings and are vital to institutions’ missions.”
Although endowments’ investment gains suffered in 2015, 78 percent of the study’s colleges and universities reported spending more endowment dollars than last year. Institutions that increased endowment spending reported a median rise in spending of 8.8 percent. Despite According to Walda, an increase in spending may be a positive signal that schools are committed to supporting programs despite poor endowment performance.
Although endowments' investment gains disappointed, the study reported a silver living — gift giving did not see similar declines. In fact, the median total of new gifts to endowment increased to $2.7 million from last year’s $2.5 million. Unchanged from last year, 45 percent of institutions reported an increase in endowment gifts and 38 percent reported a decrease in gifts.
Investment gains varied widely among colleges and universities, but the top five largest endowments maintained their spots as the wealthiest institutions from fiscal year 2014. Harvard University tops the list again with an endowment worth $36.4 billion, slightly up 1.6 percent from last year. Yale grew 7 percent to $25.6 billion, stealing second place from the University of Texas System, which shrunk -5.3 percent to $24.1 billion. Princeton University and the Massachusetts Institute of Technology swapped fourth and fifth place, respectively growing their endowments 8.2 percent to $22.7 billion and 3.6 percent to $22.2 billion.
