If you’re still smarting from your year-end 401k statement, you might not want to read this. The 2018 NACUBO-TIAA Study of Endowments showed that even institutional investors were not immune to market performance, with endowment returns down almost 1/3 from 2017 to 2018. Endowments still managed an average return of 8.2%, though the 10-year average annual return came in at 5.8%, short of the 7.2% 10-year return target.
Why do we care? Many colleges and universities are increasingly relying on endowments to fund financial aid and other student services. Last year, about 2/3 of institutions surveyed increased their endowment spending, by an average rate of 6.6%. Among all survey respondents, the endowment spending rate averaged 4.4% in 2018. (The spending rate is the annual spending divided by the endowment value at the start of the year.)
Where do endowment dollars get spent? According to the study, about half gets spent on financial aid, with 16% going to academic support and 10% to faculty positions. Endowments on average covered 10% of a university’s operating budget last year.
On the positive side, endowment values grew on average at a higher rate than simply their investment returns. That’s largely a function of gifting, which was just under $10 billion in 2018.
However, investment returns and gifting tend to go hand-in-hand. When the stock market performs well, individuals give more. When the stock market experiences volatility or underperformance, endowments and charities worry about funding, according to the Chronicle of Philanthopy. And of course, while those two items go together, so too do bad economies and need for financial aid.
If you’re looking at colleges, there’s an important subtext here: Colleges might be publicly-funded, endowment-funded, or tuition-funded. (Many institutions are funded by at least two of those.) Smaller, tuition-reliant schools have struggled lately, which makes sense if you consider that endowments fund about 10% of a school’s operations: without an endowment, it can be hard to make ends meet. And when half of endowment spending goes to financial aid, it can be difficult for endowment-poor schools to generate the revenue needed from students to make ends meet. All by way of saying: As you’re looking at schools, look at their funding sources and financial health and consider potential paths of tuition hikes over the course of your education.