Endowments Up 12%

Colleges' endowment investment returns are back up -- by double digits -- just a year after they saw a decline.

The average North American college endowment fund grew by nearly 12 percent in the 2013 budget year, according to an annual survey of 835 institutions by Commonfund and the National Association of College and University Business Officers. The survey, released today, tracks closely with preliminary results released in November.

Boosted by such returns, endowment funds of all sizes – from the $714,000 endowment at Southern Virginia University to the $32 billion endowment at Harvard University – grew in 2013, with few exceptions.

But even the healthy returns of 11.7 percent were not enough to make up for the turbulence of the recession: Over the past 10 years, college endowment funds have seen an average return of 7.1 percent, which is slightly below their average long-term growth target of 7.4 percent. Colleges need to see annual returns of about 9 percent to actually increase their endowments because they typically spend about 5 percent of their fund each year on things like financial aid, and they have to keep up with inflation.

The report divides funds into six categories based on their size. It found funds of all sizes were able to achieve similar returns, even though managers of the different-sized funds made different investment decisions. The largest funds – of $1 billion or more – rely heavily on so-called alternative strategies, including hedge funds, real estate and private equity. The smallest funds, with less than $25 million, rely most heavily on U.S. stocks.

“It was an interesting demonstration of how you can have many sources of return,” said Bill Jarvis, the managing director of the Commonfund Institute, which advises nonprofit investors and helped prepare the report.

He worried, however, about smaller funds that were also heavily invested in the bond market. The smallest funds have about a third of their endowments such fixed income assets.

“There’s this false perception that bonds are a safe asset,” Jarvis said.

The largest endowments are the usual suspects – elite privates with a few large, elite public universities or university systems. The four largest funds after Harvard are Yale University, the University of Texas System, Stanford University and Princeton University.

The survey’s authors are also not entirely optimistic about the future for funds, particularly, or colleges generally. They noted the nearly flat amount of revenue colleges are generating per student, predictions that enrollment will shrink nationally and the strain that declines in state support put on public colleges.

Endowment funds make up about 9 percent of the surveyed colleges’ operating budgets. Of course, among the colleges with the largest endowments, investment income is a much larger share of operating budgets. About 16 percent of the operating budgets of the colleges with the largest endowments comes from endowment funds compared to 2.5 percent of the operating budgets of colleges with the smallest funds.

Donations to endowment funds are also up, according to the report. Just over half of the colleges reported an increase in giving, though a third of the colleges reported a decrease.

The report also included a list of 849 endowment funds’ overall size and one-year change in market value, which measures not just investment returns but also gifts to the endowment and spending out of the endowment.

According to the report, a handful of college funds lost overall market value, which could be because of spending not bad investments. They include Lebanese American University, Creighton University, Carleton University in Canada, Trinity College Toronto, William Peace University, Delaware Valley College, the Thunderbird School of Global Management, College of Saint Elizabeth, Saint Mary-of-the-Woods College and New England College.

Preliminary findings released last year suggested colleges were curbing their use of alternative investment strategies. In the final report, use of such investments is characterized as flat, not significantly declining. The following tables show the colleges and universities with the largest 2013 endowments, as well as the top liberal arts colleges, the top historically black colleges, and the top Canadian universities, by endowment.

Colleges With Largest Endowments, 2013

Liberal Arts Colleges With Largest Endowments, 2013

Historically Black Colleges With Largest Endowments, 2013

Canadian Universities With Largest Endowments, 2013