Endowment Returns Up Again

College endowment gains, which only two years ago were negative on average, are in the double digits for the second year in a row.

November 4, 2014

College endowment funds saw double-digit returns this year, but many are still just treading water over the past decade.

Endowments saw average market returns of 15.8 percent in the 2014 budget year, according to preliminary findings of a survey by Commonfund and the National Association of College and University Business Officers.

This makes the second year in a row that endowment fund managers have managed double-digit returns. Last year, investment returns were 11.7 percent. Two years ago, market returns were negative, and only six years ago, the recession and related economic crisis caused major losses for some funds.

“The studies have reported double-digit gains in four of the past five years, giving endowments a chance to rebuild after the erosion caused by the losses reported in FY2008 and FY2009,” said the Commonfund Institute's executive director, John Griswold, in a statement accompanying the survey’s release.

Still, endowments need more than just good short-term returns to grow. Typically, they need to get market returns of about 7 or 8 percent per year over 10 years to grow their principle. Each year, funds pay out a customary 5 percent of their total size to be used by the college they support -- and funds must also still cope with inflation. 

Over the past 10 years, endowment funds have seen only about 7 percent returns.

Kenneth Redd, the director of research and policy analysis for NACUBO, said funds are only “about treading water” and breaking even over the past decade. 

“We do think the returns over all will remain very positive,” he said in a telephone interview. That means that colleges can pay out more money for things like construction, scholarships, research and faculty.

The double-digit returns were not a surprise: the stock market grew by about 20 percent during the 2014 budget year, which for most institutions ran from summer 2013 to summer 2014. On average, about eighth or so of an endowment fund's portfolio is invested in domestic stocks. 

A few colleges – Duke University, Yale University and the University of Minnesota – already reported impressive investment returns of 20 percent or more.

The NACUBO-Commonfund survey received full or partial responses from 426 American colleges and universities. The final survey, to be released early next year, typically draws about twice as many full responses. That survey lists the endowment values of individual colleges and universities, unlike the preliminary release.


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