Market Up, Spending Up

Healthy stock markets in the United States and abroad allowed colleges to spend more money from their endowment funds.

January 29, 2015

Strong stock markets and generous donors allowed colleges to spend more money from their endowment funds on campus operations last year.

About 75 percent of North American colleges reported putting more money from their endowments into their 2014 operating budgets than they did in 2013, according to an annual survey of 832 institutions by the National Association of College and University Business Officers (NACUBO) and Commonfund Institute.

Last year was the second year of double-digit investment returns for most endowment fund managers -- after a year of flat growth and the ups and downs of the recession. The average North American college endowment fund saw 15.5 percent investment returns in the 2014 budget year, largely based on healthy stock markets in the United States and abroad.

In another measure of an endowment’s health -- which includes not just investment returns but also donor support and money going out the door for campus programs and projects -- the average endowment grew by 10 percent in 2014. The 2014 budget year for most colleges ended last June.

“This was a very good year,” said John Griswold, executive director of Commonfund. “You had a continuing strong stock market that certainly gave a good tailwind to the average endowment returns.”

As usual, the wealthier endowments fared better.

Colleges and university systems with endowments worth $1 billion or more received an average investment return of 16.5 percent -- a full point higher than colleges with endowments worth $25 million or less, which saw market returns of 15.5 percent.

The same pattern holds true over the years, too: the rich get richer in the endowment world.

At the same time, higher ed donor support increased, but nearly a fourth of all donations went to just 20 colleges, according to a separate report released this week.

Flush with philanthropy and amid a good stock market, college officials drew more cash from their endowments to spend on operations.

“Endowments are becoming more and more important to our institutions, and the reason is that other revenue streams are becoming constrained,” said John Walda, the president and CEO of NACUBO.

In 2014, colleges took about 4.4 percent of their endowment funds' worth, on average, and used it to operate the college. That’s the same spending rate as in 2013, but endowment funds were larger, so the overall money available increased.

“Philosophically it’s good be spending more when the institution needs it more,” Griswold said.

The percent of a college's budget that comes from its endowment varies dramatically, depending on the institution. Wealthy privates colleges may depend on endowment funds to supply nearly a fifth of their annual operating costs.

Demand for endowment fund money might grow, though. States are cutting support to public universities, and private colleges are struggling to find enough high school graduates. That means fewer state dollars and fewer tuition dollars. Colleges are trying to come up with new revenue plans, like renting out campus facilities, opening new programs, seeking research dollars or more aggressively hitting up donors. But endowments are always there -- until they’re not.

Even the healthy returns of nearly 16 percent were not enough to make up for the turbulence of the recession, which lingers on: Over the past 10 years, college endowment funds have seen an average return of 7.1 percent, which is slightly below the average long-term growth targets most universities need to meet. Colleges need to see annual returns of about 8 or 9 percent to actually increase their endowments, because they typically spend about 5 percent of their funds each year on things like financial aid, and they have to keep up with inflation. To colleges’ advantage, inflation has also been low.

There was some shuffling in the pecking order near the top, as judged by endowment size. The largest endowment remains Harvard University’s $35.8 billion ostrich-sized nest egg. A somewhat distant second down the list is the University of Texas System, which has $10 billion less than Harvard. Last year, Yale University was second on the list, now it's third.

The average endowment is $620 million, but in a sign of just how much the richest colleges skew the math, the median endowment size is a mere $110 million. So, if one took all the money from the bottom 50 percent of endowments and put the money into one pot, Harvard would still have more money than that -- about $15 billion more.

Columbia University moved off the top 10 list, which it was on last year, while University of Pennsylvania joined it.  

A dozen colleges' endowments shrank in size. The largest of those, Yeshiva University, has been struggling financially and had to dip into its endowment funds. Its fund, now worth just over $1 billion, is about 8 percent less valuable than it was a year ago. It is the 85th-largest endowment.

    2014 Endowment Value 2013 Endowment Value % Change 2013-2014
1 Harvard University  $           35,883,691,000  $      32,334,293,000 11%
2 The University of Texas System  $           25,425,922,020  $      20,448,312,550 24.3%
3 Yale University  $           23,900,000,000  $      20,780,000,000 15%
4 Stanford University  $           21,446,006,000  $      18,688,868,000 14.8%
5 Princeton University  $           20,995,518,000  $      18,200,433,000 15.4%
6 Massachusetts Institute of Technology  $           12,425,131,000  $      10,857,976,000 14.4%
7 The Texas A&M University System  $           11,103,880,000  $        8,732,009,890 27.2%
8 Northwestern University  $              9,778,112,000  $        7,883,323,000 24%
9 University of Michigan  $              9,731,459,620  $        8,382,311,160 16.1%
10 University of Pennsylvania  $              9,582,335,260  $        7,741,396,060 23.8%


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