Endowments Post Highest Returns Since 1986

College and university endowments posted their strongest annual performance in 35 years, according to new data from Wilshire Trust Universe Comparison Service reported by Bloomberg.

The median return before fees was 27 percent in the 2021 fiscal year, which ended on June 30. By comparison, U.S. college and university endowments saw a 2.6 percent median return in fiscal year 2020 and a 6 percent median return in fiscal year 2019. College endowments of at least $500 million -- of which there are about 200 -- reported a median return of 34 percent in fiscal 2021, higher than the overall average.

“​​Especially coming out of challenging years, it is a big deal for schools from a balance sheet strength perspective,” said Jessica Wood, a credit analyst at the ratings agency S&P Global. “If over the next year we don’t see some dramatic swing in the opposite direction, it’s a very positive credit factor for institutions.”

The boom in U.S. stock prices drove the high returns.

“Whenever the stock market does well, endowments -- just like other institutional investors -- tend to do very well. So last fiscal year -- the year that ended June 30 -- the stock market as measured by the S&P 500 did about 40.8 percent, which is astounding,” said Ken Redd, director of research and policy analysis at the National Association of College and University Business Officers. “So whenever you get a major stock index like that rising, we tend to get very high endowment returns.”

Other assets, including venture capital, private equity funds and hedge funds, also saw increased performance last fiscal year. Large endowments of $500 million or more are more likely to be invested in venture capital and private equity, whereas small endowments worth $50 million or less invest primarily in U.S. equities, according to the most recent endowment study by NACUBO.

Wilshire Trust Universe Comparison Service, an investment analytics company, provided its college and university endowment data to Bloomberg but did not respond to Inside Higher Ed's request for similar information. It was not clear how many institutions were included in the sample Wilshire shared with Bloomberg, and the Wilshire data did not identify any individual institutions, which typically start reporting their endowment returns in the fall. NACUBO’s analysis of college endowment returns -- which will likely be released sometime this winter -- might look a bit different than the Wilshire data, because it relies on individual institutions’ reports.

The skyrocketing endowment funds don’t translate into cash for colleges and universities. While one-time gains are exciting, colleges do not set their endowment spending strategies based on single-year returns. Instead, they typically use rolling endowment averages to determine how much money to spend from their endowment each year.

“A one-year return that’s really high is obviously nice and welcomed by anybody, but it has a very limited impact on the actual amount institutions withdraw from their endowments,” Redd said.

Many institutions are working to maintain or lower their endowment spending, according to Wood. By doing so, they can keep more money invested and see bigger gains when the market does well, as it did in fiscal 2021.

Colleges and universities that fared especially well in the past fiscal year may use the good news as a marketing tactic and talk up the returns to potential donors, Redd said.

“Any time an institution does well in any metric -- that could be investor returns, recruitment, enrollment, those kinds of metrics -- institutions will sometimes use that as part of their outreach campaign,” he said.

While the stellar returns are great for colleges and universities with significant endowments, they will widen the wealth gap between higher education institutions, Wood said. The wealthiest colleges get lots of attention, but many institutions don’t have endowments or maintain very small ones. Those colleges and universities don’t benefit from the rising stock market in the same way.

“We have talked for several years in a lot of our reports about that growing bifurcation between the haves and the have-nots -- the highly selective institutions with the huge endowments, and then the smaller, less selective schools that don’t have as much fundraising capability,” Wood said. “We’ve seen that gap continue to grow. We saw it even widen further during the pandemic.”

Redd warned against assigning too much weight to a good year of returns. Most colleges face similar challenges heading into the 2021-22 academic year -- enrollment and revenue declines and the COVID-19 pandemic -- all of which could impact their financial success. He likened a college endowment to an individual’s retirement account -- a positive uptick in retirement savings doesn’t promise good personal finance or success in other areas of life.

“All of us had a great year in terms of our individual retirement accounts. If you look at your retirement account now, it’s certainly larger than it was a year ago,” Redd said. “But that doesn’t make you a better person, it just means that your retirement account for one year did get better than you thought it might.”

Experts are unsure how returns will look by the end of fiscal 2022, which began July 1. The ongoing COVID-19 pandemic and the rising Delta variant could cause anxiety in the stock market.

“There’s a lot of cautious optimism about schools being on campus, the normalization of enrollment, and the Delta variant does come into play and add a little bit of uncertainty,” Wood said.