University endowment returns bounce back after 2 bad years

Hundreds of U.S. universities made big returns on their financial investment last year, marking an upswing after two sluggish years, according to a new study. (Shutterstock)

BOSTON—Hundreds of U.S. universities made big returns on their financial investment last year, marking an upswing after two sluggish years, according to a new study.

The survey of 800 schools found that the value of the average college endowment grew by 12.2 per cent in fiscal year 2017, following average returns of -1.9 per cent the year before and 2.4 per cent in 2015.

Authors of the study say the improvement is largely tied to strong stock markets in the U.S. and abroad, which brought colleges the largest returns compared to other types of investments.

“It was a very strong year,” Catherine Keating, president and CEO of the Commonfund Institute, an investment firm based in Connecticut. “This obviously reflects continued strength in public equity markets.”

The annual study is done by the Commonfund Institute and the National Association of College and University Business Officers, based in Washington.

Among the schools surveyed, the average endowment was valued at slightly more than $700 million, with 100 that had at least $1 billion and 10 that reported $10 billion or more.

Harvard University continued to top the list with $36 billion, but its endowment grew by only 4.3 per cent, the lowest rate among the wealthiest institutions.

Officials at Harvard declined to comment on the findings but provided a 2017 memo from investment chief N.P. Narvekar saying returns have been “disappointing” and that he’s fixing “deep structural problems.”

Narvekar has sought to shake up Harvard’s lagging endowment since he took the job in 2016, cutting half the investment staff and shifting more work to outside investment managers.

Yale University had the No. 2 endowment last year, with $27 billion, followed by the University of Texas system’s $26 billion and Stanford University’s $25 billion.

Despite the improved returns, the business officers association cautioned that college endowments face new obstacles in coming years.

John Walda, president and CEO of the association, says the federal government’s tax overhaul includes changes that could deter donors from giving to universities, and it added a new tax on wealthy universities.

Congress’s tax bill approved in December created a 1.4 per cent tax on investment income for private colleges that have at least 500 students and $500,000 per student.

The study also found that 65 per cent of universities spent a greater share of money from their endowments to cover costs like student financial aid and research, with an average spending rate of 4.4 per cent.

Walda said that’s a sign that schools are committed to supporting students but also that they’re digging deeper to make up for flat or decreasing funding from states.

“Many schools continue to struggle in spite of their endowment dollars because of other sources of income and constraints there,” he said.

The 10-year average for endowment returns fell slightly to 4.6 per cent last year, largely because a big year of returns in 2007 fell off the average. Most schools aim for 7 to 8 per cent long-term returns.

In contrast to college endowments, the Standard & Poor’s 500 index, a broad measurement of the stock market, ended 2017 with a gain of 19 per cent.