Despite healthy 12.2% returns in fiscal 2017, U.S. educational endowments saw their 10-year annualized returns dip, according to the 2017 NACUBO-Commonfund Study of Endowments released Thursday.
For the fiscal year ended June 30, 2017, one-year returns averaged 12.2% for the colleges and universities in the study, a marked improvement from -0.19% the previous year and 2.4% in fiscal 2015.
The drop in 10-year annualized returns, 4.6% for the 10 years ended June 30 compared to 5% the previous year, was caused by dropping fiscal 2007's strong 17.2% return from the trailing 10-year average. The highest 10-year returns of 5% were posted by the largest and smallest institutions, those with more than $1 billion and less than $25 million in assets.
The 809 participating schools represent $566.8 billion in endowment assets. Of those, 44% had $100 million or less, and the median was $127.8 million. Average returns in 2017 were positive for all six sizes of endowments, in sharp contrast to 2016 when returns were negative for all sizes.
Among the five primary asset classes tracked in the study, only fixed income saw lower year-to-year returns in 2017, down to 2.4% from 3.6% in 2016. The highest returning class at 20.2% was non-U.S. equities, which accounted for the lowest return in 2016 at -7.8%. The second-highest performer was U.S. equities at 17.6%, up from -0.2% the year before.
Alternative strategies returned 7.8% vs. -1.4% in 2016, led by private equity's 11.7% return, followed by distressed debt at 8.9% and venture capital at 8.7%. Asset allocations saw little change over the fiscal year, and larger institutions continued to significantly overweight alternative strategies, the study found.
The National Association of College and University Business Officers and Commonfund officials emphasized in a news conference call that the 10-year returns were key to the institutions' missions. "You don't just look at a year; you look at a decade. It was a weaker decade," Commonfund President and CEO Catherine M. Keating said. While the latest study reflects the end of the financial crisis, "it also reflects a lot of volatility," Ms. Keating said.
That makes it all the more critical for endowment officials to focus on investment policy, she said. "Now is the time to really focus on that policy, stress test it and make sure they have a playbook," Ms. Keating said.
The study also found that average spending increased slightly to 4.4% in 2017 from 4.3% in 2016, led by institutions with $1 billion or more in endowment assets. Yet NACUBO President and CEO John Walda said during the call that tax reform and a new 1.4% tax on large endowments that was enacted at the end of 2017 will put more pressure on them going forward.