U.S. educational endowments returned an average 8.2% in fiscal 2018, down from the previous year's 12.2% return, and while their 10-year annualized returns climbed to 5.8% from 4.6% in fiscal 2017, they remained below the average institutional target return of 7.2%, according to the 2018 NACUBO-TIAA Study of Endowments released Thursday.
The study is the first partnership between NACUBO and TIAA, with 802 colleges and universities representing $616.5 billion in assets participating. The median endowment was $140 million, and 41% of the endowments had assets of $101 million or less.
The rise in the 10-year annualized returns was mainly due to the lower returns of fiscal 2008 dropping out of the average. By contrast, the drop in 10-year annualized returns in 2017, 4.6% compared to 5% the previous year, was caused by dropping fiscal 2007's strong 17.2% return from the trailing 10-year average. "The average 10-year returns are not keeping pace to satisfy the needs of the institutions," Kevin O'Leary, CEO of TIAA Endowment & Philanthropic Services, said on a briefing call.
Asset allocations were virtually unchanged from fiscal 2017: Domestic equity 16%, non-U.S. equity, 20%, fixed income 8%, alternative strategies 53% and cash/other, 3%.
Returns dipped for four of five asset classes, with only alternative strategies improving to 8.3% from 7.8% in fiscal 2017. Equities significantly outperformed fixed income, and private equity and venture capital performed well.
Non-U.S. equities saw the largest percentage decrease, falling from last year's highest return of 20.2% to 6.8% in the latest fiscal year. U.S. equity returns dipped to 13.6% from 17.6%.
Larger endowments, with significantly larger alternative asset class allocations, outperformed the 8.2% average. The 104 endowments with $1 billion or more returned an average 9.7%; 85 endowments with $501 million to $1 billion returned 8.7%; and the 88 with assets between $251 million and $500 million returned 8.5%.
Despite the muted returns, institutions continued to increase their endowment spending at a median increase of 6.6%. In 2018, endowments funded an average 10% of schools' operating budgets. "We may be sacrificing future gains by placing a priority on current generations," said Susan Whealler Johnston, president and CEO of the National Association of College and University Business Officers, on the call.