U.S. educational endowments saw their average returns slip to 5.3% in fiscal year 2019, but 10-year annualized returns rose considerably, according to the 2019 NACUBO-TIAA Study of Endowments released Thursday.
The 10-year returns came in at 8.4%, well above the 5.8% 10-year average in fiscal 2018, and the average annual institutional target return of 7%. That improvement is largely a result of the recession-era results from fiscal year 2009 dropping out of the formula, said Kevin O'Leary, CEO of TIAA-CREF endowment and philanthropic services, on a briefing call. He cautioned that looking at 10-year figures, "we are only seeing the recovery part."
Given a robust bull market and the late-stage business cycle, "it is going to be harder and harder to get those types of returns," Mr. O'Leary said.
Educational endowment officials realize that, said Dimitri Stathopoulos, head of U.S. institutional sales at Nuveen, a TIAA company. "Expectations for institutions have been moving lower since the Great Recession," Mr. Stathopoulos said on the call.
"The good news is that (the endowments) sent $22 billion to colleges," where 49% is spent on student financial aid, said Liz Clark, NACUBO vice president for policy and research, on the call. Ms. Clark noted that next year's study will show the impact on schools that are now subject to a new endowment excise tax, which requires large endowments to pay a 1.4% excise tax on net endowment income. The tax applies to institutions with at least 500 students and net assets of $500,000 per student, and does not include state colleges and universities.
The study is the second year of a partnership between the National Association of College and University Business Officers and TIAA, with 774 colleges and universities representing $630 billion in assets participating. The median endowment size was $144.4 million.
This year's study showed a continued downward trend in the long-term return objective among endowments, which was 7.7% in fiscal year 2010 and is now 7%.
The average asset allocation in fiscal 2019 was 39% alternative strategies, 14.5% non-U.S. equity, 14.1% domestic equity, 12.3% real assets, 11.7% fixed income, 6.6% global equity (a new category) and the rest in cash/other.
For larger endowments with more than $1 billion, the average allocation was 43.2% alternative strategies, 13.9% non-U.S. equity, 13.5% real assets, 11.2% domestic equity, 10.1% fixed income, 6.2% global equity (a new category) and the rest in cash/other.
The largest endowments, with more than $1 billion and significantly larger alternative asset class allocations, outperformed the 5.3% average for fiscal 2019, returning an average 5.9%. Endowments with $501 million to $1 billion returned an average 5.1%; and those with $251 million to $500 million in assets returned an average 5%.