U.S. educational endowments saw average returns drop to 1.8% in fiscal year 2020, down from 5.3% in the year earlier, according to the 2020 NACUBO-TIAA Study of Endowments.
Long term, endowments saw average annualized returns of 5.1%, 7.5%, 6.2% and 5.5% for the five, 10, 15 and 20 years ended June 30, respectively. The historical target return for endowments has been 7.5%.
"Because our data go through mid-year 2020, the study captures just the first several months of the endowment community's experiences with the global pandemic," said Susan Whealler Johnston, NACUBO's president and CEO, on a briefing call. "Next year's report, with findings on fiscal year 2021, will help contribute to the picture of how institutions and their endowments fared and adjusted throughout the pandemic."
Doug Chittenden, executive vice president and head of institutional relationships at TIAA, agreed later in the same call that the fiscal year data "is likely skewed by the pandemic-related downturn," since markets rebounded in the latter half of calendar year 2020.
Should returns continue to fall short, Mr. Chittenden said, endowments will need to reconsider their core investment strategies.
"An endowment can consider adopting more risk and exploring changes in portfolio construction, among other steps," he said.
The study is a partnership between the National Association of College and University Business Officers and TIAA, with 705 colleges and universities representing $637.7 billion in assets participating. The median endowment size was $164.6 million.
The average asset allocation among all endowments as of June 30 was 23% private equity/venture capital, 20% marketable alternatives, 13% each in U.S. and non-U.S. equities, 12% fixed income, 11% real assets and the rest in global equities.
Smaller endowments had significantly greater exposure to fixed income, particularly investment-grade fixed income. For example, while the allocation to investment-grade fixed income for institutions with more than $1 billion in assets was 5.3%, it was 22% for those with $25 million to $50 million and 27% percent for those with less than $25 million.
Dimitri Stathopoulos, head of U.S. institutional sales at Nuveen, a TIAA company, said that smaller endowments soon could feel compelled to re-examine their significant fixed-income allocations, considering that interest rates have nowhere left to go and are unlikely to provide the returns they had offered in the past.
For larger endowments with more than $1 billion, the average allocation was 26% private equity/venture capital, 21% marketable alternatives, 13% each to non-U.S. equities and real assets, 11% fixed income, 10% U.S. equities and the rest in global equities.
The largest endowments, with more than $1 billion, returned an average of 2.5% for fiscal year 2020, down from the 5.3% average return for fiscal 2019. Endowments with $501 million to $1 billion returned an average 1.5%; and those with $251 million to $500 million in assets returned an average 1.3%.
