A continuing "enrollment cliff" combined with rising interest rates and other worries are making risk a larger issue for college endowment officials, advisers say.
"We are not seeing trustees and leadership teams changing their approach to managing the endowment and their asset allocation, but believe they probably should," said Matt Bank, partner and deputy CIO at Global Endowment Management in Charlotte, N.C., an OCIO firm with $11 billion under management.
With many still recovering from pandemic-related challenges including drops in enrollment, "colleges across the country may be in for a difficult few years," Mr. Bank said. He advises them to reassess their risk appetite and consider making portfolio stability a priority, particularly as inflation becomes a bigger issue.
Inflation "is another conversation" we are having with endowment clients, along with enrollment decline, said Robert Appling, Denver-based managing director of Wilshire Advisors LLC, overseeing $39 billion in endowment assets. "I don't think any trustees or managers are naive in terms of trends," Mr. Appling said.
For colleges and their endowments, demographic trends are all too real. Birth rates that started dropping after the 2008 financial crisis could mean 15% fewer college entrants in the next college-age cohort.
Colleges forced to count on fewer students will have to make tough choices that include reducing spending or relying more heavily on their endowments, which may place pressure for higher return targets, as well as risk adjustments.
The pandemic didn't help. "The enrollment challenges existed before the pandemic, but it exacerbated it and brought it into stark focus," said Timothy Yates Jr., president and CEO of Commonfund OCIO, which manages $12.7 billion for endowments.
While some colleges had record levels of enrollment during the pandemic, others were forced to close their doors or be in defensive mode and seek more liquidity. And when inflation makes everything more expensive, "that results in a rethink of asset allocation, both in terms of risk and where you can get higher return," said Mr. Yates, who is seeing clients raise their return targets.
The downward trend in college enrollment was exacerbated in 2022 by market losses and pandemic-related pressures. This year, the slightly better news is that the rate of enrollment decline has slowed a bit.
Overall undergraduate numbers were down 0.2% last year, compared with -3.9% and -3.7% in the two previous years, according to the National Student Clearinghouse Research Center, the research arm of the educational non-profit National Student Clearinghouse.
Last year was also tough for endowments, which according to the National Association of College and University Business Officers, account for an average 11% of college revenues.
The 2022 NACUBO-TIAA Study of Endowments released in February found that of the 678 institutions covered, the largest endowments saw a 3.8% market value and the smallest had a 9.6% average decline in the fiscal year ended June 30, 2022.
It was "one of the most challenging periods for equity and fixed income assets in recent years," the study said, while the disparity between the largest and smallest endowments was due to varying allocations to private markets, particularly venture capital and private equity strategies.
Smaller endowments allocate more to public equities and public fixed income, but "both asset classes struggled in FY22 as interest rates increased," the study said.
Colleges are bracing for enrollment declines to accelerate again in 2025 and at least the next four years after that. "I don't think we are in any kind of red-flag situation with the universities we work with, but it's definitely top of mind," Wilshire's Mr. Appling said.
More immediate concerns for endowments are rising interest rates and whether there are opportunities to reduce risk, Mr. Appling said. "The equity risk premium is narrower than it has ever been," he said, and endowment offices are looking for opportunities to reduce risk by increasing allocations to fixed income and alternatives, including sector-specialist venture capital and buyout strategies pursuing trends in health care, technology and industrials spurred in part by the pandemic.