While investment returns for U.S. colleges and universities moved back into positive territory in fiscal 2010, higher-education endowments remain significantly below their pre-recession levels, a new study says.
The average 11.9 percent return for 2010 was an improvement over losses of 18.7 percent in fiscal 2009, but most endowments remain about 25 percent below the levels they reported at the end of 2007, says John Walda, president and CEO of NACUBO.
The solid performance of 2010 wasn’t enough to bring the average three-year return into positive territory, says the 2010 NACUBO-Commonfund Study of Endowments, which analyzes investment data from 850 colleges and universities for the year ended June 30, 2010.
And the 10-year average return of 3.4 percent is not enough to maintain the value of endowments over the long-term, says Walda.
That’s particularly true when factoring in spending rates — the dollars schools remove from their endowments each year to cover operations — that are approaching 4.4 percent on average and 5.5 percent for the largest institutions.
“A 3.4 percent return won’t do it,” Walda says of maintaining long-term value. “It’s obvious that those types of spending-rate policies aren’t sustainable with 10-year returns at 3.4 percent.”
Yet, with colleges and universities still feeling the pressure of the recession, endowments often are a go-to source for cash, says Verne Sedlacek, president and CEO of Commonfund, noting that 82 percent of the largest institutions increased their spending rate in 2010.
“They’re feeling pressure to fill holes in their budgets and they’re doing that through higher endowment spending,” he says. “Higher education is still under significant stress.”
Institutions with endowments valued at more than $1 billion fared best on investment returns, earning an average of 12.2 percent, while the smallest schools earned the least, with an average return of 11.6 percent.
The 10 percent of schools with the best investment performance earned an average return of 17.2 percent, a dramatic turnaround from 2009’s loss of 8.1 percent.
Performance was strong across virtually all asset classes, with only real estate posting a loss, with an average return of negative 15.8 percent.
Domestic equities earned more than any other class of assets, with 15.6 percent, followed by fixed income, which earned 12.2 percent; international equities, 11.6 percent; alternative strategies, 7.5 percent; and short-term securities and cash, 2.7 percent.
Among alternative investments, distressed debt had the highest return, at 24.6 percent, followed by private equity, with 14.1 percent.
Allocations of those assets within endowment portfolios changed little from 2009.
Fiscal 2010 showed 15 percent of assets in domestic equities, 12 percent in fixed income, 16 percent in international equities, 52 percent in alternative strategies and 5 percent in short-term securities and cash.
The average effective spending rate for endowments was up slightly to 4.5 percent in fiscal 2010, with 45 percent of schools reporting increases in their spending rates.
And following a year of significant endowment losses, the share of schools’ budgets covered by their endowments fell to 10.5 percent in 2010 from 13.4 percent in 2009.
The fundraising environment improved for colleges and universities in fiscal 2010, when 43 percent of schools reported an increase in gifts, compared to 26 percent that saw growth in 2009.
Average long-term debt held by schools grew to $181.5 million as of the end of fiscal 2010, up from $167.8 million at the end of 2009.
“We’ve had a great 12-month period, but we’re still not at all out of the woods,” says Sedlacek. “There are still many pressures on higher education as a result of the economic situation we’ve been in.”