January 31, 2017; Inside Higher Ed
University and college endowments had a tough fiscal 2016, losing an average of 1.9 percent according to the National Association of College and University Business Officers. Size and staffing did not seem to make much of a difference; in fact, Harvard, which has the biggest endowment in the country at $34.5 billion, lost about two percent.
This brings the 10-year average annual return to five percent, rather than the 7.4 percent that many endowments need to retain their purchasing power over the years. These are the lowest returns posted since the depths of the financial crisis.
“There’s no number here that’s anywhere near 7.4 percent,” said William F. Jarvis, of the Commonfund Institute. “This is a period in which formulation of investment policy for long-term institutions becomes very, very challenging.”
Despite this, 74 percent of the colleges surveyed reported that they continued to increase their mission-related spending from endowments. Inside Higher Ed says that the negative trend will affect both large and small institutions in different ways. On the one hand:
Large institutions drew even more of their operating budgets from endowment spending. Among institutions with endowment assets of more than $1 billion, endowment spending funded an average of 15.9 percent of operating budgets. Institutions with assets of $25 million or less drew just 4.6 percent of their operating budgets from endowments, on average.
On the other hand, smaller endowments suffer more from fluctuations in returns.
In terms of spending endowment money, that rate averaged 4.3 percent in fiscal 2016, up from 4.2 percent in the previous fiscal year.
As many readers know, there has been a push from some quarters in the past year to establish a policy that requires a minimum spending “floor” for endowments, similar to foundations where the required payout floor, including administrative costs, is five percent. The chart below may explain why policymakers may feel the need to push the issue: