Higher ed spent more than $23B from endowments in FY20

The pandemic and losses in tuition forced many institutions to get creative in the first half of last year, but what are the prospects long-term?
By: | February 23, 2021

Institutions of higher education tapped into their endowments more during part of the 2020 fiscal year than they did during the previous year, according to a new report from the National Association of College and University Business Officers (NACUBO) and financial services provider TIAA.

The 2020 NACUBO-TIAA Study of Endowments showed a 4% increase in endowment spending among 705 institutions that were analyzed from July 1, 2019 to June 30, 2020, driven mainly by the COVID-19 pandemic. Despite financial challenges that beset nearly every business sector, colleges and universities smartly utilized those assets during the first half of last year, experts said, although it is still a bit early to offer an assessment of 2020 as a whole.

“In next year’s report, the fiscal year 2021 findings will help complete the picture of how institutions and their endowments coped,” Susan Whealler Johnston, president and CEO of NACUBO, said in a statement. “Even in this challenging year, higher education institutions reinforced their commitment to students and used their endowments exactly as designed: to provide ongoing, predictable – and even increased – support for their educational missions, a commitment that endowment leaders work to ensure will extend to future generations.”

Colleges and universities used endowments largely to deliver more financial aid to students (48%), while another 17% went to academic areas, including teaching and tutoring, according to the study’s authors. Those 700-plus institutions spent more than $23 billion from their endowments, with 70% increasing expenditures by just over $3 million on average.

“This increase in spending reflects the success of governance policies focused on intergenerational equity,” Johnston said. “With solid fiscal management, endowments can consistently support institutions with more revenue each year than the previous year.”

The road ahead

The NACUBO and TIAA study illustrated the many challenges that lie ahead for colleges and universities as uncertainties and recent history shows. At the time of the study, endowments at the institutions had increased 1.6% year over year to an average of $905 million. Median endowments were just shy of $165 million, though more than a third were under $140 million.

Returns in FY20 were just 1.8%, a steep drop from the more than 5% attained during the previous fiscal year. Study authors noted that the benchmark for success traditionally has been around 7.5%.

“The one-year performance figure reflects the reality that few market sectors were immune to the steep downturn in early 2020 and most markets had not fully recovered by the time the fiscal year ended on June 30,” said Doug Chittenden, Executive Vice President and Head of Institutional Relationships at TIAA. “Investment markets rebounded strongly in 2020’s latter half, so the FY20 investment return figure likely understates the performance achieved by most funds in calendar year 2020.

“But going forward, if returns continue to fall short, endowments will need to consider all their possible levers for meeting their targeted return rate. An endowment can consider adopting more risk and exploring changes in portfolio construction, among other steps.”

The uncertainty brought on by the pandemic and the extraordinary pivot made by institutions in the first half of 2020 to cover losses from tuition, housing and other moneymaking endeavors on campus, forced many to spend more through endowments. The NACUBO-TIAA report also noted that institutions overall received about 15% less in donations and gifts than in 2018-19. If that continues, authors suggest they may need to look closer at how they are investing.

“A subdued outlook for returns across asset classes could force some institutions to re-examine their endowment spending rates or find other ways to resolve funding gaps,” said Dimitri Stathopoulos, Senior Managing Director of global investment firm Nuveen.

Investment considerations

Stathopoulos said smaller college and university endowments might need to consider more diversification, if possible, though many are challenged by investment minimums, he said.

“Institutions will need to be especially thoughtful about their endowment’s strategic and tactical positioning as pandemic impacts continue playing out, amid an uneven global economic recovery and persistent low-rate environment,” Stathopoulos said. “Smaller endowments soon could feel compelled to re-examine their significant bond allocations given that currently interest rates have virtually no room left to fall – and, going forward, fixed income will likely not offer institutions the returns they enjoyed in past years.”

One consideration that experts said should be a focus for colleges and universities and their endowments is “responsible investing”. Although they noted that 80% of endowments do contain a lean to “environmental, social and governance issues” less than 20% have them in the most popular public-equity and global portfolios.

Stathopoulos offered a counter to the notion that there won’t be good return on investment for those that contain ESG ideals.

“Market evidence increasingly indicates that a responsible investing approach can indeed deliver competitive returns,” Stathopoulos said. “The opportunity to more closely align investing and mission while also meeting return targets could encourage more endowments to consider these strategies.”

For colleges and universities, which often preach mission and vision, that alignment makes sense, but authors say just 6% of have “a formal policy addressing diversity and inclusion related to investment manager selection.”

Johnston said, “Advancing diversity in all facets of higher education is a crucial step college and university leaders must take. We urge endowment leaders to look closely at ways they can invest with asset management firms controlled by women and people of color while still meeting investment goals.”