Inflation and geopolitical disruptions caused endowment returns to fall by 8% in fiscal year 2022, according to an annual study released last week by the National Association of College and University Business Officers (NACUBO) and the Teachers Insurance and Annuity Association of America (TIAA). The decline comes after a spectacular performance in fiscal year 2021, when endowment returns increased by 30.6% on average.
“The 2022 fiscal year was truly a tale of two markets, with positive economic tailwinds driving equities higher through December 2021, followed by a crushing combination of inflationary pressures and other factors that forced most major investment indices down sharply by the year’s close,” said Jill Popovich, senior managing director and regional general manager at TIAA.
The study is based on data from 678 institutions holding endowment assets with a market value of $807 billion. Although the data represents only about 20% of non-profit colleges and universities, those institutions own about 99% of the endowment wealth in higher education, according to calculations by Dr. Sarah M. Iler, assistant director of institutional research at the University of North Carolina School of the Arts, and Dr. Bruce A. Kimball, professor emeritus of educational studies at the Ohio State University. The average size of the endowments in the survey was $1.2 billion and the median was approximately $203.4 million. Over half of the endowments were less than $250 million. 
Although endowments of all size categories dropped, large endowments performed notably better than small ones. Endowments with over $1 billion in assets had an average return of -4.5%, while those with under $25 million lost 11.5%. NACUBO and TIAA attributed the disparity to differences in allocation strategies. Schools with smaller endowments are more likely to put money into public equities and public fixed income investments, which struggled in fiscal year 2022, whereas larger endowments were likelier to have been invested in private markets, which did better.
“The shift from public equities toward private equity and venture capital reflects the willingness and ability of larger institutions to reach for higher return targets,” said Popovich. “Smaller endowments may not be able to pursue such an approach due to greater fee sensitivity, lower risk tolerance, and different liquidity requirements, among other factors.”
The differing performances are consequential, according to Dr. Sondra Barringer, an assistant professor of education policy and leadership at the Simmons School of Education & Human Development at Southern Methodist University.
“I was struck by the starkness of the inequality in terms of the disproportionate hit that the smaller endowments took,” she said. “It’s harder for them to weather these declines because they have fewer assets to start with. I worry that this will increase their precarity.”
Dr. Bruce A. Kimball, professor emeritus of educational studies at the Ohio State University
“They essentially reinforce each other,” said Kimball.
One factor is that schools with large endowments are less likely to leave their students with high levels of debt.
“The wealthiest schools do not encumber their students with debt because of their large resources,” said Kimball. “But if you don’t go to a wealthy school and when you’re from the working or middle classes, then you begin to get saddled with more and more debt.”
Historically Black Colleges and Universities (HBCUs) had a difficult fiscal year 2022, posting an 8.74% decline in the market value of their endowments, slightly worse than the average of all schools, according to calculations by Iler. This was reflective of their medium and small-sized endowments, she said. However, Howard, the richest HBCU, bucked the trend and gained around 7% in market value, reflecting the advantages that wealthier schools possess.
Despite the losses, colleges and universities reported an increase in spending in fiscal year 2022, to $25.85 billion. The largest percentage, 46%, went to student financial aid, with academic programs and research following at 15.6%. However, annual effective spending rates were down by over half a percent, which NACUBO and TIAA attributed to spending policies based on moving averages of endowment value over multiple years that are designed to provide the stability.
Experts thought that it was doubtful that the increased outlay would quiet controversy over the idea that wealthy colleges should spend more to enroll more students.
“The conversation is unlikely to go away because large endowments do tend to perform better than the market,” said Barringer. “There will be increased calls to either increase spending or explain why they’re not. It will be interesting to see how universities respond.”
For many schools, an increase in gifts helped balance some of the losses due to the market. Gifting was up an average of 22% across all endowment sizes, which Popovich speculated could be due to the end-of-year gifting season occurring before the adverse market conditions began. Almost two-thirds of survey respondents said that some gifts were tied to DEI initiatives. 64% of these were institutions with endowments of $250 million or less. More than 86% of schools that responded to a question about their investment policies included a commitment to ESG principles, an increase from 80% in 2021.
Although the overall returns were surely disappointing for institutions, Kimball thought that the performance of the market so far in fiscal year 2023 was encouraging.
“It may not be a great year, it may not even be a good year, but it’s a much better year than the last fiscal year,” he said. “I suspect it’s going to be at least a positive number next year.”
Jon Edelman can be reached at [email protected].
