The Uphill Slog Facing Operating Endowments

A newly released study of institutional endowments points to significant challenges ahead for managers of these funds and the institutions they support.?

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Long considered the gold standard for benchmarking performance returns across 678 college, university and education-related endowments representing over $800 billion, the NACUBO-TIAA annual study stands as a kind of proxy for institutional investor performance. Here are key takeaways from the study (which is for the fiscal year ended June 2022):?

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• The average annualized investment return has remained remarkably constant over 3, 5, 10, 15, 20 and 25 years – consistently in the range of approximately 7% to 8%, though it was obviously lowered by last year’s -8% average return.?

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• However, in 2022, the average return targeted by NACUBA respondents increased sharply over the past three years, from 7.51% in 2020 to 8.23% last year. The increase was “driven by long term inflation expectations and projected fees and expenses,” creating a shortfall between historic returns and what endowment managers believe they need to maintain their purchasing power.?

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• The average effective spending rate dropped from 4.79% in 2021 to 4.17% in 2022.?

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• Allocations to private equity and venture capital (30%) exceeded those to public equity (28%) at the end of 2022, driven by the need to achieve rising return targets.?

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• The gap between top quartile returns achieved by large (>$1 billion) endowments dramatically exceeded those earned by small endowments (< $50 million) – -1% vs. -10% – illustrating the difficulty small institutions face in pursuing higher-return targets in the private asset space.??

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For more on the topic, I invite you to explore NACUBO’s overview of the study.?