The executive summary of the 2019 NACUBO-TIAA Study of Endowments® (NTSE), covering July 1, 2018– June 30, 2019, was recently released. The study gathers data from 774 US colleges and universities about their investment programs.

The investment objective of an endowment may vary depending on the overall mission of an organization. However, the underlying fundamentals share common characteristics; that is, the investment portfolio is generally expected to provide a modest source of ongoing revenue and income, while preserving purchasing power, to help support the operating budget of the organization and any donor-designated programs.

Here we review the current state of endowments, focusing on returns based on asset allocation and endowment size, using preliminary information from the full 2019 NTSE, published by the National Association of College and University Business Officers (NACUBO).

Performance by Endowment Size

Based on data compiled over the past few years, the primary differentiating factor in performance among endowments has been size.

On average, large endowments, those with assets exceeding $1 billion, historically have outperformed smaller endowments, those with less than $500 million in assets. These large endowments, which account for about 14% of all endowments by number and about 78% of total endowment dollar value tracked in the NTSE report, typically attract the most headlines and scrutiny, resulting in several misconceptions about overall endowment performance.

In general, this year’s returns were positively correlated with endowment size, with the larger endowments outperforming the smaller ones. However, the difference in overall performance was significantly narrower than in recent years. The gap between net returns of the largest endowments in the study (5.9% for endowments with more than $1 billion in assets) and the smallest in the study (5.8% for endowments less than $25 million in assets) was just 0.1 percentage points. This compares to the 2.1 percentage point gap seen last year. It is worth noting that the lowest performing endowments, those with asset size between $50 and $100 million, generated a return about 100 basis points below the largest endowments, with a reported 4.9% return.

Average Net Investment Return by Endowment Size (Chart 1)

visual display of average net investment return by endowment size

View accessible version of chart 1

Source: NACUBO, Bloomberg L.P., PNC

While one-year performance is not insignificant, in our view, most endowment managers use a longer-term view for planning purposes. While the performance was relatively flat across size cohorts on a one-year basis, the largest endowments remain the best performing cohort over longer investment periods. The relative outperformance increases as the investment period is extended: The three-year spread between the largest cohort and the smallest cohort is 1.3 percentage points, the five-year return spread is 0.6 percentage point, and the 10-year spread is 1.3 percentage points.

Over each of the timeframes, the best performing cohort was the largest, with an average return of 9.6%, 6.1%, and 9.0% over 3, 5, and 10 years, respectively.

Similar to the prior fiscal year reported, there was little correlation this year between size and return on a one-year basis. Indeed, the smallest endowments were not the worst performing; instead, the medium-sized endowments (those with $25–500 million in assets) were the worst. This U-shaped return curve seen in the past few years, where the largest and smallest endowments on average outperformed mid-sized ones, appeared in the one-year and five-year return series; however, the three-year and 10-year showed a linear trend between larger size and larger returns.

Spending Policy and Long-Term Return Objective

For the first time in a decade, all size cohorts generated 10-year returns above the long-term objective reported, at 7.0% this year. In our view, that return may be skewed by the calendar effect from rolling off materially weak market performance from 2008 and the robust positive returns generated during 2019. We also believe the 7.0% return objective is worth noting. In past survey results, endowments in the study reported they require an annual return of 7.2% to maintain their purchasing power after spending, inflation, and investment management costs. While the long-term return objective has decreased to a decade low in fiscal 2019, spending rates have increased to 4.5%, near the decade high of 4.6% observed in fiscal 2011. This would suggest that the divergence between the two would need to be reconciled over the longer term if investment programs intend to maintain the purchasing power of their assets, requiring either increases in required return objectives or decreases in spending rates in future years or some combination of both.

Investment Returns versus Spending Policy and Long-Term Objectives (Chart 2)

visual display of investment returns versus spending policy and long-term objectives

View accessible version of chart 2

Source: NCSE, Bloomberg L.P., PNC

Looking at how the distribution is spent, for the second consecutive year the report included information on what/where the distributions are intended to support. The largest percentage of the distribution was on “Student Financial Aid,” followed by the “Academic Programs” and “All Other Purposes” categories. The largest decrease noted was for “Operations and Maintenance of Campus Facilities,” down from 13% in fiscal 2018 to 7% in fiscal 2019. It is unclear to us from the executive summary report whether this is a shift in priorities (of the reporting institutions) or a result of a change in the way data are reported.

Recipients of Investment Program Distributions (Chart 3)

visual display of recipients of investment program distributions

View accessible version of chart 3

Source: NCSE, Bloomberg L.P., PNC

Asset Allocation by Endowment Size

A more granular look helps decipher how endowments have adjusted their asset allocations based on size. Only firms with assets in excess of $1 billion have an above-average allocation to alternatives on a dollar-weighted basis; on an equal weighted basis, the $251-500 million and $501 million to $1 billion cohorts also have an above average allocation to alternatives. The smaller the endowment, the more traditional the asset allocation tends to be; that is, there is greater emphasis on public equities and fixed income investments with less exposure to alternative strategies.

Asset Allocation by Endowment Size (Chart 4)

visual display of asset allocation by endowment size

View accessible version of chart 4

Source: NACUBO, Bloomberg L.P., PNC

With alternative asset classes logging the best performance for fiscal 2019, it seems logical to us that the largest institutions, which have the greatest exposure to alternative asset classes, outperformed the smaller cohorts, with their lower exposures to alternative asset classes.

Conversely, international equities were cited as a drag on performance in fiscal 2019, causing those portfolios with higher exposures to underperform relative to their peers. This was seen in the one-year performance of institutions in the middle size cohorts ($50 million to $1 billion) that had the greatest exposure to “Dedicated Non-US Equities” and “Global Equities” asset class categories in the report.

Reevaluating Allocations and Strategies

Every endowment must balance multiple and sometimes conflicting goals, including meeting return objectives, limiting undue volatility, managing shortfall risk, and minimizing expenses. It can be a tall order, and some endowments appear to be managing these objectives better than others.

Despite 2019 being one of the best performing years of the entire cycle so far for public markets, one of the biggest challenges facing investors today is the possibility of slower growth, which could lead to below-average investment returns for both stocks and bonds over the next 10 years, in our view.

Even though we believe there is still progress to be made in 2020, our expectation is that forward returns will not be able to sustainably keep up the torrid pace of 2019.

This could be a challenge for institutions that need to achieve fairly high return objectives to help support grant-making, benefit obligations, or other liability streams. The reality of what we believe to be a lower-for-longer return environment has been consistently reflected in our Capital Market Assumptions (CMAs). As we documented last year, 11 years into the expansion from the financial crisis, valuations are now quite full by most metrics we track, which suggests to us this will be a key governor of more muted price appreciation in the decade ahead.

To address lower-return expectations, we believe investors need to continue to reassess their asset allocation and portfolio positioning. The traditional 60/40 “balanced” allocation to stocks and bonds may not be sufficient to meet the average endowment’s long-run goals and objectives, in our view. It isn’t just about the stock and bond allocation split; it is also what comprises those asset class categories. In light of what appears to be a lower-for-longer expected return environment, we believe investors should consider the following strategic asset allocation themes:

  • Sizable allocations to public equities:
    • domestic equity bias relative to market capitalization weights;
    • structurally overweight small cap and mid cap; and
    • moderate style tilt to value over growth.
  • Lower allocations to fixed income:
    • focus on liquidity characteristics, potential volatility reduction, and duration positioning; incorporate credit, emerging market, and unconstrained exposures.
  • When practical, no more than 20-30% allocation to alternatives:
    • Preference for private investment vehicles;
    • Excludes long-only positions in commodities/natural resources.

To Be Continued…

The full NACUBO-TIAA Study of Endowments was released in March 2020. The full report provides more details on asset allocations and returns as well as information on investment criteria, expenses, and management outsourcing. Please look for our deeper analysis to follow.



Chart 1: Average Net Investment Return by Endowment Size (view image of chart 1)

  Smallest Endowments Average Largest Endowments
1 Year 5.8 5.30 5.9
3 Years 8.3 8.70 9.6
5 Years
5.5 5.20 6.1
10 Years 7.7 8.40 9

Chart 2: Investment Returns versus Spending Policy and Long-Term Objectives (view image of chart 2)

  10-Year Average Investment Return
Spending Rate
Long-Term Return Objective
3.40% 4.50% 7.70%
FY11 5.60% 4.60% 7.70%
FY12 6.20% 4.20% 7.40%
FY13 7.10% 4.40% 7.40%
FY14 7.10% 4.40% 7.40%
FY15 6.30% 4.20% 7.30%
FY16 5.00% 4.30% 7.10%
FY17 4.60% 4.40% 7.00%
FY18 5.80% 4.40% 7.20%
FY19 8.40% 4.50% 7.00%

Chart 3: Recipients of Investment Program Distributions (view image of chart 3)

Student Financial Aid 49%
Academic Programs 17%
All Other Purposes 16%
Endowment Faculty Positions 11%
Operations and Maintenance of Campus Facilities 7%

Chart 4: Asset Allocation by Endowment Size (view image of chart 4)

  Equities Fixed Income Alternatives Real Assets
Average 35.2 11.7 39 12.3 1.7
Over $1 billion 31.3 10.1 43.2 13.5 0.8
$501 million-$1 billion 45.3 14.4 30.3 9.2 1.8
$251-500 million 46.9 15.7 27.1 8.4 1.8
$101-250 million 53.2 19.5 18.1 7.1 2.1
$51-100 million 54.6 23.1 14.8 6 1.5
$25-50 million 57.7 26.5 10.1 4.6 1.1
Under $25 million 60.6 29.7 5.6 3.2 0.9