U.S. College Endowment Funds: What Are They Good For?
In a year rife with crises, America’s higher education institutions are facing their toughest battle in history. On the one hand, students are questioning the value paying for an expensive college degree when their university experience is vastly diminished. On the other hand, universities have suffered lack-lustre performance in their investment vehicles – endowments. A confluence of factors could put the higher education industry at risk of disruption.
Even before the current crisis, university endowment funds were underperforming other investment vehicles. In 2018, research firm Markov Processes International found that the average Ivy League university would have performed better if it had simply invested its endowment funds in a plain-vanilla portfolio of 60 percent U.S. stocks and 40 percent U.S. bonds.
Universities have been investing in alternative assets, including hedge funds, private equity, startups and real estate, which is why this performance falls below expectations. This coronavirus outbreak has decimated returns further. Total returns for college endowments were -13.4% in the first quarter of 2020, according to a recent survey by the National Association of College and University Business Officers (NACUBO) of 333 institutions.
Despite that downturn, the biggest colleges in the country are sitting on a historically high level of cash. Harvard’s endowment fund is worth $40.9 billion, while University of Texas and Yale University have roughly $30 billion each. Many of the biggest colleges have announced pay freezes, early retirement for staff and are charging full tuition despite the fact that classes are likely to be remote for the coming semester. Coupled with the drop in international students, universities are facing the perfect storm of challenges in 2020.