3 Ways College and University Endowments Have Evolved Over the Past 50 Years

While many observers focus on the largest endowments, there are thousands of endowments and affiliated foundations of varying sizes, working to support a range of institutions—from regional public universities and community colleges to faith-based institutions and major research universities. The philanthropic trust of past donors has funded today’s growth and innovation, just as the continued support of individuals today will help our institutions meet the challenges and lead to the discoveries of tomorrow.

Data from the 2023 NACUBO-Commonfund Study of Endowments® (NCSE) show positive signs for the enterprise. Endowments of the nearly 700 U.S. colleges and universities and affiliated foundations participating in the survey returned 7.7 percent, net of fees, for FY23 (July 1, 2022, to June 30, 2023), a sharp reversal of the -8.0 percent return reported for FY22.

Those institutions withdrew a collective $28.4 billion from their endowments during the fiscal year, an 8.4 percent year-over-year increase. According to the report, the largest share of institutions’ spending policy distributions in FY23, 47.7 percent, went to student financial aid; other spending was distributed across academic programs and included research (17.5 percent), endowed faculty positions (11.1 percent), operation and maintenance of campus facilities (7.4 percent), and all other purposes (16.4 percent).

From the viewpoint of college and university chief business officers, such results are ideal—as they show a sound rate of return, demonstrating good fiscal stewardship, and additional resources available to the students, faculty, and programs that are part of core mission. While endowments are complex, and managing them in the current financial environment can be difficult, it is clear from the fiscal year 2023 data that students, donors, and institutions are being well served.

As we look back over the last half-century of survey responses, what other observations can we make?

Investment Practices Have Evolved

Endowment managers have focused on higher investment yields. Until the early 1970s, endowment assets had largely been invested in bonds whose yield was insufficient to fund college and university operating budgets, much less provide for returns sufficient to offset inflation and grow the endowment in real terms to maintain purchasing power. Increasingly, decisions have been made to move resources into equities with their potential for capital gains (as well as dividends)—this was much more attractive for long-term asset pools.

A more significant change was noted in the FY83 study: the first data reported on investment in “foreign securities” and venture capital. Under the heading in use at the time, these “nontraditional investments” would fundamentally alter the concepts of diversification and long-term investment for college and university endowments. Moreover, they would prove to be strategies in which colleges and universities were thought leaders—pioneering what is now foundational to the portfolios of nonprofit institutions of all types.

Institutions Now Rely More Heavily on Their Endowment

The past 50 years have also seen a greater institutional reliance on endowment returns. As higher education institutions strategically allocated more resources from their endowments, more of the funding has gone to operating budgets. In the late 1970s, the average level of support was just above 4.0 percent and the median hovered around 3.0 percent.  But by FY23, endowments funded an average of 10.9 percent of respondents’ operating budgets, and schools with the largest endowments – from $1 billion to over $5 billion—relied on their endowments for more than 17 percent of their operating budgets.

The surveys over time also show that endowments have supported their institutions through extremely challenging times. For example, colleges and universities relied even more heavily on their endowments during the Great Recession and the COVID-19 pandemic.  Data from the FY09 study, which coincided with the financial crisis and Great Recession, showed an average of 13.4 percent of the operating budget of responding institutions was funded by endowment. During the COVID-19 pandemic, in a difficult and unprecedented operating environment, 49 percent of study participants increased endowment support for the budget.

Spending, and Reporting, Has Become More Strategic

The rate and manner of spending now ranges among institutions. Early on, spending may have resembled a one-size-fits-all proposition for some years, as some variation of spending a percentage of endowment values was the accepted methodology. But by the latter half of the 1990’s and early years of the 2000’s, the studies began to show a much greater range of choice. Now, many institutions use a three-year average to account for the variation, and most have spending policies that take inflation into consideration.

Spending also represents an evolution in the NACUBO study itself. In 2018 we began surveying our members on the totals schools spent and the specific beneficiaries of that spending. Each year since, our members have reported that they allocate roughly half of all spending to student financial aid.

So, while the use of endowments in higher education is an established concept, the way that they leverage innovation and change continues to evolve, and their importance to the enterprise continues to grow.  Thanks to the thoughtful stewardship of higher education leaders managing with an eye on perpetuity, these endowments will be here to support their institutions for the next 50 years—and NACUBO and Commonfund plan to be here to track those future trends as well.