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College Endowments Post Biggest Losses Since Financial Crisis

Schools faced pressure to spend more of their gains as a result of the strong numbers. The latest performance figures come as universities now grapple with inflation along with years of Covid-19 expenses.Igor Mojzes/Adobe/luckybusiness - stock.adobe.com

(Bloomberg) — Investments in US college endowments declined the most since the global financial crisis, owing in part to double-digit losses in US equity markets.

Endowments lost a median 10.2 percent before fees for the 12 months through June, according to data to be published Tuesday by Wilshire Trust Universe Comparison Service. The largest funds — those with assets of more than $500 million — fared substantially better, with a slight gain of 0.9 percent. Larger endowments tend to invest more in alternatives such as private equity funds, which offered a buffer against the equity-market losses, while smaller ones rely more heavily on US stocks.

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The S&P 500 declined by 12 percent for the period. That left smaller endowments in particular with nowhere to hide, although commodities and private equity offered some relief, said Mike Rush, a senior vice president at Wilshire.

“Other than investing in cash, which obviously is not the answer, the second quarter was literally one of the worst quarters for investing,” Rush said. “Endowments have this prudent diversifier into alternatives that helped out at least the relative returns during the second quarter.”

Private equity, which has helped juice returns in recent years, couldn’t insulate endowments as much this year as valuations for startups and other closely held companies declined.

Wilshire data — as reported to the firm by institutional investors including pensions and endowments — show that median private equity returns decreased as the fiscal year progressed per quarter, from a gain of 5.3 percent in the quarter beginning in July 2021 to a loss of 0.3 percent in the most recent quarter.

The data released Tuesday didn’t represent results for individual colleges. Schools begin to release their annual investment results in September or October. They typically wait for private equity marks for the quarter ended in June.

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The returns contrasted sharply with the previous year’s results, when endowments returned a median 27 percent, their best results since 1986. The largest funds posted a median gain of 34 percent last year, driven by private equity and venture capital, with some colleges faring even better. Washington University in St. Louis notched returns of 65 percent and several schools gained more than 50 percent, including the Massachusetts Institute of Technology, Bowdoin College, and Vanderbilt and Duke universities.

Schools faced pressure to spend more of their gains as a result of the strong numbers. The latest performance figures come as universities now grapple with inflation along with years of Covid-19 expenses.

The difference between the wealthiest colleges and other schools also demonstrates the widening gap among endowment sizes and resources within higher education. Many of the richest schools also pay a 1.4 percent levy on their net endowment gains, passed during the 2017 Republican-led tax reform, a tax schools are lobbying to end.

Colleges typically need annual gains of at least 7 percent to keep pace with annual spending — on expenses such as financial aid and professor salaries — and inflation, which is affecting costs such as food in dining halls. Spending isn’t determined by a single year of performance, but rather by formulas based on three- or five-year averages.