College endowments rebound thanks to surging market

A thriving stock market bolstered investment returns for university endowments in fiscal 2017, reversing a precipitous decline from the prior year, according to a report released Thursday by the Commonfund Institute and National Association of College and University Business Officers.

Endowments at the 809 colleges and universities that were surveyed gained an average 12.2 percent in the 12 months ending June 30, compared with an average loss of 1.9 percent a year earlier. The biggest gains came from investments in private equity, distressed debt and venture capital; commodities produced among the weakest results.

Despite last year’s solid gains, long-term growth remains tepid. Ten-year average returns dipped to 4.6 percent from 5 percent, as the robust 17.2 percent return in fiscal 2007 dropped out of the trailing 10-year average, according to the survey. Because universities aim for about an 8 percent annual return to maintain purchasing power, missing that mark imperils their ability to increase endowment spending in the future.

“It was a very strong year, but as long-term investors, you don’t just look at a year; you look at a decade. And it was a weaker decade,” said Catherine Keating, president and chief executive of Commonfund, an investment-consulting firm.

Locally, the market value of Ohio State’s long-term investment pool at the end of fiscal 2017 was $4.25 billion. That includes endowed gifts as well as long-term university investments such as the parking and energy privatization deals. The investment pool grew to more than $5 billion by October, after the fiscal year ended, when Ohio State’s Comprehensive Energy Management Partnership deal closed and $819 million from the deal was invested.

About 30 private colleges and universities with endowments worth at least $500,000 per full-time student are bracing for a 1.4 percent tax on their investment income as a result of the Tax Cuts and Jobs Act. The legislation, signed into law last month, also could discourage charitable donations that schools depend on. By raising the standard deduction, fewer people will itemize their taxes, which is the only way to deduct charitable contributions. That deduction has been a powerful fund-raising tool for colleges and universities.