US university endowment funds have performed robustly over the last ten years where Yale, Columbia, and Princeton universities remained the top performers. Learn more about asset allocation, fund, size & performance of US university endowments.

1. US University Endowments
November 2014
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US university endowments: five years after the deluge
US university endowment funds have performed robustly over the last ten years, with most funds generating returns exceeding those of the benchmark 60/40 portfolio. Yale, Columbia, and Princeton universities have been the top performers during both the five- and ten- year period. However, similar to other university endowment funds, these funds performed poorly during the financial crisis of 2008–09, largely due to their higher exposure to equity instruments and low cash allocations, leading to a liquidly crunch. Nevertheless, these funds have rebounded since then. A major change in the investment strategy since the crisis was the shift toward higher allocations in alternatives and cash. Although alternative asset classes have provided superior returns, cash has helped provide the liquidity much required for meeting operational requirements.
The Harvard Management Company, which manages the Harvard University endowment issued a press release a few months ago, stating the university’s endowment delivered a considerable 15.4% return in fiscal year 2014 (FY 2014) and was valued at USD36.4bn. The release further declared Harvard’s endowment (the largest university endowment in the US) had earned an average annual return of 11.6% in the five years since the financial crisis and 8.9% in the past 10 years. Similarly, Yale University issued a press release indicating its endowment earned a substantial 20.2% return in FY 2014 and was worth USD23.9bn. Yale’s endowment (the second largest university endowment in the US) managed an average annual return of 13.7% in the past five years and 11.0% in the past 10 years. Other large endowments such as that of Princeton University, Massachusetts Institute of Technology, University of Michigan, and Columbia University also declared significant performances in FY 2014 (ended June 30).
Preliminary findings of the National Association of College and University Business Officers (NACUBO) Commonfund Study of Endowments (NCSE) suggest the average return of educational endowments for FY 2014 was 15.8%.
University endowment performance (net of fees)
Source: University Reports, Aranca Research
In contrast, five years ago (FY 2009), the performance of most US university endowments was dismal.
Owing to the financial crisis, Yale’s endowment, the best performer among the eight Ivy League schools, reported a negative return of 24.6% in FY 2009. Other endowments had similar results, including that of Harvard University, Princeton, Massachusetts Institute of Technology, University of Michigan, and Columbia University.
The investment bets of Harvard and Yale, America's two richest universities, did not pay off and both lost far more than some of the other universities (with smaller endowments), which focused on the traditional investment model of a 60/40 stock/bond portfolio.
20.2%
19.6%
19.2%
18.8%
17.5%
17.0%
15.4%
13.7%
14.0%
13.4%
12.9%
14.0%
13.1%
11.6%
11.0%
10.5%
10.4%
9.8%
10.8%
9.9%
8.9%
0%
5%
10%
15%
20%
25%
Yale
Princeton
MIT
Michigan
Columbia
Stanford
Harvard
1-Year
5-Year
10-Year

2. US University Endowments
November 2014
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Harvard and Yale had invested heavily in alternatives, including private equity and hedge funds, which helped them outperform their peers by a wide margin.
University endowments that were severely impacted in the 2008–09 deluge had been following the ‘Yale Model’ of allocating a significant portion of their assets to non-traditional and illiquid asset classes, leaving little cash to fund their considerable and ongoing operating budgets obligations. The Yale Model was pioneered by David Swensen, Yale’s Chief Investment Officer.
FY 2014 is, however, proving to be a good one as most US university endowments have not only recovered previous losses but also reached record-high levels, Yale University’s endowment rose to USD23.9bn in FY 2014, the highest in Yale’s history, without accounting for inflation. The trend was the same for Stanford University (USD21.4bn), Princeton University (USD21.0bn), Massachusetts Institute of Technology (USD12.4bn), University of Michigan (USD9.7bn), and Columbia University (USD9.2bn).
Harvard remains the only Ivy League institution yet to completely recover from the 2008–09 financial crises. At USD36.4bn, Harvard’s endowment is about USD500mn million below its peak level in 2008.
Performance* of US university endowments
Asset allocation trend
Source: National Association of College and University Business Officers (NACUBO) Commonfund Study of Endowments (NCSE), Aranca Research
US university endowments have rebounded substantially due to a shift in asset allocation strategies. Preliminary findings from the National Association of College and University Business Officers (NACUBO) Commonfund Study of Endowments (NCSE) suggest colleges and universities continue to increase allocations to alternatives and cash. Average allocations toward alternatives stood at 58% in FY 2014 compared to 46% in FY 2008. Allocations to cash increased to 5.0% from 1.4% over the same period as liquidity risk became a significant factor in the wake of the 2008–09 deluge.
Alternatives or alternative assets are investments that are not one of the three traditional asset types (equities, bonds, and cash). Alternatives include marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, event-driven, and derivatives), private equity (LBOs, mezzanine, M&A funds, international private equity, and private equity real estate), venture capital, natural resources, and distressed debt.
In contrast, colleges and universities have reduced allocations to equities (especially domestic equities) and fixed income to 30% and 7%, respectively, as of FY 2014 from as high as 46% and 13% in FY 2008.
Several US university endowments have unsurprisingly outperformed the traditional investment model of a 60/40 stock/bond portfolio by a wide margin. For instance, the returns recorded by the endowments of Columbia and Yale over the past decade surpassed that of the traditional 60/40 portfolio (comprising 60% S&P 500 index and 40% Barclays aggregate bond Index) by more than 300 basis points.
9.3%
10.8%
17.2%
-3.0%
-18.7%
11.9%
19.2%
-0.3%
11.7%
15.8%
-30%
-20%
-10%
0%
10%
20%
30%
2005
06
07
08
09
10
11
12
13
2014e
32%
35%
38%
46%
51%
52%
53%
54%
53%
58%
0%
10%
20%
30%
40%
50%
60%
70%
2005
06
07
08
09
10
11
12
13
2014e
Alternatives
Equities
Fixed Income
Cash/Other
*net of fees

3. US University Endowments
November 2014
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Performance of US university endowments compared to traditional 60/40 stock/bond portfolio
Source: University Reports, Bloomberg, Aranca Research
University Endowment 101
What is a university endowment fund?
A university endowment fund is an investment fund set up by an educational institution to fund regular operations or meet specific requirements; for example, providing need-based scholarships. The funds are normally received in the form of donations, which are tax deductible for the donors.
What are the major types of endowment funds?
Endowment funds can be broadly classified into two categories:
 True endowment/donor-restricted: In these funds, donors have a significant influence on how funds can be used and how it is to be invested to generate income to meet the specific purpose. For a true fund, the corpus (principal raised) usually cannot be used. Only income generated by the corpus can be used to meet the designated expenses.
 Quasi endowment/board-restricted: In these funds, the governing body or the trust that manages the fund can decide how the funds raised are to be spent. Donors may also allow the corpus to be spent.
What are the major policies related to an endowment fund?
The three main policies are:
 Investment policy: It determines the type of investments the endowment fund manager can make and how aggressive he can be in meeting return targets.
 Withdrawal policy: It determines the amount of money the institution can use from the fund in each period, which depends on the funding needs of the institution and the amount remaining in the fund.
 Fund usage Policy: It helps ensure that funds are used only for the designated purposes.
What is the amount of money endowment funds spend annually to support university operations?
University endowments, on average, withdraw 4–5% of the asset value for current use.
What is the total size of endowment assets of colleges and universities in the US?
The 835 institutions participating in the study conducted by NACUBO and Commonfund Institute represented USD449bn in endowment assets as of June 30, 2013. We estimate this figure to have exceeded USD500bn in June 30, 2014.
7.0%
8.9%
9.8%
9.9%
10.4%
10.5%
10.8%
11.0%
60/40 Stock/bond
Harvard
Michigan
Stanford
MIT
Princeton
Columbia
Yale
10-Year
11.6%
12.9%
13.1%
13.4%
13.4%
13.7%
14.0%
14.0%
Harvard
Michigan
Stanford
60/40 Stock/bond
MIT
Yale
Columbia
Princeton
5-Year

4. US University Endowments
November 2014
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Total endowment assets
Source: National Association of College and University Business Officers (NACUBO) Commonfund Study of Endowments (NCSE), Aranca Research
What is the tax treatment of endowment funds?
The earnings of endowment funds, in the form of interest and dividend income, are tax-exempt. However, the payout may be taxable depending on the recipient. Endowment funds typically have stipulations that managers payout annual earnings up to a certain limit and reinvest the balance amount to increase the corpus.
340
340
411
412
306
346
408
406
449
510
0
100
200
300
400
500
600
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014e
(all values in USDbn)

5. US University Endowments
November 2014
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