During the last fiscal year, colleges had the strongest endowment returns in 35 years. But what goes up must eventually come down and a new report on fiscal year 2022 shows a downturn for endowments across the sector compared to last year.

The median return before fees was 27 percent in the 2021 fiscal year, according to data from the Wilshire Trust Universe Comparison Service. But more recent numbers indicate that college endowments fell by a median of 10.2 percent before fees in the 12 months leading up to June 2022, according to data released Tuesday by Wilshire and first reported by Bloomberg. However, colleges with larger endowments of more than $500 million performed better.

Unpacking the Numbers

The drop-off for fiscal year 2022 was dramatic. Wilshire data shows that U.S. college endowments suffered their biggest loss since 2009 when returns fell by 17.6 percent. But if the news sounds negative, it isn’t all bad. Higher ed experienced strong returns compared to other sectors.

“Endowments actually did fairly well,” said Mike Rush, senior vice president at Wilshire.

That’s especially true for larger institutions with more diverse investment strategies.

“Endowments, particularly, larger ones are diversified beyond equity stocks and bonds, which is what helped them in a relative sense. Their alternative portfolios have been down a bit this year, but nowhere near what the broader U.S. equity, non-U.S. equity market is doing,” Rush said.

The change in returns seems to be largely the product of market volatility. And even amid a difficult fiscal year of weak returns, college endowments still beat out the traditional 60/40 investment portfolios where 60 percent of allocations go to stocks and the other 40 to bonds.

“The second quarter of 2022 was historical but for all the wrong reasons. If you look back 50 years, you’ll be hard pressed to find another quarter where global equities were down by double-digits and investment grade bonds were down five percent,” Jason Schwarz, President of Wilshire, said in a company press release. “All plan types were able to outperform a traditional 60/40 portfolio, particularly larger plans with higher allocations to alternative investments.”

Though Wilshire released its data Tuesday, providing Inside Higher Ed with a partial data set, most colleges won’t publish endowment details until the fall, according to statements from numerous institutions contacted by Inside Higher Ed.

Taking the Long View

While fiscal 2021 was up and fiscal year 2022 was down, the change likely won’t matter much in the long term, explained Jessica Wood, sector lead for higher education at S&P Global. College investing strategies, she explained, are long-term plans that aren’t shaped by one good or bad year.

“Schools don’t set their budgets based on one year of investment returns, they set an endowment spending rate based on endowment performance over a longer period of time,” Wood explained.

Rush offered a similar thought on taking the long view, noting that the returns had more to do with investing challenges than endowment strategies, meaning colleges shouldn&rsq#39uo;t overcorrect.

“It wasn’t anything that changed with the endowments, it was just a very rough year for investing in general,” Rush said. “Nothing broke during the last year, it was just the markets were quite poor. So let’s look at the longer-term history, let’s think about the long term going forward.”

Based on conversations she’s had with colleges, Wood said some market watchers saw this coming. At the very least, endowment managers weren’t expecting the boom they saw in fiscal year 2021, when some of the colleges with the largest endowments raked in returns as high as 50 to 60 percent.

“I think the takeaway is, you can’t earn large returns in a guaranteed way, year after year,” Wood said.