US universities turn on spending taps as value of endowments swells

Some of the most prestigious universities in the US are heeding calls to spend more on students and staff after their endowments notched the strongest returns in decades thanks to booming asset prices.

Universities have been a major beneficiary of buoyant financial markets because they plough a big proportion of the gifts they receive from alumni and other benefactors into equities and private investments.

But the increasing value of their endowments in recent years has prompted demands for universities to share the proceeds with students and employees through lower tuition costs and higher pay.

“Moving to lower costs and increased access, including lowering [the price of tuition], would be a bold move and can be afforded in this environment,” said Richard Vetter, a professor emeritus of economics at Ohio University.

The Massachusetts Institute of Technology this week reported an “unexpected” 55.5 per cent return on investments for the fiscal year ending June, prompting the university to pledge to increase the amount it will siphon off from the endowment to spend on students and staff.

MIT said it would increase its endowment payout by 30 per cent from 3.1 per cent to 4.2 per cent — an estimated $286m increase to $1.1bn starting in June next year.

Similarly, Dartmouth College, which this week said its endowment had made gains of 46.5 per cent in its fiscal year, eliminated tuition for students whose parents made less than $65,000 annually and gave employees a one-time bonus of 3 per cent of their salaries.

And Washington University in St Louis, which reported gains of 65 per cent during its fiscal year, announced it would commit an additional $1bn to financial aid. It also said it would adopt a “need-blind” approach to admissions, meaning students who might struggle to pay full tuition will not be at a disadvantage when applying for a place.

Harvard’s endowment ended the fiscal year with $53.2bn in assets, representing a gain of 33.6 per cent. In April the university in Cambridge, Massachusetts said it would increase distributions from the vehicle by 2.5 per cent of total assets based on preliminary returns.

In the past fiscal year, the Harvard endowment distributed $2bn, or about 2 per cent of overall assets.

The spending pledges from MIT, Dartmouth and Washington University come against a backdrop of strong returns for a clutch of the biggest endowments. Yale University’s endowment gained 40.2 per cent in the year through June.

The returns have reignited a long-running debate about the size of endowments at large universities. Many of the vehicles have earned annual returns exceeding 10 per cent over the past decade, resulting in fresh scrutiny of their spending plans as the cost of tuition continues to rise.

The average cost of college in the US has tripled in the past two decades to $35,720 a student per year, according to the Education Data Initiative.

Students are not the only constituency to argue that they should benefit from the strong performance of endowments, with staff also arguing for higher pay and benefits.

“Institutions often tell us we’ve got to tighten our belts because times are tough,” said Irene Mulvey, head of the American Association of University Professors, a non-profit that represents faculty members. “When times are good, then we should all be compensated,” she added.

However, some university administrators were quick to temper expectations of a big increase in spending on the back of strong endowment performances.

“Certainly Harvard is relatively well-resourced compared to many other universities, but contrary to popular perception, the university does not have unlimited wealth,” said chief financial officer Thomas Hollister in an interview.

A large portion of the gains came from private investments such as venture capital, a favourite among large endowments such as Yale’s.

Colleges and universities have so far reported median returns of 34.6 per cent this past fiscal year, the best results since the early 1980s, according to preliminary estimates from Cambridge Associates. A 60/40 portfolio of stocks and bonds gained about 20 per cent during the same period.

Investors said most of the venture capital returns were paper gains on the value of holdings, meaning they could not be quickly crystallised to fund even bigger increases in spending.

“A lot of the one-year number is unrealised,” said Andrea Auerbach, head of global private investments at Cambridge, which estimated that the median US venture capital fund rose 88.1 per cent in the year up to the end of June.

Scott Wilson, chief investment officer of WashU, said most of the school’s outperformance came from its equities portfolio, but that private investments had also been a big contributor.

“We’re super happy with the performance, but these one-year returns probably aren’t that meaningful, particularly in a year like this,” Wilson said. “We’ll believe the numbers when the cash comes in the door.”

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