That’s how much the value of each school’s endowment, the top four in the Boston area, increased for the year that ended June 30, counting investment gains and donations. If Harvard’s $53.2 billion endowment were a hedge fund — which isn’t a stretch — it would be the fourth largest in the world.
Thanks to a rip-roaring stock market, it was a standout investment year for universities, the best since the mid-1980s, as well as for foundations. After all the disruptions caused by the pandemic, including a painful market crash in February and March of 2020, these not-for-profit organizations can take a deep breath and move forward with a more comfortable financial cushion.
Good news, for sure, but don’t expect to see free tuition for all at the Ivies or foundation leaders throwing money around Boston like a tech entrepreneur whose company just scored big with an initial public offering.
First, most of the big numbers being reported by the schools and foundations are paper profits; they are known as unrealized gains, which don’t become real dough until the assets are sold. Moreover, most sophisticated institutions have a lot of investments that can’t be sold quickly, including stakes in private equity and venture capital funds that typically pay out over 10 years or more.
During the 2008-2009 financial crisis, values of these illiquid private investments plunged, and schools such as Harvard and Yale University were squeezed for cash and had to cut budgets when payouts dried up.
In the past year, private investments made up for some of that disaster, generating outsize gains. Harvard’s private equity portfolio returned 77 percent; at Brown University, where the endowment ended June with $6.9 billion, private equity was up 87 percent, driving an overall 51.5 percent return, the biggest since 1983.
Second, endowments have rules on how much, and on what, they can spend in any given year. Many higher-education donations come with restrictions on their use. And school administrators limit the amount they can draw from the endowment for their operating budgets each year, somewhere around 5-6 percent of the previous year’s fund value, with a formula that smooths out big fluctuations, up and down.
Finally, endowments and foundations are working with time horizons of generations, not years. Private universities with the largest endowments — including the Ivies, Stanford, and MIT — have been criticized for saving billions of dollars for a distant future rather than doing more now to help students and the communities in which they operate.
The Yale University endowment is run “to support the university in perpetuity,” the school explained in announcing an $11.1 billion surge in the value of the fund to $42.3 billion. But it also said that the endowment contributed $1.5 billion to cover 35 percent of the school’s operating budget, which is a typical ratio at the wealthiest schools.
Yale also noted that during the 2020-2021 academic year, 61 percent of undergraduate students received financial assistance, with the average grant award for students receiving financial aid amounting to $58,340, or 78 percent of tuition, room, and board.
But most schools aren’t as rich as Harvard and Yale, and even a blowout year in the markets isn’t a game-changer when tuition revenue is far more important for paying the bills than the endowment.
“Our endowment performance this past year was spectacular,” Boston University president Robert A. Brown said in his “State of the University” letter earlier this month. He wrote that BU’s estimated investment return was 41 percent for the year, pushing the endowment to $3.35 billion.
“Our excitement over this growth is tempered by the knowledge that, due to the university’s large scale, the income from the endowment only supported 4.1 percent of our expenses,” Brown said.
Of course, it was hard for endowments and foundations not to make money in the markets when the Federal Reserve kept interest rates near zero and Congress pumped trillions of dollars of stimulus into the economy. The Standard & Poor’s 500 index, a benchmark for US stocks, returned 41 percent including dividends in the 12 months through June.
That helped grantmaking foundations, which typically don’t take as much risk as endowments, to enjoy banner returns. The Barr Foundation finished calendar 2020 with a 50 percent investment gain. At The Boston Foundation, which has $1.5 billion in investment assets to support its charitable giving, its main fund climbed 35 percent, five times its average annual return over the past 20 years.
Some endowments and foundations boosted their holdings of private investments after seeing the huge gains they posted for others. Many institutions had cut their private holdings after the Great Recession.
“We are in a different place than we were in 2008,” said Kristin Reynolds, a partner at investment consultant NEPC in Boston and the team leader of its endowments and foundations group. Illiquid investments underwent a “stress test” when the pandemic hit, and most portfolios held up fine, she said.
Harvard, for one, has signaled it might be willing to take more risk.
The school reduced its holdings of private investments after the financial crisis, and N. P. “Narv” Narvekar, CEO of Harvard Management Co., which oversees the endowment, said last week that its 34 percent return last fiscal year would have been much higher if it had taken more risk.
“In order to maximize the endowment’s returns in support of Harvard’s mission, Harvard should take an appropriate amount of risk, subject to some important constraints,” he wrote in Harvard Management’s annual report. “How much portfolio risk can and should Harvard tolerate? While this appears to be a simple question, the answer is less obvious.” A committee has been studying the issue.
Other investors are thankful for the great year but don’t plan big changes.
“We like to think of years like this as outliers, where strong performance of one year represents borrowing from the future,” said Michael Trotsky, executive director and chief investment officer of the Massachusetts Pension Reserves Investment Management Board, which overseas retirement funds for 300,000 state employees, teachers, and other municipal workers.
The pension fund had its best year ever, up 29.5 percent, but Trotsky knows that level of return won’t be sustained. Its target return is 7 percent.
“Too often after strong periods like we just experienced, we notice that investors chase areas that have performed well. As a philosophy, we do not,” he said.