ESG Investing

Elite University Endowments See Record Returns, Highlighting Equity Gaps

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2021 grew into a banner year for university endowments at top colleges in the United States. Both Duke University and the Massachusetts Institute of Technology reported returns of about 56% for the previous fiscal year. Returns reached 65% At Washington University in St. Louis, marking the largest gain in the school’s history. The list goes on.

Such impressive returns spell good news for these elite institutions. However, they are not shared by the vast majority of US colleges, which generally lack the multibillion-dollar endowments and connections typical of elite universities. As such, these striking numbers also underscore the significant divide in educational equity in the United States.

Accounting for the Increase

Soaring global stock markets played a role in reaching these high numbers. The results look particularly stark compared with the poor average returns of the year before.

Yet the key reason behind this year’s bumper crop may be the increasing push by top universities to diversify investments beyond the usual stocks and bonds, an approach pioneered by Yale in 1985. University endowments valued at more than $1 billion are more likely than other institutions to invest in alternative asset classes such as venture capital and private equity.

That has been a boon to wealthier schools, especially as venture capital is set to experience its best year since the dot-com boom of the 1990s. As of the third quarter, private equity exits reached $638 billion—50% greater than the next-highest annual figure.

Alternative investments have unlocked new opportunities in university portfolios. Comprising a third of its portfolio, Harvard’s private equity investments realized a 77% return in its latest fiscal year and contributed to an overall return rise of 34%. The University of North Carolina saw a 142% return from the venture capital portion of its $10 billion endowment.

Many universities have reaped the benefits of the rising stock market, but their prosperity is not necessarily reflected outside of high-income schools.

Examining the Wealth Gap

However, the majority of educational institutions have been left out. Schools with smaller endowments often simply cannot make alternative investments—in part because of the expensive startup costs such investments require. Hundreds of schools lack any endowments at all.

Separately, conditions such as these also illustrate a widening equity gap in higher education. “These results highlight the growing divide between higher education’s “haves” and “have nots,” wrote Michael T. Nietzel, former president of Missouri State University, in Forbes. “It’s a gap involving money, status, and influence.”

These returns also point to the overall wealth gap, made even more pronounced during the pandemic. Many universities have reaped the benefits of the rising stock market, but this prosperity is not necessarily reflected outside of high-income schools.

Seizing Opportunity for Impact Investors

Impact investors have historically placed less focus on the educational sector in favor of promoting other environmental, social, and governance concerns such as such as clean energy. That trend continues today: impact investments in global education totaled only about $1.26 billion in 2019, ranking 12th out of 13 sectors.

Considering that less-wealthy colleges and universities train the vast majority of students in the United States, impact investors hold an opportunity to help close the equity gap in higher education by supporting university endowments outside of elite institutions; a step forward on this path may help bridge even larger-scale societal wealth gaps going forward.

Any company, security, fund or other investment identified herein is provided solely for illustrative purposes and should not be construed as a recommendation or solicitation for the purchase or sale of any such investment.

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