College endowment returns averaged 30.6% after fees in the 2021 fiscal year, surging due to high investment performance led by U.S. equities, according to an annual study released Friday.

The breakout 2021 figure far outpaced a 1.8% average return from the year before. It was the second-highest average return ever recorded in the study, which dates back to 1974 and is from the National Association of College and University Business Officers and financial services firm TIAA. Only a 41.3% average return in 1983 was higher.

After the banner year, endowments are averaging a three-year return of 12.1%, a 5-year return of 11.4% and a 10-year return of 8.5%. But their average annual effective spending rate did not increase, remaining at about 4.5%.

Wealth concentrated at the top

Endowments are relatively small at most U.S. colleges, with a large amount of wealth clustered in a handful of institutions. The NACUBO study covered $821 billion in endowed assets across 720 colleges and their related foundations. Most of that money, about 84%, was held by 136 endowments valued at $1 billion or more each.

The top three institutions alone totaled well over $130 billion in endowed assets. Harvard University reported $51.9 billion, the University of Texas System had $42.9 billion, and Yale University counted $42.3 billion.

In contrast, the median endowment in the study was worth about $200 million.

Endowment returns and the spending they support nonetheless shape higher education because they influence how institutions fund key budget lines like financial aid, faculty positions, academic programs and campus upkeep.

Spending steady amid widespread gains

Every endowment size category measured in this year's study — from those valued under $25 million to those worth over $1 billion — posted returns above 20% in 2021. But larger endowments tended to perform better than smaller ones. Endowments valued at over $1 billion posted an average return of 37.3%, compared to 23.9% for those worth less than $25 million.

Investments in venture capital and private equity helped drive the higher returns for large endowments. Large endowments invested more heavily in these asset classes than did smaller endowments, which tended to skew more toward fixed income and U.S. equities.

Average annual effective spending rates varied relatively little by endowment size. The largest endowments posted a spending rate of 4.7%, up slightly from 4.5% in 2020. The smallest averaged 4.1%, unchanged from the previous year.

Investment professionals often say that endowments are not savings accounts to be drawn down — they are meant to last into perpetuity. Spending more today, whether on priorities, taxes or fees, could mean spending less in future years, especially if returns start to lag.

"The spending rate did not drop last year in the face of low returns, and it has not risen this year in the face of high returns," said NACUBO's president and CEO, Susan Whealler Johnston, during a webinar to discuss the study results. "I would not call it hoarding. I would actually call it wise management of the funds that are available to serve the purpose and the mission of the institutions."

Endowment managers are most concerned about matching returns with targets over long periods so that endowments won't lose their spending power.

"Even with a blockbuster year like 2021, we should also remind ourselves that it can still have a very limited impact on longer-term annualized trends," said Ivy Flores, managing director at Nuveen, an investment manager and TIAA subsidiary, during the webinar.

Net annualized average returns over 25 years were 7.7% in 2020. Despite the big year in 2021, the 25-year return marker slipped to 7.4%.

Historically, endowments have set a 7.5% target return to cover spending plans, inflation, management fees and other expenses. But in 2021, return targets moved up to slightly more than 7.9% as expenses increased and managers expected higher inflation.

Returns raise concerns about equity

The large returns in 2021 caused Nicholas Hillman, an education professor at the University of Wisconsin-Madison, to worry about inequality. He saw in the returns an example of a K-shaped recovery from the pandemic — a recovery lifting some sectors while leaving others to struggle.

The colleges without large endowments enroll the majority of the country's low-income students and students of color, Hillman said in an email. Meanwhile, a small slice of higher ed benefits most from large endowment returns.

"This is a story of how the rich get richer in higher education and endowments are a critical tool for maintaining — and widening — inequality in U.S. higher education," Hillman said. "When I hear about these endowments having double-digit returns, I think of the K-shaped recovery and I worry what it means for the long-term inequality of funding in higher education."

New giving to endowments rose by 15% over 2020, according to the study. Small and medium-sized endowments saw particularly large increases.

This year's study added a section about gifts for diversity, equity and inclusion initiatives. A solid majority of respondents, 65%, said they'd received gifts for such initiatives, which can include scholarships, research programs and funding for faculty members.