In this article, translated from the platform Investopedia – prepared by specialist writer Tim Smith, reviewed by Ebony Howard, and fact-checked by Yarelit Perez – we explore how endowments have formed a core pillar in American universities and what we can learn from them in our local environment. All rights reserved to the publisher and contributors of the original article, and the content is republished here for non-profit educational purposes, with explicit acknowledgment of its source.

Endowments are a fundamental element of the financial structure of higher education in the United States, to the extent that the size of the endowment at any university is considered an indicator of its financial stability.

They enable colleges and universities to fund their operational expenses from sources other than tuition fees, serving as a safety net in times of crisis.

Prestigious educational institutions, such as the Ivy League universities, have successfully built large and robust endowment funds, benefiting from factors such as:

- Continued donations from wealthy alumni.

- Professional and effective financial management of the funds.

Quick Fact: Marcus Aurelius established the first documented endowment in history around 176 AD, intended to support the major philosophical schools in Athens, Greece.

Criticism of Endowments

Harvard University and other elite colleges have faced criticism for the size of their endowments. Some critics have questioned their utility, with some likening them to a 'hoarding' or 'storing wealth without direct benefit'.

While large endowments were once seen as safety nets for educational institutions, many of them reduced their distributions during the global financial crisis (the Great Recession).

A study published in 2014 in the American Economic Review addressed this behavior, finding a growing tendency among institutions to prioritize the health of the endowment itself at the expense of the actual financial needs of the educational institution as a whole.

The Controversy over Endowment Investments

It is common for student activists to criticize their educational institutions concerning the investment destinations of endowment funds.

In 1977, Hampshire College decided to pull its investments from South Africa in protest against apartheid, a move that was later followed by a large number of American universities.

In recent years, three universities with endowments estimated in the billions—namely Harvard, Princeton, and Stanford—have refused millions of dollars allocated to them as part of a 14 billion dollar federal aid package for higher education under the CARES Act.

Harvard University has also declined three times to receive emergency aid related to the COVID-19 pandemic, the latest being $25.5 million under the American Rescue Plan from President Joe Biden.

Real-World Examples of Endowments

The oldest active endowments today were established by King Henry VIII and members of his family.

His grandmother, the Countess of Richmond, founded endowed chairs in theology at the Universities of Oxford and Cambridge,

while King Henry VIII established endowed professorships in various disciplines at the same universities.

According to an article from the National Center for Education Statistics (NCES), the top 10 American universities by endowment size in 2023 were as follows (in billions of U.S. dollars):

  1. Harvard University – $49.5 billion
  2. The University of Texas – $45.0 billion
  3. Yale University – $40.7 billion
  4. Stanford University – $36.5 billion
  5. Princeton University – $34.0 billion
  6. Massachusetts Institute of Technology (MIT) – $23.4 billion
  7. University of Pennsylvania – $21.0 billion
  8. Texas A&M University – $19.2 billion
  9. University of Michigan – $17.8 billion
  10. University of California – $17.7 billion

Harvard University's Endowment

Harvard University officials predicted that the endowment would decline in 2020 due to the pandemic's impacts on the economy and financial markets.

However, those predictions did not materialize, as the endowment achieved a return of 7.3% on its investments and even saw a slight increase in size.

In 2021, concerns became less justified; as the stock market's rise contributed to the endowment posting a huge return of 33.6%, leading to a growth of $11.3 billion, bringing its total to $53.2 billion.

However, performance slowed in subsequent years:

  • in fiscal year 2022: the endowment recorded a negative return of -1.8%
  • in fiscal year 2023: it recorded a weak return of 0.1%

Harvard's endowment consists of thousands of sub-funds, and its assets are distributed across various investment categories, as follows:

  • Stocks: 11%
  • Hedge Funds: 31%
  • Private Equity: 39%
  • Real Estate: 5%
  • Bonds: 6%
  • Cash and other assets: 7%

The annual spending rate from the endowment is subject to a cap, which was approximately $2.2 billion in 2023.

From an investment perspective, Harvard's endowment demonstrates strong long-term performance, though its overall growth is also attributed to the continued receipt of new endowments from donors.

For example, Harvard University's total endowment exceeds $50 billion, and it is not a single fund but rather thousands of individual donations, each conditioned by specific rules.

An endowment for a university or any non-profit institution consists of multiple individual donations, each referred to as an