Higher Education Endowment Return Assumptions in a Changing Environment

Many colleges, universities, and nonprofit institutions built long-term endowment portfolios on assumptions about investment returns, donor giving, and federal support that once enabled confident long-range planning. They often set those assumptions during periods of lower interest rates, expanding access to investment opportunities—and more predictable funding—and enabling aspirational but achievable goals. However, conditions have changed, and it may be time to rethink underlying assumptions—particularly those related to return outcomes.

In a recent Chronicle of Higher Education article, Ted Karns, a lecturer at Boston University’s Questrom School of Business and the former managing director of Princeton University’s endowment, observes, “They were aspirations that had survived long enough to feel like facts. Questioning them meant starting a conversation about spending less and promising less.”¹ That reluctance is understandable. But in today’s environment marked by elevated spending demands, uncertain federal funding, and more tempered forward‑looking return expectations, reexamining return assumptions has become a necessary governance responsibility rather than an uncomfortable exercise to defer.

Commonfund maintains that reassessing return assumptions should not be a tactical response to short‑term market movements. Instead, this reassessment should be understood as part of an institution’s ongoing fiduciary duty to align financial planning with evolving realities. Evaluated within the framework of the investment policy statement (IPS)—which includes return objectives, spending, asset allocation, risk management, and liquidity—a thoughtful review can help ensure that endowment portfolios remain positioned to support mission priorities across market cycles.

Importantly, return assumptions are not the same as return objectives. Return assumptions are planning inputs—for example, an assessment of economic, technological, market, and political landscapes—that allow institutions to assess the sustainability of spending and long-term commitments. Return objectives, by contrast, are portfolio-level targets tied to asset allocation and implementation. Assumptions may underlie target-setting, but conflating the two can obscure emerging risks and delay necessary conversations—particularly when institutions are asking their endowments to do more.

As reliance on endowments to support institutional operations increases, it is even more critical to return to and consider ongoing return assumptions, for reasons we explore below. But first, the data: the 2025 NACUBO-Commonfund Study of Endowments® has reported an increasing reliance on endowment distributions by colleges and universities over the past three fiscal years, rising from 10.9 percent of operating budgets funded by the endowment to 15.2 percent from fiscal year 2023 to fiscal year 2025. Over the same period, effective spending rates have increased from 4.7 to 4.9 percent, while new gifts to endowments declined in two of the past three years. As the Chronicle article notes, “A number that was manageable when the endowment funded 10 percent of expenses is much more consequential when it funds 30, 50, or 60 percent.”¹

At the same time, forward‑looking return expectations have become more constrained. Nearly half of institutional investors responding to Commonfund’s 2026 Annual Market Sentiment Survey expect U.S. equity returns in 2026 to fall below both long‑term historical averages and the S&P 500’s 10‑year average annualized return of 12.9 percent, reflecting heightened geopolitical risk and valuation concerns. Despite these near‑term headwinds, most institutions remain cautiously optimistic about their long‑term ability to meet return goals, with nearly 79 percent indicating they are either very or modestly bullish about achieving their target returns over the next 10 years. This combination of greater reliance on endowment support and more modest return expectations heightens the stakes of holding assumptions that are slow to evolve.

What makes revisiting return assumptions difficult is not a lack of data but the hard decisions that might follow from an honest assessment of the data. Lowering an assumption does not simply adjust a model; it highlights unavoidable trade-offs. As the Chronicle article notes, “A lower expected return does not just change a spreadsheet. It means telling a campus and a board that there will be less to go around.”¹ Yet the alternative of allowing outdated assumptions to persist can quietly erode financial flexibility and sustainability until options become more limited.

Failing to update return assumptions can heighten institutional risks. If too optimistic, this may lead to unachievable targets, and institutions may face emergency cuts and destabilizing budget adjustments. If assumptions are too conservative and markets exceed expectations, the outcome is far more manageable. Assumptions that are misaligned with reality over time can compound this risk. Karns cautions, “Compounding is unforgiving about the assumptions underneath it…. A roughly two percentage point difference might feel modest in any given year. Over a decade, it changes everything.”¹

Seen through this lens, reviewing return assumptions is not an admission of failure or a retreat from long‑term investing but a reassessment of structure, spending demands, and risk tolerance. Institutions that engage in this work intentionally, transparently, and within policy are better positioned to preserve intergenerational equity and institutional resilience.

In this context, boards and investment committees may wish to revisit several key questions:

• What are our return assumptions and when were they established? Do they reflect today’s capital market environment and opportunity set?
• Are portfolio‑level return objectives realistically achievable without taking on additional risk, illiquidity, or concentration?
• How dependent is the operating budget on endowment distributions, and how resilient are we if returns fall short?
• How exposed is the institution to volatility in other funding sources, including federal support and donor inflows?
• Is the structure of the portfolio aligned with today's liquidity and spending needs as well as positioned for the longer term?

The real issue isn't that return assumptions are shifting, as they inevitably will. What matters is whether institutions shape that change proactively or respond to fundamental shifts. Having challenging conversations guided by proactive and clearly articulated questions is the clearest path to enduring mission support.