New political and economic realities are spurring Princeton University to downshift its investment strategy from growth to focus, as long-term rates of return among university endowments continue to decline.
As a result, the Princeton University Investment Co., which manages the school’s $36.4 billion endowment, significantly lowered its long-term return assumptions to 8%, down from 10.2% just three years ago.
“That shift is necessary for multiple reasons, including because it will help Princeton to stand strong for its defining principles and against rising threats to academic freedom,” Princeton University President Christopher Eisgruber wrote in his annual state-of-the-university letter. “We face political threats to our financial model along with the economic ones.”
Eisgruber wrote that it is hard to notice the decline in long-term investment results because returns have been volatile and inconsistent, rather than a steady 8% or 10% annual return. Eisgruber cited as an example the university’s massive 46.9% return in fiscal 2021—the highest in its history, which raised its 10-year average performance to 12.7%.
However, the returns in the ensuing three years were “among the worst that the university has had,” as it registered negative returns for consecutive years for the first time ever. Eisgruber also noted that the three-year average from fiscal 2022 through fiscal 2024 was in the red and ranked second worst in more than four decades, behind only the financial crisis of 2008 and 2009.
Eisgruber described the 220-basis-point reduction as “very consequential,” noting that over a 10-year period, the reduction would amount to a cut of more than $11 billion, which he wrpte exceeds the university’s last two capital campaigns combined.
“Even the 8% assumption we are now using might be considered aggressive,” Eisgruber wrote. “We could be wrong in either of two directions: we might be too pessimistic, but it is also possible that we are being too optimistic.”
Eisgruber likened the endowment to an annuity, rather than a savings account, noting that the university spends around 5% of its endowment each year to “support almost every aspect of its operations.” This includes financial aid, graduate stipends, faculty and staff salaries, research equipment, construction projects and building maintenance, he wrote.
That 5% in spending means that if salaries and other costs rise 3% annually, the university’s investment earnings must exceed 8% on average to maintain the endowment’s purchasing power. Eisgruber explained that if average earnings are higher than 8%, then that margin of return after payout and inflation can support new growth.
“That is the fortunate position that Princeton has enjoyed for more than three decades,” Eisgruber wrote.
Eisgruber also wrote that Princeton’s reliance on its endowment has “grown dramatically” over time, noting that fund’s payout provides 65% of its operating revenue, compared with 15% in 1985. He also said that while Princeton has strong financial foundations, the university will have to make “hard budgetary choices” in the months and years ahead.
In addition to economic issues, Eisgruber said the university faces “political threats” to its financial model, as the endowment and sponsored research grants account for 83% of Princeton’s revenue. He added that over the past year, the university has enacted budget cuts of 5% to 7% for each of its units amid uncertainty about federal funding, endowment taxes and other federal policies.
“American universities have become world leaders in no small part because they have insisted on academic freedom and because our governments have, for the most part, respected it,” Eisgruber wrote. “If universities cede that right, they compromise not only their own missions but also the vital contributions they make to our country’s health, culture, prosperity, and security.”
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Tags: annual return, Endowment, Investment Strategy, Princeton University, Princeton University Investment Company, Private Markets