Jan. 24 (Bloomberg) -- The University of Notre Dame and the University of North Carolina at Chapel Hill had the fastest- growing endowments among the wealthiest U.S. colleges in the year ended June 30 as schools posted their best gains since 1998.

Notre Dame's endowment grew 34.7 percent to lead 76 schools with funds of $1 billion or more, the Washington-based National Association of College and University Business Officers said today. The group surveyed 785 U.S. and Canadian colleges and found their funds grew to $411.2 billion, 20.9 percent more than a year earlier.

U.S. and international stocks were the top-performing investments for the endowments, signaling that returns in the current fiscal year may be lower. The schools' performance fell short of the Standard & Poor's 500 Index, which rose 20.6 percent in the fiscal year ended June 30. The index has fallen 10 percent since then.

``A good year in the equity markets will cause the endowments to have a good year overall,'' said Brett Hammond, chief investment strategist for New York-based TIAA-CREF Asset Management, a co-sponsor of the study, covering the year that ended June 30. ``Other classes had a pretty good year, too.''

Notre Dame, located in South Bend, Indiana, generated a 25.9 percent investment return and North Carolina earned 23.4 percent, with both schools helped by fund-raising campaigns.

Among the top five universities, the fund at Harvard University, in Cambridge, Massachusetts, increased 19.8 percent to $34.6 billion; Yale University, in New Haven, Connecticut, rose 25 percent to $22.5 billion; and Stanford University near Palo Alto, California, grew 21.9 percent to $17.2 billion.

Princeton University, in New Jersey, rose 21 percent, to $15.8 billion, vaulting past the University of Texas system. The Austin-based fund increased 18 percent to $15.6 billion.

Covering Costs

Endowment income is one of the primary sources of revenue for colleges and universities, along with tuition, public financing and gifts. Schools use their earnings to help cover salaries, scholarships and capital improvements.

On average, the endowments in the survey earned 17.2 percent on investments, improving on their 10.7 percent gain in the prior year, the survey said. Over 10 years, the funds gained an annual average of 8.6 percent, compared with 7.1 percent for the S&P index and 5.6 percent for international stocks.

Since July 1, ``equities have gone from being a huge driver of investment growth to being a drag on investment growth,'' TIAA-CREF's Hammond said. Through yesterday, the Russell 3000 Index had fallen 11 percent and stocks from developed nations outside the U.S. have dropped 15 percent.

Grassley's Stance

The number of schools with endowments exceeding $1 billion increased last year to 76 from 62. Wealthy colleges have been criticized by U.S. Senator Charles Grassley, an Iowa Republican, for spending too little of their endowments. He urged them to raise outlays to 5 percent each year.

Colleges spent an average of 4.6 percent of endowment assets, the same as in fiscal 2006. With an overall gain of $71.1 billion in assets, schools will receive an additional $3.25 billion from their endowments in 2007-08, according to the study.

Notre Dame tied with Cornell University, in Ithaca, New York, for the second-best investment return by the 25 wealthiest U.S. institutions, according to a separate Bloomberg survey. Only Yale gained more, 28 percent.

The fund at Notre Dame, the Catholic university founded in 1842, grew to $6 billion from $4.4 billion, according to today's study. Scott Malpass, Notre Dame's chief investment officer, said that holdings in energy, buyout funds, real estate and emerging-markets stocks each gained more than 30 percent. Those categories made up about 43 percent of Notre Dame's assets.

Notre Dame in May opened the public stage of a $1.5 billion fund drive, the largest in Catholic higher education, scheduled to end in 2011. Notre Dame has already raised more than $1.2 billion.

North Carolina's fund rose to $2.2 billion from $1.6 billion, aided by the Carolina First Campaign that ended Dec. 31. The drive raised $2.3 billion, surpassing its $2 billion goal.

To contact the reporter on this story: Matthew Keenan in Boston at mkeenan6@bloomberg.net

Last Updated: January 24, 2008 00:05 EST