Endowment’s input rises

The University’s endowment is expected to provide approximately $500 million of Yale’s income next year, up $30 million from fiscal year 2003, according to the 2003 Yale Endowment Report released Thursday.

If these expectations are met, the endowment will provide 32 percent of the University’s revenue, more than double the 14 percent it supplied in the fiscal year 1993. During the past year, the endowment provided 30 percent of current fund income, more than two times as much as net tuition, room and board.

According to the 2004 Commonfund Benchmarks Survey released Wednesday by Commonfund — which provides fund management and investment advice to nonprofits — endowments on average funded 13 percent of university operating budgets last year. The survey examined the investments of over 650 educational institutions.

“One year of good returns would make any provost happy,” Yale Provost Susan Hockfield said. “But year after year of good returns just makes management of our budget much easier. The consistency of the performance is extremely impressive.”

The target mix of assets in the endowment — the framework Yale’s Investments Office uses to distribute its investments — is expected to produce a real long-term growth rate of 6.2 percent after inflation, the same prediction as last year. The endowment is worth about $11 billion.

The Investment Office allocates the University’s assets into seven different categories: domestic equity, fixed income, foreign equity, absolute return, private equity, real assets and cash. In the last endowment report, Yale Chief Investment Officer David Swensen made large shifts in the University’s investment allocation targets, including reducing the target for private equity from 25 percent to 17.5 percent of holdings. No changes were made to those targets this year.

Last year, the University invested the largest amount of its assets, 25.1 percent, in absolute return assets, which attempt to exploit market inefficiencies and provide diversification to the endowment. Real assets — timber, oil, gas and real estate — make up the second largest allocation, 20.9 percent.

“Real assets investments provide claims on future streams of inflation-sensitive income, supplying protection against unanticipated inflation and playing an important diversifying role in the portfolio,” the authors of the endowment report wrote. “In addition to attractive diversifying characteristics, real assets present tremendous opportunities for superior managers to add value and outperform industry averages.”

According to the report, Yale invests less than half as much of its endowment in domestic equity, or stocks, than the average educational institution and slightly more than one-third as much in fixed income assets, or bonds.

The University seems to be leading a trend in this direction. According to the Commonfund Benchmarks Survey, one-third of the institutions queried were planning to increase their alternative holdings next year and 20 percent planned to reduce their investment in fixed income assets.

John Griswold ’67 — the executive director of the Commonfund Institute, which performs the educational activities of Commonfund — said the largest institutions have done better over the years than smaller ones because they are more diversified.

“In many cases, distributing your assets over many different strategies, you can count on a few of them doing well,” Griswold said.

While size has its advantages, Griswold said managing large endowments creates additional logistical problems.

“It’s hard to find that many good investments of high quality,” Griswold said. “The bigger it gets, the harder gets.”

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Bridget Kelly
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