Yale gives annual endowment report

The University’s endowment is expected to provide nearly a third of Yale’s operating budget for the 2005 fiscal year, according to the 2004 Yale Endowment Report published online Tuesday.

According to the report, Yale Investments Office estimates $562 million in endowment funds was set aside for the 2005 fiscal year, accounting for approximately 32 percent of the University’s projected $1.76 billion in total revenues. Approximately 30.8 percent of Yale’s operating budget came from the endowment last year, contributing more than funds from room and board, net tuition and medical services combined. These projections anticipate an increase of $60 million in endowment spending from last year.

The University’s planned increase in endowment spending is in part because of a newly relaxed endowment spending cap, which was raised from 5 percent to 5.25 percent in October. The cap was changed for the first time in nine years after Yale Chief Investment Officer David Swensen reported a 19.4-percent return and $2.1 billion in earnings during the 2004 fiscal year. The 2004 endowment report lists a $12.7 billion total net endowment value.

“This represents an extremely important part of the University’s budget revenues and allows us to fund new programs, support financial aid initiatives and underpin the renewal of our campus infrastructure,” Yale Provost Andrew Hamilton said. “David Swensen and his team are to be complimented on another very successful year of funds management.”

The 2004 National Association of College and University Business Officers endowment study released last month scored Yale’s endowment returns well above the average of 15.1 percent. The study examined the investments of 741 higher education institutions, among which Yale placed second.

While Swensen made few changes to holdings targets in last year’s report, the report indicates a plan to shift the 3.5 percent in cash assets into other areas, including private equity and real assets like lumber, fossil fuels and real estate. Some funds are also set to be shifted from absolute return assets to domestic, foreign and private equity.

Yale’s Investments Office was the first to pursue absolute returns as a distinct asset class in 1990, according to the 2004 report. These assets exploit market inefficiencies to generate long-term returns largely independent from larger market activity. Absolute returns currently make up the largest segment of the endowment’s portfolio at 26.1 percent, followed by real assets at 18.8 percent.

According to the report, the new target rates seek to raise real asset investments to 20 percent of the portfolio and lower absolute return assets to an even 25 percent.

Portfolio diversity is likely the primary reason for these planned shifts in funds, said John Griswold, executive director of the Commonfund Institute, the educational arm of a group that provides fund management and investment advice to many universities. Griswold said the large endowment Yale enjoys makes it easier to invest in more diverse and better-performing long-term asset pools.

“They are more ready to take on new asset classes and new risk … as long as those asset classes are not particularly highly correlated to their current mix,” Griswold said. “Large endowments have long since moved to much more diversified endowments, and smaller endowments are just now starting to catch up.”

Over the past fiscal decade, Yale’s annual net endowment returns have averaged 16.8 percent, and the endowment’s total value has more than tripled from $3.5 billion after fiscal year 1994. Griswold said the University’s favorable performance cannot last forever, citing a period of endowment stagnation during the 1970s, but he said Yale holds a market position superior to almost any comparable institution.

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