University endowment performances improve nationwide

Yale’s improved investment performance last year was echoed by university endowments nationwide, according to preliminary survey results released yesterday.

The 2007 Commonfund Benchmarks Study of Educational Endowments, which will be released in its final form in January, reported an average return of 10.9 percent in the 2006 fiscal year for the 255 institutions surveyed. Yale earned a 22.9 percent return over the same period. On average, endowments improved over last year, and certain asset classes — such as international equities — far exceeded other classes in performance. Though the numbers are only preliminary, Yale professors said they were not surprised by the study’s results.

The survey, conducted by the Commonfund Institute, the educational arm of an investment firm that serves nonprofit organizations, will eventually include about 730 universities, private schools and education-focused foundations before the final results are released. Roy Chernus, a spokesman for Commonfund, said the study is a work in progress and that the early figures were released to give a sense of the trends evident so far.

John Griswold ’67, executive director of the Institute, said in a press release that the results appear encouraging.

“Taking into account that these are preliminary data, they do indicate that U.S. endowments enjoyed solid returns on their investments last year,” he said.

While Deputy Provost Charles Long was unfamiliar with the results, he said he was unsure how meaningful a survey of 255 of the nation’s approximately 3000 endowments would be. Long said he is pleased with Yale’s performance for the 2006 fiscal year, which topped its 22.3 percent return from the year before.

Overall, endowments earned 9.7 percent in returns in the 2005 fiscal year, according to the 2006 Commonfund report that surveyed 729 institutions. Though performances this year are up over last year, institutions had predicted lower returns of just 8 percent when they were surveyed in 2005.

The final study will include a smaller proportion of “very large” endowments than the current results do, according to a Commonfund press release. The top-performing endowments in the 2005 fiscal year, on average, were those with holdings greater than $1 billion, according to the 2006 report.

The most successful endowments, such as Yale’s and Harvard’s, have emphasized diversifying their portfolios, said David DeRosa, adjunct finance professor and president of DeRosa Research and Trading, an economic research and consulting company.

“They’ve [gained] by having a lot of exposure to stocks, and they’re also not shy about diversifying,” he said.

International equities are driving the recent gains with 24.5 percent average returns, the highest of any asset class. Endowments have long been increasing their holdings internationally, DeRosa said, and the Commonfund report indicates that the trend has continued. According to the survey, endowments increased their international holdings from 16 to 19 percent of their total assets over the last two years. Though DeRosa said he was not surprised to hear that international holdings performed well in 2006, he said the asset classes vary in performance from year to year.

But strong performance is not the primary reason why endowments are increasingly looking outside the country, finance professor Robert Ibbotson said.

“[International markets] work differently from American markets, and they diversify the portfolio,” he said. “They behave differently, and sometimes Japan is up and the U.S. is down. A portfolio that has everything is more stable and has less risk.”

Alternative investments, which include hedge funds, private equity funds and other exotic investments available mainly to individuals or institutions with high net worth, had the second-highest average returns at 15.2 percent. Though Yale has increased its stake in this asset class in recent years, some of the markets involved have not performed well in general lately, especially hedge funds, finance professor K. Geert Rouwenhorst said.

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