Market shift may hurt Yale

The Chinese stock market suffered its largest fall in a decade on Tuesday, leading to the worst week in four years for U.S. exchanges. But the tumbling global stocks pose little threat to Yale’s $18 billion endowment — and could help it.

While it is impossible to know how well the endowment fared last week, experts said large investors like the University tend to handle short-term fluctuations fairly well. Still, such events can impact even the largest of endowments, and Yale could be employing a variety of strategies to ride out or even benefit from them.

A massive sell-off in the Shanghai stock market Tuesday — occurring Monday night in the United States — sent the index down almost nine percent and spilled over into other global markets the following day. By week’s end, the Dow Jones Industrial Average, a leading benchmark index, lost nearly 500 points, sinking to its lowest level since November. The week’s losses at the S&P 500, an index that provides a picture of the broader market, were the worst in more than four years.

The Investments Office does not comment on individual investments, but at first glance, it would seem that falling stock prices likely had relatively little impact on the University. Domestic and foreign stocks made up slightly more than a quarter of the endowment’s holdings as of last June, according to the office. By contrast, the average endowment larger than $1 billion had almost 45 percent of its investments in equities (a term generally synonymous with stocks), according to the 2006 National Association of College and University Business Officers Endowment Study. Smaller endowments had even larger positions in stocks. With comparatively little of Yale’s money invested in equities, fluctuations in the stock market would not greatly affect the endowment, experts said.

“Everything impacts up and down, but a diversified portfolio will ride through that,” said Richard Anderson, head of the higher education practice at Hammond Associates, an endowment consulting firm.

In addition to stocks and hedge funds, the Yale endowment portfolio includes private equity, bonds, cash and real assets, which include real estate and natural resources.

University President Richard Levin said Yale’s is less susceptible to drops in the stock market than most university endowments.

“The effect is relatively small because only a small fraction of the endowment is invested in the U.S. stock market,” he said.

But major shifts in the stock market do impact even the largest endowments in the short term, he added. And even though large university endowment managers sometimes shy away from directly owning stocks, the hedge funds they invest in heavily can make endowments vulnerable to stock market shifts, said Roger Kaufman, economics professor at Smith College. Yale’s portfolio is a little under one quarter “absolute return,” or hedge funds.

“It’s not clear what those [hedge] funds have,” he said. “That’s the problem with hedge funds; it’s not transparent what they are invested in.”

Depending on what their hedge funds hold, endowments may withstand temporary dips in equities, Kaufman said. The stock market has increased 16 percent in the last year, he said, and the Shanghai exchange that lost nine percent of its value in one day last week had almost doubled over the previous year. Endowments can even profit from declining markets through short-selling.

“These hedge funds could have bet that the stock market could have gone down,” Kaufman said. “[Chief Investment Officer] David Swensen could have made a coup, and the [Yale] endowment could go way up.”

Regardless of the impact on one week’s or even one month’s returns, a short-term correction in the market is nothing professional investors tend to worry about, Kaufman said. Of those actively trading in the Chinese markets that lurched up and down last week, 80 percent were individual retail investors rather than financial institutions, the New York Times reported Friday.

“Endowment managers have to take a long view,” Anderson said.

Elaborate investments can take as much as a decade for endowments to realize their value. Universities can contribute money to a private equity fund that uses pooled resources to buy out companies, but the investment is generally not recouped until the bought-out company is taken public again by the fund. Venture capital investments in start-up companies can also take years to have an effect on an endowment’s bottom line, Kaufman said.

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