Endowment is up 28 percent

The University endowment returned a staggering 28.0 percent last fiscal year, the strongest performance of any large college endowment fund so far this year.

The returns boost the endowment to $22.5 billion from last fall’s total of $18 billion, according to a University press release, keeping it the second-largest university fund in the country. But some investing experts questioned how much longer Yale can continue to lead a crowded endowment field that is increasingly adopting the same strategies Yale has profited from over the past decades.

The year’s performance was an improvement over the previous year’s 22.9 percent return. Yale President Richard Levin said he was impressed by the endowment’s success, especially in comparison to other top institutions.

“The stunning thing is how much we outperformed other endowments,” he said. “In a normal year we might edge out Harvard, Princeton, Stanford by one percentage point. Five is quite unusual.”

The endowment is expected to contribute $843 million to Yale’s more than $2 billion operating budget, representing 37 percent of the net revenues used for the 2007-2008 fiscal year budget. The contribution represents an increase of almost $170 million over what the University planned to use from the endowment in the 2006-2007 budget.

But that total would be even higher were it not for a conservative set of spending rules that will weaken the immediate impact of the outstanding returns. The target spending rate is 5.25 percent of the endowment, which would now total $1.18 billion, but the actual spending rate is determined mostly using the endowment total from the previous year. This “conservative” spending rule, as the Yale Investments Office describes it in their 2006 Investment Report, is meant to keep the endowment large enough to withstand lean years. The 2007 report is expected to come out this winter.

The strong performance announced yesterday could push Yale’s endowment spending close to or over $1 billion next year, Levin said.

Yale’s 28 percent return was the strongest of nearly any large university endowment he has heard of, said Richard Anderson, head of the higher education endowment consulting practice at Hammond Associates. Though not every endowment has reported its 2006-2007 fiscal year returns yet, Anderson said he expects the University to be near the very top after all results are in. While he said the returns were “spectacular,” the investing environment this year was strong for all institutional investors.

“Everybody has done better this year,” he said.

Domestic equities returned more than 20 percent this past year, Anderson said. But international equities returned approximately 30 percent, and the emerging markets segment of international stocks — which Anderson said was probably an important component of Yale’s investments — netted an average return of 45 percent last year. Levin said real estate and other real assets were particularly important to the University’s success.

Class-leading returns may not always be in Yale’s future, some endowment experts said. A global market in which U.S. stocks and bonds outpaced Yale’s most important segments, including hedge funds, private equity and emerging markets, could keep Yale out of the top spot sometime in the future, Anderson said.

Yale could see lower returns as the strategies popularized by Chief Investment Officer David Swensen begin to pay off for other colleges, said Roger Kaufman, an economics professor at Smith College who studies the economics of higher education.

“Most people think the alternative investments area is becoming more competitive,” he said. “It’s becoming more competitive in the sense that a lot more people are getting involved in hedge funds and there are only a certain limited, finite number of strategies.”

Still, Kaufman said Yale’s track record suggests that increased competition will not hurt the Investments Office’s success.

“These guys seem to have performed well,” he said.

The figures released Wednesday describe the endowment as of June 30, but may not present an accurate picture of its current health. A collapse last spring in the subprime mortgage market impacted some endowments, but Anderson said the real effect of the meltdown — which led to some hedge funds losing much of their value — was not felt until August, outside the time frame included in the recent returns.

Levin said the last two to three months have seen much more instability in the market, but that the endowment is weathering the storm.

“It’s not clear we are holding up for another 20 percent year,” he said. “But we’re fine.”

Harvard’s fund — the largest educational endowment in the country — announced last month a 23 percent return on its investments for the 2006-2007 fiscal year. Two weeks ago, Mohamed El-Erian, Harvard’s chief investments manager, unexpectedly announced he was resigning from the Harvard Management Company to return to a private investment management firm in January. Amherst College announced a 27.8 percent return on its endowment this past year.

Over the last decade, the Yale endowment returned an annualized 17.8 percent, increasing by almost $17 billion over that same period.

Comments