Endowment rises, barely

The Yale endowment overcame the slumping financial markets to post a single-digit gain for the fiscal year that ended June 30, although it was outperformed by Harvard’s fund, the News has learned.

The exact return is expected to be announced later this month. But in a letter sent to donors Friday and obtained by the News, University President Richard Levin said Yale’s endowment now stands at nearly $23 billion, up from $22.5 billion at the end of the previous fiscal year.

Levin’s disclosure came as Harvard announced Friday its endowment had posted an 8.6-percent return in the last fiscal year, rising to $36.9 billion, the most of any university. Its money managers said that return significantly outperformed internal projections as well as outside benchmarks, exceeding the performance of 95 percent of the 165 large institutional funds tracked by the Trust Universe Comparison Service, for example.

While it earned a positive return, the Yale endowment did not perform that well, a University official said Sunday, speaking on the condition of anonymity while discussing confidential investment results.

“Don’t expect us to top Harvard this year,” the official said.

Yet few are likely to complain when the University announces its official results. Harvard and Yale’s positive returns came in spite of a year “marked by periods of intense market turmoil,” as Harvard’s investment managers put it in their annual letter. The subprime-mortgage crisis and the broader economic slowdown have driven the equity markets sharply downward over the last year.

For a comparison, the median return in that period among the funds tracked by the Trust Universe Comparison Service was negative 4.4 percent. And investments in the stock market fared even worse; one widely observed benchmark, the S&P 500 Index, registered a return of negative 13.1 percent in the year ending June 30.

But Harvard’s announcement of its investment performance Friday sheds new light on just how its fund and some of the other largest university endowments managed to weather the economic climate in the last year and stay out of the red.

Just as Harvard and Yale managed to post gains, Princeton President Shirley Tilghman suggested last week in remarks at a Senate Finance Committee roundtable that Princeton also squeezed by with single-digit gains.

Harvard, for one, did it in part because of the diversity of its holdings, its Friday letter indicates. That strategy is a hallmark of venerated Yale investments czar David Swensen, who has been hailed for diversifying the Yale endowment to include alternative investments such as venture capital, oil, gas and timber rather than the standard stocks and bonds that it comprised a generation ago.

That has become a model for other schools to follow as one strategy to insulate themselves against the volatility of the stock market.

Indeed, Harvard lost money this year on traditional equities, with its investments in domestic equities falling 12.7 percent and foreign equities 12.1 percent. But such investments comprised only a quarter of the school’s total portfolio.

Another quarter was devoted to so-called “real assets,” including commodities, timber, farmland and real estate, which performed much better. Those holdings earned a return of 35.8 percent, helping to drive the endowment’s value upward even as the equity market plunged.

Yale is likely to benefit similarly. Real assets comprise the largest chunk of the University’s fund, with a target allocation of 28 percent, according to the Yale’s 2007 report on its endowment.

Over the last 30 years, Yale’s holdings in real assets have posted an average annual return of 17.8 percent, according to the report, helping to drive Yale’s endowment upward to the $22.5 billion it reached last year, second only to Harvard’s.

But while Yale, Harvard, Princeton and others have similarly embraced alternative investments, many other smaller investors have not done so to such a large extent, helping to explain, in part, why Harvard’s fund outperformed so many other funds this year. Yale’s real-asset allocation, for instance, is nearly three times the average university’s allocation to such investments, according to data from the research firm Cambridge Associates.

Still, while Yale and Harvard both remained in the black in the last fiscal year, the golden age of record returns appears to be over — or at least on hold. Last year, Yale’s endowment posted a nation-leading 28-percent return and gained a record $5 billion; over the previous decade, it had posted an average annual return of 17.8 percent, more than two percentage points higher than any other large university fund in the country.

Those massive gains helped fuel questions in Washington, raised most strongly by Sen. Chuck Grassley of Iowa, about whether the wealthiest universities have been unnecessarily hoarding money when some of it could be used to lower tuition and provide more financial aid.

That discussion may very well be tempered by the dramatically smaller returns that will be announced over the next month and, perhaps, in coming years. Harvard’s managers warned that they remain “very cautious” in their expectations for the next few years.

“The last ten years have seen periods of extraordinary investment results,” they wrote. “In light of recent market stress and dislocations, however, we are keenly aware that returns produced in the next few years may fall well short of these robust historical levels.”

But Harvard’s endowment will at least have one thing going for it: It will be under the guide of an Eli. Jane Mendillo ’80 SOM ’84, who got her start in the Yale Investments Office and went on to oversee the endowment at Wellesley College, took office as president and chief executive officer of the Harvard Management Company on July 1.


  • Hieronymus

    Of course, commodities are down roughly 30% since June 30. I am hoping that Swensen's smaller FY increase vis-a-vis Harvard translates into smaller losses on the downside. Not that I wish Harvard ill; I just wish Yale better!

    Commodities fall-off should have mixed implications: bad for the endowment but, given the pace of New Haven construction, perhaps good for the town and the university (steel prices are un-be-LIEVE-able right now).

    Ceteris parabis, I trust Swensen to have foreseen the bursting of the commodity bubble earlier and to better effect than the el-Erian (or Kaplan--given that Jane only started in July, I wonder whether she had time to recognize and execute any strategy… guess we'll have to wait a year!).

    Boola, boola!

  • Observer

    It appears that Yale is as "Harvard-centric" as ever.

  • y

    It's only a relevant comparison because Yale beats Harvard almost every year in this category. For them not to, is a sign of something interesting happening in the market. Probably means that Harvard's endowment will plummet in the next FY while Yale's will continue to rise.

  • juytre

    1. David Swensen is God. Deservedly the highest paid Yale employee.
    2. Yeah, stop always using Harvard as your benchmark.

  • reader

    Not sure if your analysis is right. The $23 billion figure in Pres. Levin's letter appears to be net of the approx. $850 million in endowment spending this year. That would lead to a 5-6% return. We'll see soon, I guess.

  • Yalies!

    Figures they needed a Yale grad to beat out returns!

  • Ken McKenna ('75, PhD '78)

    It's not a good idea to focus on the putative modesty of these results. Yale's endowment managers are reported to be ultraconservative in recording gains, especially with regard to the non-liquid assets to which much of the endowment is devoted. With so much turbulence and uncertainty now in the markets, such ultraconservative reporting policies will normally reduce reported gains. University endowment management is a very long term game, and it would be very disturbing to the functioning and psychology of an institution to be later obligated to give up gains optimistically recorded. It is possible that some institutions reporting better results than Yale's this year will find themselves writing another, more bitter, chapter later in the economic cycle.

    Further, these results date back to the end of the last fiscal year. Because the financial turmoil now racking the markets cranked up quite a bit just after that date, the "snapshot" implied by formal returns for 2007-08 give far less information about the true current state of any endowment than is normally the case. Yale's endowment is reported to be famously hedged against loss. Other endowmentss, perhaps not so much so. We'll see.

  • Spy Vs. Spy

    It is not so much a "Harvard versus Yale" thing as it is a Harvard-style management versus Yale-style, and the comparison is worth making.

    Harvard typically hires folks into Harvard Mgmt Co who, after a couple of years at their "low" pay, quit and start an outside firm which HMC can then hire (and pay "real" salaries). Harvard hires LOTS of outside managers.

    Yale has one guy, paid a relative pittance (for which he must suffer the usual sophomoric criticism regarding unfair pay), plays things VERY close to the vest, and does most everything in-house.

    Harvard and Yale offer two models to other large entities, i.e., endowments, foundations, pensions, etc., thus it is worth comparing styles--and results--of these two behemoths in order to better gauge which offers advantages.

    #7's comments are worth thinking about; thanks!

  • Alum

    The bottom line:

    Apparently, after the return on investment, expenditures, and new gifts, the net value of the endowment increased by $400 million - from $22.5 billion to $22.9 billion in FY 2008.

  • Hieronymus

    Yale's spending--$3 billion over the last ten years, roughly equivalent to Dartmouth's *entire* endowment--has *transformed* New Haven.

    That spending--and the current and future construction (and, hence, jobs) it supports--is almost entirely dependent upon the endowment.

    The effects, both trickle-down and attractive (whereby other business feel comfortable coming to New Haven, knowing that it is stabilized and even getting better) are a tremendous benefit to all residents of New Haven, whether town or gown.

  • Agcapita

    The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead.

    Research by Agcapita Farmland Investment Partnership (Calgary, Canada based agriculture private equity firm) shows investors must be prepared to rotate into asset classes with different characteristics.

    During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland.
    - Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms);
    - Cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return); and the
    - S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)

    I believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:
     Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
     Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
     Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981

  • Wealth advisor

    In the last ten years, Yale endowment outperformed Harvard most of the time. This is nothing to be ashamed of getting a lower return than Harvard. Harvard allocated 16% to commodities, I am it is taking a big hit now.