ENDOWMENT FALLS 25 PERCENT

How in this world could Yale's sophisticated investment advisors have not foreseen these market conditions? Yale's spending plans were so out of line that they could have been used as contrary market indicators. These market conditions were screaming downturn at least as early as last winter.

President Levin, take advantage of these endowment troubles--delay the new colleges indefinitely. Plans to expand Yale College were a bad idea.

The numbers are worse than I expected (I thought we'd at least come out ahead of Harvard), but I'm encouraged by Levin's response. Some significant delays and cuts, but no panicky hiring freeze (a blunt and unnecessary instrument), and most importantly, no reduction in financial aid. As for my fellow recent alum (#3), I couldn't disagree more. The poor and middle class are already making plenty of "sacrifices in this economy," in the form of job losses, wage and benefit cuts, and tightened social services. A university that sits on a nest egg as large as Yale's (and receives favorable tax treatment to boot) shouldn't be telling those families' children it's time for them to "sacrifice" their dream of going to one of the best schools in the world, just because we now have only $17 billion instead of $22 billion.

Overall I find Levin's response measured and appropriate, with exactly the right priorities. Levin has been criticized (by me among others) for being too much a technocrat and not enough of a visionary, but these times call for a technocrat, and so far I'm very impressed by his performance.

Leaving the generous financial aid untouched is a great decision. I'm sure if they lowered it many would consider Yale hypocritical in its financial aid philosophy.

Yes, "Other Recent Alum" is right--funding a Yale College education is tremendously difficult for most people, even in a booming economy. I would think that "Recent Alum," as someone who spent four years in Yale's socially-conscious environment would know better than to call the financial aid policies "overly generous."

What is sad, however, is seeing that the pay increases of dining hall workers, janitors, and other servers of Yale is the first thing cut. These people are always the economy's first victims. (I-bankers may get laid off more quickly, but unlike Yale's staff, they may very well have savings accounts to tide them over a little while….)

I believe "Other Recent Alum" and the YDN itself overlooked an important point when comparing Yale's data to Harvard's:

From Harvard's memo: "Harvard Management Company, using standard industry practices for valuing assets, has calculated investment losses of approximately 22 percent from July 1 through October 31. Yet even that sobering figure is unlikely to capture the full extent of actual losses for this period, because it does not reflect fully updated valuations in certain externally managed asset classes, most notably private equity and real estate."

That is a huge portion of their endowment, and so to compare Yale's 25% endowment loss including real estate and private equity to Harvard's 22% loss excluding those asset classes seems misleading. I'm a total layman, but I'm guessing that when ALL the numbers shake out, Harvard will have it much worse.

More generally, I agree with ORA in that I'm really impressed with Levin's response here.

This could have been so much worse, and these numbers are being seen across the board in higher education. Given the overall economic collapse, I find it difficult to criticize our investors… these risks were the only way we ballooned to $23B in the first place. We're lucky not to lose 30% like Harvard, and even if Princeton doesn't lose a penny (and they will), we're still on par with their endowment.

I'm all for delaying the new colleges, but not axing them.

Baker's comments are fascinating. What if Yale turns this into another boon?

Are top university officials (particularly Pres. Levin and David Swensen) planning to take a pay cut? The News should be putting this question to them directly.

Hopefully the College will delay the new residential colleges indefinitely. They were a terrible idea, as another poster already stated. They won't add anything to the college and Yale can't actually afford it any longer.

for # 8

"What is sad, however, is seeing that the pay increases of dining hall workers, janitors, and other servers of Yale is the first thing cut. These people are always the economy's first victims. (I-bankers may get laid off more quickly, but unlike Yale's staff, they may very well have savings accounts to tide them over a little while….)"

None of the dining hall workers, janitors, etc will be dealing with pay cuts. They have contracts which outline their pay structure with raises built in at certain intervals. They'll be just fine.

The limit on raises for next year affect the managerial and professional staff. Alot of them will be just fine too, but they don't have the same protections that the union staff does about having a job next year.

It's a little surprising that to judge from some of these comments it's not clear to everyone how poor Harvard's economic performance has been relative to Yale's and how poor Harvard's disclosure has been relative to Yale's.

Yes, Harvard's 22% figure stops as of October 31. But that figure ALSO only includes losses from marketable securities as of that date, and does not include Harvard's losses from illiquid assets like private equity, which generally has fared much worse than marketable securities. So even as of October 31 the complete Harvard story is much worse than 22%, probably much worse than what Harvard is calling its "just in case" 30% loss.

Yale did far better. According to Levin's letter, as of October 31 Yale's loss from marketable securities was about 13%, about 8% better than Harvard's. And Yale's disclosure of its losses (25%) includes losses from ALL assets to date. Harvard has not disclosed any endowment performance post-Oct 31 nor has Harvard disclosed any performance of its illiquid assets since July 1.

Since Yale has disclosed all of its losses to date, Harvard could do the same. Why the Harvard secrecy? Why the artificial October 31 date? Is there some reason why the Faust administration doesn't want to address widespread rumors in the financial world that Harvard has lost at least 40% and likely more than 50% of its entire endowment? Wouldn't it be worth while to confront those rumors if they are not true? Does "just in case" planning for a 30% drop include an unhealthy dose of hope that markets will recover substantially by June 30? Is that what "just in case" means to the Harvard administration?

Just asking.

wall st alum -

You make a good point. But what you say is certainly correct about SOME illiquid assets, but not ALL illiquid assets. Further, there are ways of dealing with this problem for many classes of illiquid assets, especially where an institution is supposed to be taking a uniformly "conservative" approach to its planning and valuation. For example, it is notoriously difficult to value undeveloped real property, and both Yale and Harvard own a lot of timberland. But is it "useless" to prepare a conservative estimate of the value of timberland. Of course not. There's no "model" to mark to in that case and the problem is not new or in any way connected with the more complex problems in the securities markets. In addition, the problem arises every single year for every single endowment in the world when that endowment reports its annual results, and the problem has never generally been viewed as insurmountable in the past, nor have annual aggregate annual valuations been viewed as useless. Quite the contrary. That's why there has been pressure on endowments to give special reports now.

The problem you identify is more severe with respect to some (but not all) private equity, and perhaps reaches its zenith with respect to certain speculative derivatives. But if university endowments are holding speculative derivatives they should report their value on the conservative side - which may mean zero for the time being if there is really nothing more than fantasy reasonably supporting any other valuation. That course is not necessarily an option for commercial operations, especially those struggling to maintain regulatory solvency. And if a financial firm wants to know which of its employees has really been economically productive in a given year it may not be appropriate to take a uniformly conservative approach to valuing that employee's investments on behalf of the employer (at least if the employer wants to keep the employee from leaving).

But your basic point is exactly right: One should not take too seriously an aggregate valuation estimate, which is just one piece of data which is really not all that useful for many purposes. The Yale administration has made that point many times. The point is closely related to the economics of the university being a very long term investor.

I understand that really ALL invested funds dove 25% this fall, including my little retirement account. However, since then my account, with mediocre AIG management, has recovered 50% of those losses. Surely Yale is doing better than than as far as recovering? There are also hidden benefits: lower "unrelated business income" taxes, incredible buying opportunities (esp. for real property) for those who have liquid assets, and opportunities to rake in waves of short-term gains riding up and down the unprecedented daily volatility. The whole picture is much more interesting, and much less gloomy for the "well-endowed", than "We lost a bunch like everyone else."

Here's something on what's looking like it may turn out to be a bit of an incompetence scandal at the Harvard Management Company, from Slate:

http://www.slate.com/id/2204827/

"Much of the granular data on who manages what and how much Harvard has invested in which assets aren't publicly available. But every quarter, HMC files a 13-F form with the Securities and Exchange Commission, indicating a portion of its holdings in publicly traded securities—stocks, bonds, exchange-traded funds. The 13-F is a snapshot and is not fully representative of Harvard's overall holdings. But the chunk of the portfolio revealed in the most recent 13-F looks like it was chosen by someone who watched a few episodes of CNBC's Squawk Box and heard that the hot new investments were emerging markets, commodities, and private equity.

"The 13-F shows Harvard with some 231 positions worth nearly $2.9 billion, highly concentrated in popped macroeconomic bubble plays. The top 10 holdings … account for 70 percent of the value of the disclosed holdings. Virtually all of them performed rather poorly in the third quarter, and virtually all of them have slid in the weeks since Sept. 30. ….

"The biggest position disclosed—all amounts and dollar values are as of Sept. 30—was $463 million in the iShares MSCI Emerging Market fund. As the six-month chart shows, that fund's off nearly 60 percent from this summer and down by about one-third from the end of September. Third-largest was a $233 million position in Weyerhauser, the wood-products giant that has fallen about 40 percent since the end of September. The top 10 included $232 million in the iShares MSCI Brazil Index Fund, off about 40 percent since the end of September; about $51 million in the iPATH MSCI India Index, off about one-third since the end of September; and $158 million in the iShares FTSE/Xinhua China Index, off about 30 percent since the end of September. For good measure, top 10 holdings also included index funds that were plays on South Africa's commodity-based economy and on the perennially emerging market of Mexico. Would it surprise you to learn that both of those investments, after fairing poorly in the third quarter, have fallen further in the fourth quarter?

"Now, this emerging-market-heavy filing is clearly not representative of Harvard's overall asset-management strategy. As HMC's asset-allocations data show, the endowment allocated about 11 percent of its total to emerging market stocks. (By contrast, nearly half of the portfolio described in HMC's 13-F was in emerging market stocks.) But it does show that even the best, most experienced, and highly regarded long-term investors can get suckered into new-era thinking and make investments that turn out to be highly risky bets. The 13-F shows that the managers running this Harvard porfolio were huge believers in the decoupling theory—i.e., that emerging markets would continue to thrive even as the United States stalled—and in the notion that commodities would keep booming."

Could this Slate writer be correct? If Harvard investors bet the endowment on assumptions such as that emerging markets would continue to thrive even as the United States stalled and that commodities would keep booming in a recession, then this is a real scandal and somebody at HMC has got to go pronto. (Of course, Slate has only seen part of the endowment, but the principle is terrifying) Covering up such a scandal (if that is what it is) would not exactly be good judgment on Faust's part.