The Yale endowment posted a 24.6 percent investment loss in the fiscal year that ended June 30, falling to $16.3 billion in its most severe decline ever, University officials announced Tuesday.
The $5.6 billion decline is in line with the University’s projection last December, so it comes as “no surprise,” Provost Peter Salovey said. But it does allow administrators to move ahead with planning for next year’s budget because they can now determine how much revenue they can expect from the endowment.
Spending from the endowment in the University’s 2009-’10 fiscal year is expected to total $1.1 billion, down from $1.2 billion last year. To cushion the effect of the market on the University’s budget, the amount that Yale spends from its endowment is smoothed over several years. But since the University’s budget is based on a model that counts on 10 percent annual growth, the reduced payout will tear hole in the budget that runs in the hundreds of millions of dollars.
The return “falls in the range of expected outcomes” in a year when equity markets across the globe fell by some 30 percent, the University said in a statement that was drafted with direct involvement by David Swensen, Yale’s chief investment officer.
“If you have a return like you did June 30, 2007, when we were up 28 percent, or June 30, 2000, where we were up 41 percent — if it goes up 28 percent or 41 percent it can go down by double digits too,” Swensen said in an interview last January. (He declined to comment for this article.) “It’s just that there was a very long period, more than 20 years, where that didn’t happen.”
Swensen’s widely imitated approach to investing favors nontraditional assets, which are less liquid than stocks and bonds. In the aggregate, Yale’s marketable assets declined by just 13.1 percent. But private equity holdings lost 24.3 percent of their value, and real assets, the largest part of the University’s endowment, posted a decline of 33.9 percent.
Still, Swensen has said the financial crisis has not altered his strategy.
“While the decline in endowment value in the current financial crisis caused some observers to question the tenets of Yale’s investment strategy, when evaluated with a time horizon appropriate for a long-term investor, the University’s equity-oriented, well-diversified portfolio continues to provide the best foundation for future investment success,” the Investment Office said in its annual report published last March.
Swensen’s approach emphasizes investing for the long term, and, indeed, over the past 10 years, Yale’s endowment has still outperformed benchmarks: The fund returned an average 11.8 percent over the past decade, beating annual results for domestic stocks of negative 1.2 percent and domestic bonds of 6 percent. If Yale’s investments had performed comparably to the average return of other college and university endowments over the past 10 years, the endowment would be $10 billion lower.
But this year saw a stunning reversal of fortunes: Endowments such as Yale’s and Harvard’s, which racked up enormous gains in recent years through alternative and illiquid investments, were hit hardest in the financial collapse. Meanwhile, portfolios such as the University of Pennsylvania’s, which holds mostly stocks and bonds, lost 15.7 percent.
The exact return of Yale’s endowment as it stood on June 30, 2009, took until September to tabulate because so many of the assets are illiquid and hard to value, and because the Investments Office needed reports from the thousand or so external managers who directly handle most of the University’s portfolio.
The endowment is the University’s largest source of revenue, accounting for about 42 percent of the operating budget.