Endowments post major losses

Though Yale was not alone in seeing its endowment’s value drop precipitously last year, experts say the University may be better equipped than other schools to recover in the long run.

American educational endowments lost an average of 18.7 percent in the fiscal year ending June 30, 2009, according to a survey of 842 colleges and universities, including Yale, released Wednesday. This is no surprise — Yale’s own endowment fell more than the survey’s national average, losing an unprecedented 24.6 percent in 2009 — but thanks to the Yale endowment’s reliance on alternative assets such as real estate and venture capital, the University will eventually be able to recoup its losses, though perhaps not as quickly as institutions whose endowments are more dependent on the stock market, experts said.

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“For the long-term picture, you will certainly see improvement,” said Richard Anderson, director of the higher education group at the endowment consulting firm Hammond Associates. “This past year is just noise. But it’s a very difficult investment environment right now.”

Jointly conducted by the National Association of College and University Business Officers and the Commonfund Institute (a nonprofit investment manager), the survey paints a grim picture of the last fiscal year. Still, officers of NACUBO and Commonfund said they expect educational endowments to bounce back this year, pointing to the stock market’s strong performance in fall 2009.

Though Anderson said the stock markets have recovered as much as 27 percent since June, stocks and bonds only constitute 15 percent of Yale’s endowment, Deputy Provost Charles Long said. And because Chief Investment Officer David Swensen’s famed “Yale Model” of investing relies on “alternative” investments such as private equity, hedge funds, venture capital and real estate, it may be more difficult for the University’s endowment to rally, experts and administrators said.

“One would expect Yale to do less well than [a 27 percent increase] because they have a diversified portfolio,” Anderson said.

Nevertheless, the endowment’s value has risen slightly since June 30, Provost Peter Salovey said in an interview Wednesday. But he said he did not know the exact figure.

At the end of the fiscal year in June 2010, the growth in the endowment will likely be flat or slightly positive, said William Jarvis ’77, the managing director of the Commonfund Institute.

Much hangs on Yale’s investment return this year, Salovey said. The sooner the endowment begins to strengthen, for example, the sooner the University can resume the building projects administrators froze last January after realizing Yale no longer had the money to fund multi-million-dollar construction, he said.

“Whether or not we can resume building projects depends on how quickly the endowment recovers,” he said.

The NACUBO survey also highlights the difference in losses suffered by large and small endowments, which often take different approaches to allocating their assets.

Though educational endowments worth at least $1 billion declined by an average of 20.5 percent last year, they gained 6.1 percent over the past 10 years. Endowments under $25 million, meanwhile, lost 16.8 percent last year and gained only 3.9 percent over the last decade. (Yale’s endowment gained 11.8 percent on average during the last decade, Salovey said.)

The endowments that lost the least or even gained value during the downturn had nearly half of their assets accumulated in stocks and other short-term securities, while endowments worth over $1 billion stockpiled an average of 61 percent of their assets in alternative categories such as private equity, hedge funds, venture capital and real estate — a reversal from previous years, said John Griswold ’67, the executive director of the Commonfund Institute. But in the future, he cautioned, hedging funds in cash and fixed income will not be a successful investment strategy. Yale’s diverse portfolio of investments will eventually help it perform strongly in the long run, Anderson said.

Even within the over-$1 billion category, though, Yale’s deep investments in alternative assets will make it harder for the University to recoup its losses as quickly as, for instance, the University of Pennsylvania, which was able to post an 8.3 percent increase from the end of June until Sept. 30 because of its heavier investment in stocks and bonds, Jarvis said.

But in the short term, alternative asset classes are still stalling, he added, and they are difficult to measure accurately. When Yale’s investment return is tabulated starting June 30, for example, assessors take months to determine the value of Yale’s myriad property holdings and other physical assets before the University can release a final figure, Long said.

The volatility of the stock market, combined with the uncertainty of alternative assets, makes this year’s investment return all but impossible to predict, Jarvis said.

“I don’t think this entire story has played out yet because of the tremendous lags of private capital and real estate,” he said. “So even if Swensen and crew are being really opportunistic, they’re fighting against the fact that their portfolio could be a drag for a while.”

So though the Investments Office has an approximate figure for the investment return since the summer, Long said the number is meaningless. He would not disclose the number, and Swensen did not respond to two requests for comment.

“It’s not a real number,” Long said. “Who knows what it is? You can’t accurately evaluate the assets in the endowment right now.”

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