Univ. stands by investment strategy

Despite the major losses Yale’s endowment suffered last year, Chief Investment Officer David Swensen is sticking to the famously contrarian investment strategy that may have deepened those losses — and that may continue to delay the endowment’s recovery, at least in the near future.

At the end of the last fiscal year, which ended June 30, the Yale Investments Office increased the percentage of the endowment it invests in diversified assets, according to the University’s annual endowment report, released Thursday — meaning Yale will pour more money into private equity and real assets such as oil, gas, timber and real estate despite the losses those assets generated last year. Though these risky investments may keep Yale’s endowment from recovering as quickly as those of other universities, administrators and experts said Swensen’s strategy is likely to pay off in the long run.

“Swensen took risks and had a lot of real assets, and those returns were terrible,” said Richard Anderson, the director of the higher education group at Hammond Associates, an endowment consulting firm, last month. “But the real story is how Yale has done over the long term, and Swensen’s done terrifically.”

Anderson added that he thinks Yale’s endowment will improve again over the next decade.

Swensen did not respond to a request for comment.

In the endowment report, Yale’s investment group acknowledged critics who have questioned Swensen’s frequently imitated strategy of pursuing nontraditional investments, conceding that Yale’s diversified portfolio failed to shield the endowment from the global economic downturn. Yale’s endowment plunged 24.6 percent last year, compared to an average of 19 percent for other large U.S. endowments.

But the same strategy helped the endowment more than double over the past 10 years — and it will continue to yield high returns over a longer period of time, Swensen’s group said in the report.

“If diversification fails to protect a portfolio in the face of a financial panic, why bother to diversify?” they wrote. “The answer lies in the diversified portfolio’s lower risks and higher returns.”

Nontraditional asset classes such as private equity and real assets may be riskier, but they are ultimately more profitable than stocks, bonds and cash, the group wrote. Meanwhile, Yale’s investors have used stable U.S. Treasury bonds to lower risk, they added. But because bonds yield little profit, the Investments Office will continue to keep bonds at a minimum, the report said.

Though the real assets in Yale’s endowment declined 33.9 percent last year, the Yale Investments Committee opted to increase the percentage of Yale’s endowment invested in real assets from 29 percent in last year’s investment portfolio to 37 percent this year. The average higher education endowment, by contrast, aims to allocate 10.7 percent of endowments to real assets.

Anticipating growth in private equity assets, Yale’s investors also decided to raise the percentage of Yale’s endowment invested in private equity from 21 to 26 percent — over three times the educational endowment average of 8.3 percent, according to the report.

Yale administrators are not expecting investments in nontraditional assets to perform well this year, and Yale’s endowment is likely to perform worse than other endowments that rely more on stocks and bonds, Deputy Provost Charles Long said last month.

Still, Swensen and his team said they believe these diversified assets will ultimately strengthen the endowment, and two experts agreed.

“Talking about one year of performance is almost irrelevant,” said John Griswold, the executive director of the Commonfund Institute, a nonprofit endowment consulting group.

To compensate for the increased investment in private equity and real assets, Yale has taken some money out of its other asset classes, which include hedge funds and foreign and domestic equities. Lowering its allocations to these investments will help the University to avoid the negative effects of inflation, the investment group said.

The Investments Committee also voted to keep 0.5 percent of the endowment as cash, but as of June 30, the endowment had cash assets of negative 1.9 percent, meaning the University was leveraged and used its cash to pay off debt.

In 1989, 70 percent of the endowment was committed to stocks, bonds and cash. This year, just 11.5 percent of the endowment was invested in these traditional assets.

Comments

  • Brainiac Poker

    “investment strategy”

    Sounds like brainiac gambling to me.

    Just because it’s called “investment strategy” doesn’t mean it ain’t poker.

    PK

  • FailBoat

    Poker is a positive-expectancy game for a smart player.

  • Here’s a more cynical explanation for the strategy

    Here’s The Real Reason The Head Of Yale’s Endowment Is Bullish On PE

    Courtney Comstock | Mar. 22, 2010,

    Yale Money

    PE Hub (via Paul Kedrosky) has an interesting take on why the head of Yale’s endowment is still bullish on PE after losing tons of money investing in the asset class.
    Even though Yale’s endowment was mauled in 2008, largely because of their manager’s, David Swenson’s, investments in private equity, recent news shows that he has upped Yale’s exposure to PE from 20% to 26%.
    This is because, says PEHub, Swenson, wants to create wiggle-room — and an aura of calm — when the PE exposure inevitably grows.
    Let’s take a look at Yale’s Annual Endowment report:
    Under the terms of certain limited partnership and limited liability company agreements for private equity and real estate investments, the University is obligated to remit additional funding periodically as capital calls are exercised. At June 30, 2009, the University had uncalled commitments of approximately $7.6 billion.
    Yale’s entire endowment fund was worth $16.3 billion as of June 30. So Yale’s investment in PE and real estate makes up almost half of their whole endowment.
    The University has various sources of internal liquidity at its disposal, including cash, cash equivalents and marketable debt and equity securities. If called upon at June 30, 2009, management estimates that it could have liquidated approximately $3.6 billion (unaudited) to meet short-term needs.
    This means Yale committed a certain amount of money to PE funds that it hasn’t yet delivered to them (this is normal – similar among all investors in PE funds). The PE fund can “call” this money and then Yale is expected to make good on its promise. But as of June 30, 2009, Yale wouldn’t have been able to pay out even half of its investment in PE.
    So, PEHub suggests, Yale’s hope here is that private equity distributions will outpace new capital calls. (That they’ll make money off their investments before they have to deliver the funds.) Even more damaging, PEHub suggests:
    The school felt its best hedge is to increase its target allocation, in order to create wiggle-room — and an aura of calm — when the PE exposure inevitably grows.
    This might be something cash-strapped Yale can’t fix just by slashing capital spending by 60%.

  • Auntie PK

    Ha! Beat me to it.

    Sad that a supposedly learned scholar (and teacher!) cannot discern between “gambling” and “investing.” But then, neither can half of Yalies.

    A few more Probability & Statistics courses mighta helped, eh?

    Ah, whither the liberal arts? (For you moderns, the seven liberal arts once included arithmetic and geometry…)

  • Shysters

    Auntie PK:

    Investing (in the world of gentlemen, which was in its death throws as I was being raised in the 1950′s) used to mean putting your money at risk in order to show support for a person or company you believed in.

    Now it means, trying to make a buck off anybody or any firm you think you can clean up on.

    NOBLE EXCEPTIONS: Anti-Apartheid investing and Green investing.

    PK
    PS Regarding ending a sentence with a preposition (twice above), Winston Churchill said, “That is nonsense up with which I will not put.”

  • Auntie PK

    “Throes” not “thows.”

    So, to be consistent, you have eschewed professional management of your retirement plan?

    If not, could you explain your hypocrisy?

  • Throe-up

    My so-called “retirement plan” is insolvent thanks to the very greed mentality I am speaking of.

    In fact, whatever small amount of funds were in my 403B I shifted to U.S. Bonds BEFORE the economy tanked when the Stock Market was at 14, 300, in an uncharacteristic act of investment prescience. I have been told I should have put it back in the Market when it was a 6,500. In my opinion, that dipping in and out is shilling.

    If I could participate in Dwight Hall’s Green investing, I would be delighted.

    How about getting Yale to put 50% of its 18 BILLION in Green Stocks? That would be REAL student activism.

    A hypocrite “knowingly” speaks with forked tongue. I am simply a Wall Street illiterate.

    However, to rephrase a famous Supreme Court justice, I know gambling when I see it.

    And it makes me throe-up.

    PK

    BTW–Ben and Jerry’s is another Noble Exception to unvarnished greed and shilling.

  • Auntie PK

    A) You sidestep the question. By stating that you “shifted to U.S. bonds before the economy tanked” begs the (original) question: were you, indeed, invested in the stocks of those companies you decry? So, you WERE a hypocrite but now you are not? You repented? Or did you, as you imply, seek to PROTECT your self-implied ill-gotten gains (as shifting from stock to bonds, as you note, was a “prescient” move)?

    B) “Dipping in and out is ‘shilling’” But… isn’t that EXACTLY what you did? You were in… now you are out (in a “prescient” move). BTW: if you are close to retirement, you should, of course, have a higher percentage of fixed-income securities. So… your self-congratulatory “goodness” is merely a residual of following whatever routine investment advice was offered by your plan, right?

    C) Aren’t you an English teacher? Could you please review the definition of “shilling” and explain how that pertains to the manner in which you employed the word? (‘Cuz I’m too stoopid to unnerstan; I allus thot “shilling” was selling with verve, verging on hucksterism or false bidding in an auction to artificially bolster a price, but then, as noted, I’m stoopid.)

    D)Lastly, let us discuss a bit more “hypocrisy” and “honesty.” To wit: “VVSTRS is a… contributory, defined benefit plan to which its participating members make regular contributions to a trust fund AND the State of Vermont deposits an annual appropriation (contribution)…

    “With a defined benefit plan a participant’s actual retirement benefit is specifically determined by a formula… [blah, blah, blah]… The final benefit is not dependent on the amount of contributions made to the plan.”

    In other words, a VT teachers gets paid via taxes, then puts some percentage of those monies into a plan, that plan is augmented by VT (i.e., by taxes), and the benefit IS NOT DEPENDENT on those contributions (Why, because such plans–being gummint creations–typically pay out more than they take in, also known as UNFUNDED LIABILITIES. In other words–YOU WILL GET MORE OUT THAN YOU EVER PUT IN. In other words, a double sort of hypocrisy. *You* figure out how…).

    Gorsh I canna stand Liberal whining wrapped in self-righteousness, based in ignorance and shouted with cult-like confidence. Ugh.

  • Shilly shallying

    Such unpleasantness. It is unbecoming in the young. And it is not good for the health or the digestion.

    A shill is a person who promotes something for a false purpose, a pretense which gives others a false confidence that you are engaged in an activity for sincere reasons.

    I believe it is a pretense to call dipping in and out of the stock market”investing”.

    It is more like card-sharking it seems to me.

    I don’t intend to discuss my personal financial affairs with someone who is too cowardly to use her own name.

    I consider your specific references prying and invasive and indicative of a lack of manners (an old world custom, you may not have come across in your many years on the planet.)

    403B’s are a way of deferring taxes. I use mine for that purpose. Overtly: It is not a shill.

    Your anonymity however is tantamount to being a shill.

    PK
    The Anti-Yale

  • Invest vs. Gamble

    [in-vest]

    –verb (used with object)
    1.to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.
    2.to use (money), as in accumulating something: (She invested large sums in books.
    3.to use, give, or devote (time, talent, etc.), as for a purpose or to achieve something: (He invested a lot of time in helping retarded children.)

    To retuirn to Yale’s “investment strategy”:

    I guess the real problem is not with the word “shill” but with the word “invest”.

    I am using definitions #3 above which I consider “old fashioned investing” and Yale is using definition # 1 which I consider to be a euphemism for “gambling”.

    Profits in the history of the Stock Market for the last 100 years have been in

    OIL and its stepchild, automobiles;

    WAR and its stepchildren, weapons, aircraft, ships,technology etc;

    and BANKING which funds all the previous.

    If Yale could be forced grudgingly to CEASE investing in Apartheid stocks in the 1970′s (as it was so forced to do), then perhaps it could be forced to COMMENCE “investing” (#3 and #1) its EIGHTEEN BILLION dollars in Green Technology.

    Then I would consider Yale as having a true “investment strategy” as opposed to a “gambling strategy” because it would be putting its money at risk for something it believed in as a moral enterprise rather than putting its money at risk simply for profits.

    EIGHTEEN BILLION ain’t chicken feed.

    PK
    The Anti-Yale

  • Auntie PK

    Divestment occurred in the ’80s, not the ’70s (note, please, the correct placement of the apostrophe, Mr. English Teacher).

    Yale was not “forced” to do anything; investment decisions are based mainly on potential for future return, even in the Eighties.

    In the investment world, just to set you on the right path, the difference is between “investment” and “speculation” (what you would call “gambling”). Just trying to help out a fellow thinker; trying to help you get your terms straight.

    Um… Yale invests far less in all the “evils” you cited (oil, war, banking, etc.). Yale mostly eschews common stocks, investing instead in less liquid propositions.

    As for “prying,” nothing I posted has to do with you personally, merely the facts regarding defined benefit pension plans and public school union employees (the most overpaid, most extortionist public “servants” out there, with the possible exception of politicians).

  • Harmartia

    #11

    Character is Fate.

    PK

  • Auntie PK

    For some reason, the YDN is protecting Ben and Jerry. I will try one more time, strictly on facts.

    B&J sold out to Unilever years ago. Jerry admits that it was, indeed, a sell out. The ice cream now subs high fructose corn syrup for sugar. So much for nobility (or, um, “character”).

  • Censorship

    # 13

    It might be the nastiness of your tone, not the B&J critique, which YDN is censoring.

    Frankly, I am a bit disturbed by its drivenness and its anonymity.

    I repeat: Character is Fate.

    Paul Keane
    M. Div. ’80

  • 1200 calories

    My Ben and Jerry’s New York Super Fudge Double Chunk says “sugar” in the list of ingredients, NOT “high fructose corn syrup”. Its coffee-mug sized tub holds an appalling 1200 calories, however.