A year after Yale’s endowment lost nearly a quarter of its value, the fund is back in the black — even if its growth pales in comparison to other schools’ and its own past performance.
The endowment’s 8.9 percent investment return from the fiscal year ending June 30, 2010, which the University announced Friday morning, recovers some of the $7 billion the endowment lost last year. But Yale, for many years the envy of the investment world because of its annual returns of over 20 percent, trails the five Ivy League schools that have released their endowment results so far this year. Though it still claims the second-largest university endowment in the world behind Harvard’s, the fund’s performance trailed its peers at Columbia, Dartmouth, and the University of Pennsylvania as well as Harvard. The returns lagged behind those of Yale’s peers in part because of its exposure to real estate investments, which lost value this year even as other parts of the endowment outgained benchmarks.
Taking into account endowment spending of $1.1 billion, the fund grew 2.5 percent, rising from $16.3 billion in 2009 to $16.7 billion this summer. That includes a total investment return of $1.4 billion and gifts of $136 million, according to Friday’s announcement.
“We certainly are glad we’re moving in a positive direction,” Provost Peter Salovey said. “But anytime we look at the end numbers, single years don’t tell us much — our model is one positioned for a very long-term outlook.”
And the long run is what matters, administrators and observers say. Although Yale trails its Ivy League competitors this year, it has outperformed them in the long term: It produced an average annual return of 8.9 percent over the last decade, beating Harvard’s 7 percent.
Yale racked up gains of up to 41 percent in previous years by following a model pioneered by Chief Investment Officer David Swensen, who emphasizes investing in alternative assets including private equity, real estate, gas, timber and other “real” assets. While a traditional university endowment holds mostly stocks and bonds, Yale’s endowment, under Swensen, has kept a low profile in both areas, allocating 7 percent of its assets this year to domestic stocks and 4 percent to bonds and cash.
Smaller endowments and ones that are more heavily invested in liquid assets such as stocks and bonds are likely to do slightly better than Harvard, Yale or other large institutional endowments this year, investment consultants interviewed said. Nontraditional assets will take a long time to recover from the market crash, but stocks and bonds rebounded more quickly, they explained. Columbia’s endowment, which is mostly composed of stocks and bonds, jumped 17 percent this year.
The focus on nontraditional assets came into question after the market crash last year — real assets lost about 30 percent in the 2009 recession — but most of them, with the exception of real estate, timber, oil and gas, did much better than expected this year, according to the release. Yale’s private equity portfolio, which suffered last year, rebounded with an 18.1 percent return.
Less successful was the real estate portfolio, which lost 4.5 percent this year and dragged down the return generated by other parts of the endowment. Had Yale’s endowment and other funds like it had less exposure to real estate, they might have done better — a fact Harvard Management Company President Jane Mendillo ’80 SOM ’84 mentioned in her six-page report on Harvard’s 11 percent return this year.
It remains to be seen how other endowments that heavily invest in real estate, including Princeton, the Massachusetts Institute of Technology, Stanford and Duke, did this past fiscal year.
Swensen, who has headed the endowment for over 20 years, declined to comment.
But he has defended his model throughout the financial crisis: “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 in March 2009.
Whatever the implications for the Swensen Model, knowing the final figure means that Yale’s budget planners can begin to decide whether the University will need to make more budget cuts this year. First, though, they must wait for the total expenses from fiscal year 2010 to be tabulated to see whether all departments met their budget targets last year.
Administrators’ first budget projections assumed the endowment would not grow at all, Salovey said. Over the course of the spring and summer, he said, the budget models began to take a more optimistic view, eventually settling on an assumption that grew closer to 8.9 percent as more information about the endowment’s assets became available. In an interview two weeks ago, Salovey said he expected the return to be between zero and 10 percent.
So although the release of the actual number allows officials to become more specific about their budget planning for the next few years, there were no surprises, Salovey said.
Based on the University’s spending rule, which dictates how much Yale can pay out from its endowment every year, endowment spending for the 2010-’11 year will amount to $986 million, a downgrade from last year’s spending budget of $1.1 billion, he said.
The drop may seem counterintuitive after a year of endowment growth, but, Salovey explained, the spending rule looks to the recent past to cushion the effect of the market on Yale’s budget. The spending rule dictated a smaller budget for the coming year based on the endowment’s 24.6 percent loss last year, while this year’s 8.9 percent gain will be reflected in the spending rates of future years, he said.
The endowment is Yale’s largest source of revenue, accounting for about 38 percent of the operating budget this year.