Yale lags average in endowment returns

Yale’s endowment posted the worst return in the Ivy League — but overall positive endowment performance in 2010 may restore credibility to the University’s untraditional investment model.

Endowments in American higher education returned 11.9 percent on average for the fiscal year ending June 30, 2010, according to a study of 850 college and universities released by the NACUBO-Commonfund Study of Endowments on Wednesday. The Yale endowment returned just 8.9 percent last year — lowest among the Ancient Eight, but a drastic improvement from fiscal year 2009, when the University’s endowment plunged a record 24.6 percent.

“The endowment is invested for the very long-term,” Provost Peter Salovey said in an e-mail Thursday. “So 10- or 20-year performance is what matters, much more so than one-year performance.”

The 11.9 percent average return seen by endowments nationwide reflects the economy’s gradual recovery from the financial crisis of fiscal year 2009, said John Griswold ’67, the executive director of the Commonfund Institute. American educational endowments lost an average of 18.7 percent that year.

Griswold said positive double-digit returns from many college and university endowments are encouraging, but noted that short-term evaluations of investment performance are less important to higher educational instutions than longer-term studies.

“The performance in every given year for a perpetual fund like Yale or any other university is of little consequence on a one- or even a three-year basis,” Griswold said. “The strategies Yale employs, like any university in the Ivy League, are focused on long term investments.”

In the short term, Yale’s own investment strategies came under fire as the economy worsened throughout 2008 and 2009.

Yale’s pioneering investment strategy, called the “Yale model” or “Swensen model” for creator David Swensen GRD ’80, Yale’s chief investment officer, relies heavily on alternative, illiquid assets such as private equity, venture capital, oil, gas and timber instead of United States stocks and bonds. The model helped Yale register major endowment gains of nearly 20 percent or more between 2004 and 2007 — but when Yale and other universities using the same investment tactics saw returns slow and then plummet in 2008–’09, the strategy was called into question.

Smaller endowments also posted greater returns than larger ones in fiscal year 2009, an atypical occurrence, Griswold said. But a return to “normal patterns of endowment behavior” in fiscal year 2010 — better performances from larger endowments — has reaffirmed the value of the Swensen model, he added.

“I think people have reassessed the Swensen model and decided there is still validity to it,” Griswold said, adding that there is not yet a better alternative to Swensen’s diversification-based investment strategy. “The model will survive and probably thrive.”

Swensen could not be reached for comment Thursday.

The average annual three-year return for colleges and universities was a 4.2 percent loss, the study reported. Five-year returns averaged 3 percent, and the 10-year average was slightly higher at 3.4 percent.

Columbia’s endowment performed the best in the Ivy League in the latest fiscal year, with 10.6 percent growth. Harvard’s 5.4 percent growth was the second-lowest among Ancient Eight schools, while Yale’s 2 percent increase marked the worst performance.

Yale’s endowment remains the second largest in higher education, valued at $16.7 billion.

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