Endowment posts high return

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Photo by Alison Griswold.

Though Yale posted the worst endowment return in the Ivy League during fiscal year 2010, the University’s latest report has boosted it back up in the performance rankings.

Yale’s endowment returned 21.9 percent on its investments in the fiscal year that ended June 30, Chief Investment Officer David Swensen announced Wednesday. University investments gained a total of $3.6 billion in the 2011 fiscal year to boost the current endowment value to $19.4 billion. But the latest increases still have not returned Yale’s endowment funds to the high-water mark of $22.9 billion they reached before the 2008 recession.

“We were very pleased to learn of the endowment’s gain of nearly 22 percent during the 2010–’11 year,” Provost Peter Salovey said in a Wednesday email. “The Investments Office has done exceptionally well over the past 10 and 20 years, despite some very difficult years.”

Yale’s 21.9 percent return is a drastic improvement from the endowment’s performance in fiscal year 2010, when the University posted an 8.9 percent return, last among its Ivy League peers. Yale’s most recent performance has already edged out that of Harvard, which returned 21.4 percent in the 2011 fiscal year.

The double-digit jump in returns may indicate that University is finally recovering from the 2008 recession, which caused Yale’s endowment to fall nearly 25 percent that year. After multiple rounds of budget cuts across the University and gradually improving investment returns, Salovey said Tuesday that he believes University finances are finally stabilizing.

Buoyed by the strong endowment performance announced Wednesday, the University will siphon more funds from the endowment toward its 2011–’12 operating budget than in the previous year, allocating $992 million for campus-wide expenses. In fiscal year 2010, the University put $986 million aside for the same purpose.

Though Yale’s report and similar endowment returns seen by peer institutions are bright spots in a time of global economic uncertainty, experts have cautioned that figures reported by colleges and universities for fiscal year 2011 will not show the full impact of the turbulence that has plagued the market since the summer.

“This is great that [the endowment] is recovering, but it’s not above where it was before and it may go down again,” said Sandy Baum, chairwoman of the economics department at Skidmore College and a senior policy analyst at the College Board. “Look what’s happened to the market in the last two weeks. For the past couple of weeks, the market has been very volatile.”

The volatility will test endowments in the current and coming fiscal years, but it is too early to predict what the impact will be, said William Jarvis ’77, managing director of the Wilton, Conn. investment firm the Commonfund Institute.

The effect of economic volatility is twofold for endowment managers, Jarvis said. Though instability and declining markets threaten and pressure managers’ choices, Jarvis said that volatility also opens up investment opportunities.

“It’s not easy, but it will be interesting to see where the more talented and more sophisticated endowments come out,” he said.

Despite the strong returns that most colleges and universities have reported so far this year, Baum cautioned against reading too much into one-year numbers, noting that long-term results are better indications of how an institution’s investments are faring.

Yale administrators have maintained that the University’s nontraditional investment model is designed not only for short-term success, but also with a long-term view in mind.

“The way in which Yale’s endowment compares to other university endowments on a year to two year basis is not especially important,” Salovey told the News last week. “What is important is that our approach can allow us to do better than a traditional endowment over longer periods of time — say five to 10 years — and with less risk.”

Salovey said that Yale’s investing strategy and focus on non-publicly traded assets has helped reduce investing risk in the current, volatile economy. Pioneered by Swensen, Yale’s investing model favors illiquid assets such as real estate, oil, timber and gas, but also takes a long-term view on those more easily converted to cash. The investments office did not respond to requests for comment.

Swensen’s tactics propelled Yale to returns near or above 20 percent between 2004 and 2007, but impeded the University’s financial recovery immediately after the recession. Though Swensen’s model came under fire in the wake of the 2008 crisis, Jarvis said Yale’s investments guru has firmly defended the long-term benefits of his strategy.

“You don’t run the University from semester to semester or from year to year, you run it for eternity,” Jarvis said. “I just don’t think there’s any other way to play this game than that endowment model of highly diversified and less liquid.”

Indeed, Yale has maintained comparably strong returns in the long-term, despite its short-term ups and downs. The University’s endowment has returned an average of 10.1 percent annually for the 10 years through June 30, while the standard college and university endowment has seen average returns of roughly 6.2 percent for each year during that period.

Yale’s endowment currently ranks second only to Harvard’s, which is valued at $32 billion.

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