Weaker endowment returns expected

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Photo by Gavan Gideon.

Yale will likely see a lower return on its investments than the 21.9 percent it reported last year, based on the performance of endowments at the University’s peer institutions and of financial markets in fiscal year 2012.

In an interview with Bloomberg a week ago, Princeton University President Shirley Tilghman estimated that the school will register a zero to 5 percent return on its investments for the fiscal year that ended June 30, and on Sept. 14, the Massachusetts Institute of Technology reported an 8.0 percent return for the same period. While the Yale Investments Office has yet to release its own figures, which generally appear near the end of September, Provost Peter Salovey said endowments across higher education are likely to report weaker performances than they did in the previous year.

“It seems unlikely that university endowments across institutions will see the kind of returns in 2011-’12 that they saw in 2010-’11,” Salovey said.

Over the past five years, Yale’s return on investments has always fallen within 6 percentage points of Princeton’s and 8 percentage points of MIT’s. In fiscal year 2011, when the value of the Yale endowment rose to $19.4 billion, Princeton tied Yale’s return of 21.9 percent and MIT reported a return of 17.9 percent. Colleges and universities nationwide averaged 19.2 percent returns that year, according to the 2011 NACUBO-Commonfund Study of Endowments.

Sandy Baum, an economics professor at Skidmore College and a senior policy analyst at College Board, said Princeton’s and MIT’s numbers are not surprising given economic conditions during the latest fiscal year.

“There’s no reason to believe people would be getting 20 percent returns this year,” she said.

Roger Kaufman, a professor of economics at Smith College, said that schools like Princeton, Yale and MIT have allocated larger portions of their endowments to alternative investments — such as private equity, venture capital, commodities and hedge funds — in recent years. These types of assets did not have “stellar years” in the latest fiscal period, he said.

Kaufman also said administrators at universities seem to have lowered their expectations for long-term rates of return over the next decade.

“A lot of these alternatives had tremendous years back in the 1997-2007 period, and they don’t expect them to have these supernormal returns in the future,” Kaufman said.

The shift to alternative investments in higher education was largely driven by an investment model pioneered by Yale Chief Investment Officer David Swensen. The nontraditional strategy, which redefined the approach to institutional investing and is often termed the “Yale Model,” favors illiquid, alternative assets and takes a long-term view. It propelled the University to investment returns of near or above 20 percent between 2004 and 2007, and has been adopted by many of Yale’s peers.

While the Investments Office allocates a large portion of its endowment to alternative asset classes, 15.7 percent of the endowment was invested in domestic and foreign equity as of June 30, 2011. Indices that measure performance in these markets also suggest that fiscal year 2012 may have been a weaker year for Yale’s endowment.

The MSCI Emerging Markets Index, which measures equity performance in global emerging markets, saw roughly 24 percent growth in fiscal year 2011, compared to a 19 percent drop this past fiscal year. The MSCI EAFE Index, which measures equity performance in developed markets outside the United States and Canada, also went up 25 percent in fiscal year 2011 before falling 17 percent in fiscal year 2012.

With regard to the performance of United States equity, the Dow Jones Industrial Average increased by 28 percent in fiscal year 2011 but only by 2 percent in the year that ended June 30.

Endowments valued at over $1 billion returned an annual average of 6.9 percent over the past decade, according to last year’s NACUBO-Commonfund study.

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