Investment returns slow down

Though Yale returned 4.7 percent on its investments in the latest fiscal year — beating the performances recorded by two other Ivy League schools so far — the value of its endowment slipped by $100 million because spending distributions outpaced growth.

The performance of Yale’s endowment, valued at $19.3 billion as of June 30, was significantly weaker than the 21.9 percent return posted in fiscal year 2011. The University’s investments in foreign equity were hit particularly hard, as international developed markets lost 13.8 percent and emerging markets fell 15.9 percent, according to a statement released Thursday. But Yale’s continued commitment to alternative, illiquid assets helped prevent too dramatic a reversal from last year, even though those investments were largely responsible for the endowment’s huge loss three years ago.

“We’ve done well compared to the general market, and that’s really all you can hope for,” University President Richard Levin said. “It’s the only benchmark that matters.”

Richard Anderson, former principal of the higher education group at the endowment consulting firm Hammond Associates, said the “whisper number,” or the unofficial figure cited by professionals in the industry trying to forecast performance, for endowments is roughly a 1 percent loss. He said 4.7 percent is “absolutely a terrific number” given the economic conditions of the past fiscal year.

Harvard University announced on Wednesday that its endowment — the largest in higher education, worth $30.7 billion — fell in value during fiscal year 2012 after its investments faced a 0.05 percent loss. The University of Pennsylvania posted a weak 1.6 percent return last week, and Stanford University reported similarly low earnings of 1 percent on Thursday. Two weeks ago, the Massachusetts Institute of Technology published its return of 8.0 percent for the same period.

The Yale Investments Office declined to comment Thursday.

While the University’s return on investments added roughly $900 million to the endowment in the last fiscal year, Yale spent $1 billion from its endowment in that year’s budget — resulting in a net decline in the value of the endowment.

For the fiscal year that began on July 1, administrators are budgeting just over $1 billion of spending from the endowment, accounting for about 36 percent of the University’s net revenues.

“If the University were to allow its expenditures to fluctuate based on the annual return of the endowment — if they were to allow its expenditures to fluctuate the same way those returns fluctuate — it would be a disaster,” said Sandy Baum, an economics professor at Skidmore College and a senior policy analyst at College Board.

Yale’s endowment continues to perform strongly in the long term. It has registered an average annual return on investments of 10.6 percent over the past decade, and increased in value almost sevenfold from $2.8 billion over the past 20 years. On average, endowments in higher education have maintained estimated 6.8 percent annual returns over the past 10 years.

“If you’re going to look at the long term and you’re not worried about short term fluctuations, you can expect to have a higher average return,” said Roger Kaufman, an economics professor at Smith College.

Chief Investment Officer David Swensen is credited with developing the nontraditional institutional investment strategy that has led Yale to a strong endowment performance in the long run. The model, which has been emulated by many of Yale’s peer institutions, takes a long-term view and favors alternative, illiquid assets such as private equity and real estate. In the current fiscal year, the Investments Office aims to allocate roughly 35 percent and 22 percent of its endowment to those two illiquid asset classes, respectively.

Anderson said private equity “probably jumped back up” this past fiscal year after taking a beating during the nationwide recession that hit in 2008. That financial crisis led to the endowment’s fall from a high-water mark of roughly $22.9 billion, losing almost a quarter of its value in fiscal year 2009. While domestic and foreign stocks fared poorly across the board in the last fiscal year, Yale’s portfolio projections for the current fiscal year allocate only 14 percent of the endowment to those assets.

Prior to the economic downturn, Yale’s investment model propelled the endowment to returns of around or above 20 percent during the “boom years” of the mid-2000s. The endowment seemed to rebound in fiscal year 2011, but experts at the time cautioned that the performance was not necessarily indicative of sustained strong returns, as markets remained highly volatile.

Anderson said institutions such as Yale that “invest wisely” could see returns in the “high single digits” in the next decade. Levin said Yale aims for returns of 5 percent plus inflation.

“No one can predict future returns, but it would be irresponsible for the University to plan a budget for the next five years or so in which we made double-digit assumptions about the endowment’s annual return,” Provost Peter Salovey said in a Thursday email.

Yale’s endowment remains the second-largest in higher education.

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