The strong performance of the U.S. stock market over the past nine months bodes well for endowment returns of colleges, including Yale, according to experts interviewed.
The stock market index S&P 500 hit an all-time high Tuesday and is up about 15 percent since the beginning of fiscal year 2013, which started on June 30, 2012. Though three months remain in the 2013 fiscal year and colleges generally do not report their endowment returns until September, finance experts interviewed said they predict that colleges will report higher endowment returns this year than they did last year and that Yale will be no exception.
“The odds of Yale’s return being better than last year are very high,” said Roger Ibbotson, a finance professor at the Yale School of Management. “It’s easy to forecast when you have nine months in of the 12 months [in the fiscal year].”
Experts said the stock market will have less of an effect on Yale and other institutions with large endowments because they allocate a smaller portion of their assets toward public equities, which are traded on stock markets. Yale currently invests only 14 percent of its endowment, which was valued at $19.3 billion as of June 30, in public equities.
“Yale does not invest much of its assets in [public] equities, so the returns are not very highly correlated to the market,” Provost Benjamin Polak said.
Still, experts said the performance of the stock market will benefit Yale indirectly because of the University’s large private equity holdings.
Yale allocates 35 percent of its endowment toward private equity. Scott Clemons, chief investment strategist of New York-based investment bank Brown Brothers Harriman, said the University will still see good returns this year because its large private equity holdings will probably perform as well as the stock market.
Money invested in private equity is locked away until fund managers liquidate an investment, experts said. But in the meantime, they said, investors receive estimates of the current value of their investments based on the value of comparable companies traded on the stock exchange.
“To the extent that you see gains reflected in portfolios that have not been crystallized yet, those are based on estimates of comparable companies, and so there may be in fact an effect that is kind of a second-order effect coming from the stock market,” said William Jarvis ’77, managing director of the Wilton, Conn., investment firm the Commonfund Institute. “But it’s not clear how that would play out in the case of individual companies.”
Though public and private equities are likely to do well, other asset classes, such as hedge funds, might see less success this year, experts said. Yale’s target allocation toward the “absolute return” asset class, which includes hedge funds, is 18 percent.
“I would not expect a hedge fund to have kept up with the rally we’ve seen,” Clemons said. “I imagine that will be a weaker part of the portfolio, relatively speaking.”
The recent success of the stock market will impact universities with smaller endowments the most, Jarvis said. Institutions with endowments valued at less than $100 million tend to allocate 30 to 40 percent of their assets to public equities, he said, adding that the performance of these equities will therefore have a “fairly substantial influence” on the endowment returns of these colleges.
During fiscal year 2012, the average U.S. college endowment saw a return of -0.3 percent, according to the 2012 NACUBO-Commonfund Study of Endowments, which examined data from 831 institutions. Yale’s endowment return was 4.7 percent.