Strong endowment return expected

Yale will likely announce a stronger endowment performance for the fiscal period that ended June 30 than the 4.7 percent return on investments the University posted a year ago, according to experts interviewed.

Provost Benjamin Polak told the News earlier this month that the fiscal year 2013 endowment return would be “comfortably above” the University’s annual target return of 7 percent, though the Yale Investments Office usually releases the results of the prior fiscal year in late September. Economists and finance experts interviewed said Polak’s statement is consistent with how they expect the endowment performed given the behavior of the financial markets.

“It would not surprise me to find that the Yale portfolio did very well last year,” said William Goetzmann, a finance professor at the Yale School of Management. “It has traditionally had a strong emphasis on equity and the equity markets have been up recently.”

Though most of Yale’s peer schools have yet to release the performance of their endowments for the latest fiscal year, the Massachusetts Institute of Technology, the University of Pennsylvania and Bowdoin College recently reported returns of 11.1 percent, 14.4 percent and 16 percent, respectively.

Experts said the University’s results will likely fall within a similar range because the endowment managers of these schools share similar investment philosophies. The endowment managers of MIT, Penn and Bowdoin are all alumni of the Yale Investments Office, where they worked under Chief Investment Officer David Swensen.

Roger Ibbotson, a professor at the Yale School of Management, estimated that Yale could see a return of about 16 percent.

“Yale is more aggressive so it will likely come on the top end,” said Alan Moreira, a finance professor at the Yale School of Management.

Ibbotson said the University has an advantage over other institutional investors because Swensen began investing heavily in alternative asset classes such as private equity and real estate in the 1980s. Though it is never easy to invest in private equity pools, the Investments Office has more knowledge, experience and “negotiating power” than other investors do, he said.

Still, it is difficult to predict how the endowment fared this year because the University holds about 35 percent of its assets in private equity, about which limited information is available as the asset class is not publicly traded by definition, Ibbotson said.

“Because private equity is private, it is difficult to know, on a month-by-month basis or even a year-by-year basis how exactly it is performing,” Goetzmann said.

Polak said the University spends about 5 percent of the value of the endowment each year. Due to inflation, the endowment must earn a minimum investment return of approximately 7 percent to keep the purchasing power of the endowment constant, he said.

During the 2012 fiscal year, Yale saw an endowment return of 4.7 percent. Because the return was not large enough to offset spending fully, the size of the endowment dropped from $19.4 billion to $19.3 billion.

Though a Sunday recruitment email from the Yale Investments Office mentioned that the size of the endowment is currently $21 billion, Ibbotson said the precise endowment return cannot be calculated directly from the size of the endowment without knowing how much the University received in donations last year.

Polak said he does not know how other university endowments performed this year, though he said he suspects fiscal year 2013 will prove to have been a good year nationwide.

“There’s a tendency to see it as a race, but it isn’t really — it is a little bit,” he said. “But the real question is a question of what we can do here at Yale. We’d rather have a big [return] and come in second compared to our peer schools than come in ahead of the pack with a low [return].”

The size of the Yale endowment peaked at roughly $22.9 billion in fiscal year 2008, before the onset of the nationwide economic recession.

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