Several years after the financial crisis cost Yale roughly a quarter of its endowment, the future seems promising for Ivy League schools.
Yale earned a 12.5 percent investment return for the fiscal year that ended June 30 — up from 4.7 percent the year before. Though Princeton and Cornell have yet to release their fiscal 2013 returns, Yale currently stands in third place in the Ivy League, behind the University of Pennsylvania and Brown University. On average, Ivy League schools saw a return of 11.9 percent in fiscal 2013, compared to 2.3 percent the prior year. While financial analysts interviewed cautioned against looking at individual years as evidence of long-term trends, they added that Yale and other top universities will likely continue to perform relatively well because of their resources and access to expertise.
“I can’t predict the future, but if you look at the data, the larger endowments will be the most successful,” said Jonathan Berk GRD ’90, a finance professor at the Stanford Business School.
Fiscal 2013 was a more prosperous year in general than fiscal 2012, when the world was suffering from severe economic instability in Europe, particularly for the first half of the fiscal year, said William Jarvis ’77, managing director of the Commonfund Institute. The performance of alternative asset classes such as private equity and hedge funds improved during fiscal 2013, he said.
Yale and other top universities tend to invest heavily in these alternative asset classes, experts said. Pioneered by Yale’s Chief Investment Officer David Swensen, this diversified style of investing is known simply as “the Yale model.”
In 2012, an independent report by the Commonfund Institute found that “well-diversified” investment portfolios with an “equity bias” were most likely to succeed going forward.
In the years ahead, the comparative advantages possessed by Ivy League endowments will allow them to perform well in a post-recession market, Jarvis said.
“I would argue it’s possible to be big and frankly not very skilled at investing,” Jarvis said. “The key is diversification of the investment pool, and, once you’ve diversified, putting your assets in [the best-performing funds].”
The current financial environment favors investing skill and access to top managers, he said.
Scott Clemons, managing director of Brown Brothers Harriman, said Ivy League schools generally have better access to the best managers and have all adopted Swensen’s diversified model. Many of the Chief Investment Officers at top universities started their careers in the Yale Investments Office.
Clemons said the brand names and endowment sizes of schools like Yale, Harvard and Princeton help attract top investment managers that can secure higher returns.
Still, all financial experts interviewed said the endowment returns will not likely reach pre-recession levels in the near future.
“I would say the returns over the next 10 to 15 [years] are not going to be as impressive as before the crisis,” Clemons said. “Even to take the 12 to 13 percent returns and project [them] into the future would be a mistake.”
The memory of the damage done to endowment portfolios during the 2008-’09 financial downturn may also lead to more conservative investments, experts said.
Provost Benjamin Polak said Yale’s target investment return is around 7 percent. A return of this size allows Yale to spend around 5 percent of its endowment on operating costs while adjusting for inflation.
Under Swensen’s guidance, the Yale endowment has performed exceptionally well over the past two decades. A 2011 Harvard Business School report noted that over the past 20 years, ending in fiscal 2010, Yale’s endowment earned an average annual return of 13.1 percent, “exceeding the return of all colleges and universities.”
Yale’s 20-year average was 4.3 percent per annum better than other endowments, the report added.
Harvard earned an 11.3 percent return, compared to Penn’s 14.4 percent, Dartmouth’s 12.1 percent, Columbia’s 11.5 percent and Brown’s 12.6 percent.