Investments Office predicts strong growth

Yale defended its investment strategy and forecasted strong long-term growth rates in an annual report released by the Investments Office last week.

In the 24-page document, the Investments Office repudiated criticism of the Yale Model — a style of investing that emphasizes diversification and active management of nontraditional asset classes — and said its risk-adjusted growth rate remains strong. Though Chief Investment Officer David Swensen declined to comment, outside financial experts interviewed echoed the report’s conclusions. In the report, the Yale Investments Office said its investment strategy is not for everyone, but works well for the University.

“Performance over longer horizons demonstrates the strength of Yale’s investment program,” the report said. “Although the endowment produced painful losses in fiscal 2009, the results of any one-year period tell very little about the efficacy of a long-term investment strategy.”

The report said that while Yale could have used a traditional strategy of a 60 percent U.S. equity and 40 percent Treasury bond portfolio since 1988 — a strategy that would have protected Yale’s assets during the crisis — this tactic would have yielded a current endowment value of $9.11 billion, which is less than half its actual total today.

Financial experts agreed with the success of the Yale Model, adding that Yale’s strategy of carefully balancing risk and return helps to produce long-term endowment success. William Jarvis ’77, managing director of the Commonfund Institute, said managing university endowments is not a one-year, or even five-year, game.

Though smaller endowments with less than $25 million in assets have outperformed larger endowments over the past five years, according to the 2013 NACUBO-Commonfund Study of Endowments, Jarvis said the current policy environment is not normal.

“[People are saying] all you need is stocks and bonds — and that’s just not true,” he said. “These people are taking a very short-term, frankly distorted, look at a policy environment since 2009 and pretending it’s a normative environment and it’s not.”

According to the report, Yale’s mix of assets under current management produces a portfolio expected to grow at 6.2 percent with risk of 14.8 percent.

According to Jarvis, the equity risk premium — the excess return that equities provide over treasury bonds — has been around six percent over the last 150 years. Jarvis said the “holy grail” is to attain that kind of long-term equity risk premium without the volatility of investing in a pure equity portfolio.

“What [the Investments Office is] saying in technical terms is that they’ve gotten quite close to achieving that goal,” he said. “This is why Yale is so good.”

The Investments Office defended its ability to beat market returns. As endowments, foundations and other institutional investors have flocked towards private equity, hedge funds and real assets over the last decade, these alternative asset classes have become more crowded, the report said.

Still, Yale’s access to top-quartile venture capital, leveraged buyout, natural resources and real estate managers has contributed to its strong performance, according to the report.

“The Yale Model of endowment investing is not appropriate for everyone,” the report said. “Only those organizations with a true long-term perspective and sufficient staff resources should pursue an active, equity-oriented, alternatives-focused investment strategy. The costly game of active management guarantees failure for the casual participant.”

School of Management professor Roger Ibbotson argued that Yale actually owes its success not to the model, but to the Investments Office personnel and other money managers.

“It’s like driving a race car,” Ibbotson said. “If you have a great race car driver, you’ll do great. But if you have an ordinary driver, you’re better off not driving a race car.”

According to the NACUBO study, the average return of 835 universities and colleges in the United States was 11.7 percent in fiscal 2013. Yale generated a return of 12.5 percent over the same period and added over $7 billion to its endowment relative to the average return of universities during the past decade.

Over the past 10 years, the endowment has grown by nearly $10 billion. Similarly, spending from the endowment to support the University’s operating budget grew from $470 million to $1.02 billion over the past decade.

Jarvis said that just the existence of such a comprehensive report is impressive.

“When this report first came out in 1995, I remember reading it and thinking … this is the most incredibly impressive thing,” he said. “It is by far the most open and detailed revelation of what any leading endowment is doing. Harvard doesn’t publish anything like this.”

In fiscal 2013, the endowment generated an investment gain of $2.29 billion.

Comments