In a year when the economy dragged and most universities saw their endowments shrink, the 9.2 percent growth of Yale’s endowment was arguably more impressive than last year’s 41 percent gain, which took place in a strong economy.
An advance copy of the Yale Endowment Report offers some insight into the strategies that allow Yale’s investment team to outperform its competitors on a consistent basis.
The investment team has always pursued a strategy of diversification that has distinguished its portfolio from those of other universities, but the report shows that in fiscal year 2001 the strategy protected Yale from the harsh economic conditions that hurt other endowments.
“Following a number of years in which Yale posted excellent results in spite of its diversified portfolio, fiscal year 2001 marked a period in which diversification finally paid dividends,” the report states.
Chief Investment Officer David Swensen, who is widely acclaimed as an investing genius, never talks about the performance of the $10.7 billion endowment, but Yale President Richard Levin said Swensen’s strategies and strong management have allowed the endowment to continue to grow.
“Our diversification strategy has been a major ingredient [in our success], and of course the very rigorous procedures we use in selecting managers [have been too],” Levin said.
While the average university puts 43.3 percent of its money in domestic stocks; Yale only places 15.5 percent of the endowment in this investment category, according to the report.
In a fiscal year where the Dow Jones Industrial Average was flat and the Nasdaq index lost nearly half of its value, the average endowment’s heavy reliance on U.S. stocks helps to explain the downturn in endowments.
Also unlike the average university, Yale puts little emphasis on investment in bonds. Although bonds are usually considered the safest investments and the second most popular investment for endowments nationwide, the report states that the relatively low return of bonds does not attract Yale’s investment team.
Instead, Yale places a far greater emphasis on other investment strategies like exploiting market inefficiencies, participating in buyout partnerships, and investing in venture capital, gas, oil, real estate and timber. These alternative strategies comprise over 50 percent of the University’s investments.
“Over the past 15 years, Yale has reduced dramatically the endowment’s dependence on domestic marketable securities by relocating assets to nontraditional asset classes,” the report states.
These “nontraditional” investments usually are immune to downturns in the stock market and other normal investments.
“The heavy allocation to nontraditional asset classes stems from their return potential and diversifying power,” the report goes on to state. “Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management.”
The Yale endowment has quadrupled over the last 10 years, and endowment spending pays for more of Yale’s operating budget with each passing year. Of the $1.3 billion operating budget this year, $337.5 million will come from endowment spending.
Yale has the second largest endowment in the county. Harvard has the largest endowment with $18.3 billion but saw its endowment decrease 2.7 percent during the last fiscal year.