Thanks to an impressive 22.3 percent rate of return, Yale saw its endowment grow to $15.2 billion in the last fiscal year.
The endowment’s total value rose by approximately $2.5 billion over the past fiscal year, which ended June 30. Faced with spiraling energy costs and new financial aid and construction initiatives, Yale’s budget was narrowly balanced in June by relying heavily on projected returns from invested endowment funds. The endowment comprised approximately 31 percent of this year’s budget, and a poor showing on returns would have forced Yale back into a deficit in its operating budget after only recently inching into the black.
“This year has been another outstanding year for the Investments Office team,” Provost Andrew Hamilton said, adding that the returns were “critical” in supporting financial aid, international internships, new academic programs and campus renovation projects.
To provide some context, over the same period, the S&P 500 rose just slightly more the 4.4 percent.
In addition to fundamental priorities such as financial aid, capital replacement and utilities costs, Vice President for Finance and Administration John Pepper said smaller programs like the Yale Sustainable Food Project — which received a $1 million expansion this year — depended primarily on solid endowment returns, which were projected to feed $610 million into the approximately $1.8 billion operating budget.
Top Yale finance officials said they were not surprised by the endowment’s performance, having received detailed monthly updates on the University’s investment management. But they said far fewer initiatives designed to benefit student life, like the Sustainable Food Project, would have been approved during June’s Yale Corporation meetings if the returns were not so reliable.
“This is what we were counting on as we put together our budget,” Pepper said. “It isn’t like this has presented us with a windfall versus what we expected, but the contribution of this endowment over time is the key to carrying out the academic missions of this University.”
Pepper said Yale’s endowment returns came in at the high end of his expectations, but he said the returns are unlikely to remain this high in the long term. Most industry analysts also see such continued growth as increasingly unlikely, Commonfund Institute Executive Director John Griswold ’67 said.
“The consensus is that the returns are going to come down,” said Griswold, whose institute serves as the educational arm of a group that provides fund management and investment advice to many universities. “For those who can invest as Yale and Harvard do, there’s more chance that they can sustain these double-digit returns, but it’s getting more and more difficult to find in the absence of a roaring bull market.”
Yale helped balance its budget last year by raising the cap on endowment spending from 5 to 5.25 percent, but Griswold said the University should not increase it much further in light of the projected downturn for returns.
“Increasing the spending cap would be a bad idea in the long run,” Griswold said. “There are periods of time when needs are greater than average, and there are times where Yale has had to invest in its infrastructure, but Yale has to understand that it will affect future spending.”
Hamilton said there are currently no plans to increase the spending cap beyond 5.25 percent.
For two decades, portfolio diversification has been the hallmark of Yale’s investment management strategy. But Griswold said such expansion is becoming more and more difficult due to the rapid increase in the number of index funds, which seek to mimic the market, and hedge funds, which seek to exploit its inefficiencies.
No other Ivy League university has yet released its endowment return figures for this year, but Yale tends to be at the top of its class. The University consistently ranked in the top one percent of institutional funds during the past decade, with an average return of 17.4 percent. Stanford University’s $12.4 endowment benefited from a 19.5 percent return during the past fiscal year, with an annualized return of 15.4 percent. In comparison, the S&P 500 had an annualized return of 8.1 percent.