Despite the major losses Yale’s endowment suffered last year, Chief Investment Officer David Swensen is sticking to the famously contrarian investment strategy that may have deepened those losses — and that may continue to delay the endowment’s recovery, at least in the near future.
At the end of the last fiscal year, which ended June 30, the Yale Investments Office increased the percentage of the endowment it invests in diversified assets, according to the University’s annual endowment report, released Thursday — meaning Yale will pour more money into private equity and real assets such as oil, gas, timber and real estate despite the losses those assets generated last year. Though these risky investments may keep Yale’s endowment from recovering as quickly as those of other universities, administrators and experts said Swensen’s strategy is likely to pay off in the long run.
“Swensen took risks and had a lot of real assets, and those returns were terrible,” said Richard Anderson, the director of the higher education group at Hammond Associates, an endowment consulting firm, last month. “But the real story is how Yale has done over the long term, and Swensen’s done terrifically.”
Anderson added that he thinks Yale’s endowment will improve again over the next decade.
Swensen did not respond to a request for comment.
In the endowment report, Yale’s investment group acknowledged critics who have questioned Swensen’s frequently imitated strategy of pursuing nontraditional investments, conceding that Yale’s diversified portfolio failed to shield the endowment from the global economic downturn. Yale’s endowment plunged 24.6 percent last year, compared to an average of 19 percent for other large U.S. endowments.
But the same strategy helped the endowment more than double over the past 10 years — and it will continue to yield high returns over a longer period of time, Swensen’s group said in the report.
“If diversification fails to protect a portfolio in the face of a financial panic, why bother to diversify?” they wrote. “The answer lies in the diversified portfolio’s lower risks and higher returns.”
Nontraditional asset classes such as private equity and real assets may be riskier, but they are ultimately more profitable than stocks, bonds and cash, the group wrote. Meanwhile, Yale’s investors have used stable U.S. Treasury bonds to lower risk, they added. But because bonds yield little profit, the Investments Office will continue to keep bonds at a minimum, the report said.
Though the real assets in Yale’s endowment declined 33.9 percent last year, the Yale Investments Committee opted to increase the percentage of Yale’s endowment invested in real assets from 29 percent in last year’s investment portfolio to 37 percent this year. The average higher education endowment, by contrast, aims to allocate 10.7 percent of endowments to real assets.
Anticipating growth in private equity assets, Yale’s investors also decided to raise the percentage of Yale’s endowment invested in private equity from 21 to 26 percent — over three times the educational endowment average of 8.3 percent, according to the report.
Yale administrators are not expecting investments in nontraditional assets to perform well this year, and Yale’s endowment is likely to perform worse than other endowments that rely more on stocks and bonds, Deputy Provost Charles Long said last month.
Still, Swensen and his team said they believe these diversified assets will ultimately strengthen the endowment, and two experts agreed.
“Talking about one year of performance is almost irrelevant,” said John Griswold, the executive director of the Commonfund Institute, a nonprofit endowment consulting group.
To compensate for the increased investment in private equity and real assets, Yale has taken some money out of its other asset classes, which include hedge funds and foreign and domestic equities. Lowering its allocations to these investments will help the University to avoid the negative effects of inflation, the investment group said.
The Investments Committee also voted to keep 0.5 percent of the endowment as cash, but as of June 30, the endowment had cash assets of negative 1.9 percent, meaning the University was leveraged and used its cash to pay off debt.
In 1989, 70 percent of the endowment was committed to stocks, bonds and cash. This year, just 11.5 percent of the endowment was invested in these traditional assets.