Friday saw the $16.7 billion endowment managed by Yale investments chief David Swensen fall to the bottom of the Ivy League in its most recent investment gain. But that hasn’t diminished Swensen’s standing among Yale officials and onlookers.
“Anybody that makes money is going to have a really bad year at some point,” said David DeRosa, the founder of DeRosa Research and Trading, a Connecticut-based consulting firm. “The question is whether or not you chuck the whole thing or you stay the course. I think [Swensen’s] plan was well-thought out, and I don’t think you could hold him responsible for a really awful environment.”
“So I remain a big fan,” DeRosa added.
Though Swensen is just one of many institutional endowment officials, he has an outsized presence in the investing world. At Yale in the 1980s, he pioneered a model of institutional investing that several other large university endowments now emulate — one that bears his name.
The “Swensen model” — or “Yale model,” as it is sometimes known — emphasizes investing in alternative assets, including private equity, real estate, gas, timber and other “illiquid assets.” Yale racked up endowment gains of up to 41 percent in previous years under Swensen’s guidance, and returns of 20 percent or more became routine for the University in the years leading up to the financial crash of fall 2008.
That crisis, which produced a 24.6 percent loss for Yale’s endowment, brought the Swensen model under closer scrutiny — and Wick Sloane SOM ’84, the former chief financial officer of the University of Hawaii, said it deserves to be reevaluated.
“Yale and Harvard and others with their panic reaction showed that they had overinvested in risks that they couldn’t afford to take,” Sloane said. “That’s an outrage.”
But the 8.9 percent return the endowment posted last year has administrators saying they expect the endowment to return to its former success by the end of the next decade. While predictions are always difficult, four investment analysts interviewed said, Yale probably did the right thing by continuing to support Swensen’s diversified approach to investing.
Investing in many different types of alternative assets should produce “superior” returns over time, said William Jarvis ’77, managing director of the Commonfund Institute, a nonprofit consulting firm. It is difficult to come up with a model guaranteed to do better, he added.
“It’s very easy to take a cheap shot now because of a time when a cataclysmic event affected the portfolio,” Jarvis said. “But one inning doesn’t make a ball game.”
Jarvis said the strength of the Swensen model lies in its ability to generate massive returns over the long term, even if its focus on alternative assets might make it more vulnerable to a market crash such as the one in 2008. Endowments such as the University of Pennsylvania’s and Columbia’s, which returned 12.6 and 17 percent respectively last year, rely more heavily on stocks and bonds, generating lower returns but also protecting them from extreme losses, he said.
Yale’s long-term results remain among the best of all institutions: It gained 8.9 percent annually over the past decade, according to the University’s Friday announcement, beating Harvard’s 7 percent. Harvard announced earlier this month that its endowment had produced an 11 percent return for fiscal year 2010.
And other endowment managers seem to recognize Swensen’s success, choosing to stay the course with the Swensen model just as Yale has. Harvard Management Company CEO Jane Mendillo ’80 SOM ’84, who runs Harvard’s endowment, wrote in the HMC endowment report that she planned to continue following the endowment model, though HMC would try to unload some of its real estate assets.
Harvard may be selling some of its real estate in part because it, along with Yale and other universities, has struggled to come up with cash over the past year to pay for everything from building projects to normal operating costs.
“I think most of the institutions understand that they have not paid enough attention to liquidity issues before,” said Ronald Ehrenberg, the director of the Cornell Higher Education Research Institute.
At first glance, investment observers said, selling real estate, as Harvard is, might seem practical in another way. The real estate portfolio performed poorly last year, generating losses of 4.5 percent and dragging down Yale’s return.
But because the real estate market is struggling, now is the perfect time to snap up property at fire-sale prices, Jarvis said. Whether the Yale Investments Office will take advantage of the market remains to be seen.