The direct threat of Ebola to global financial markets remains undiagnosed, but its risk to the University’s pocketbook is likely minimal.
According to the most recent data issued by the World Bank, the estimated cost from the disease could reach $32.6 billion by 2015 if Ebola spreads throughout West Africa. While the impact on University assets — including Yale’s $23.9 billion dollar endowment — remains uncertain, financial experts in the field largely agreed that Yale’s returns will not be affected over the long term.
“The Yale endowment is really focused on long-term appreciation, and the illiquidity provides a bit of a buffer since those assets will not be liquidated in the course of the week,” MIT finance professor Andrew Lo ’80 said, referring to Yale’s holdings in asset classes such as leveraged buyouts, real estate and natural resources. “So the ups and downs will not cause returns to be too affected.”
Lo added, however, that financial markets could be affected by the Ebola virus.
He said the current analysis of the financial implications of Ebola breaks down into two categories: the direct economic consequences of an outbreak and the consequences due to investor response and strategy. He added that while the current risk and cost of an Ebola outbreak in the U.S. is relatively minor and straightforward, questions regarding investor psyche are “quite severe.”
“Markets are often driven by animal spirits,” he said. “When you have something as deadly and frightening as Ebola virus, clearly markets will reflect that public sentiment.”
Charles Skorina, publisher of the Skorina Letters — a publication providing analysis on institutional asset managers and tax-exempt funds — said a more serious Ebola threat could generate a great deal of panic. He added that this poses a risk to financial markets since they often react poorly to uncertainty.
Still, the ultimate impact any fluctuation will have on the returns of the Yale endowment or the University’s investment strategy remains small. Most experts interviewed said Yale’s emphasis on diversification and reliance on illiquid asset classes — assets that cannot be easily sold or exchanged — may help immunize the University from short-term spikes.
Since endowments are often diversified, even if some institutions were more heavily invested in health care stocks currently seeing a rise in price, the impact would occur largely on the margin, said William Jarvis ’77, managing director of the Commonfund Institute.
He added that if the U.S. maintains a relatively small number of Ebola cases, there will be no effect on the market and endowment investment strategy. More generally, Jarvis said it would be difficult to provide a clear investment strategy that fully accounts for the financial consequences of unpredictable market forces.
Chief Investment Officer David Swensen could not be reached for comment.
Laurie Garrett, senior fellow for global health for the Council on Foreign Relations, said that investors with a long-term perspective could benefit from sectors that are currently under- or overvalued as a result of the fears surrounding Ebola.
“If you are buying for the long term, and hedging against the insanity of the fearfulness, it is a great time to buy stuff,” Garrett said. She cited hotel and airline stocks as two examples of sectors that were unnecessarily undervalued in current economic conditions.
But others advised Swensen that the best financial response to the Ebola crisis is to do nothing at all.
Professor of finance at the Yale School of Management Matthew Spiegel said he hopes Swensen will ignore the fears regarding Ebola, since they will likely have no impact. Financial markets will not be hurt in the long term since they are based in relatively unaffected locations such as the U.S., Europe and parts of Asia, Spiegel added.
“People in the stock market are betting real money with real companies with real earnings,” he said. “When you buy a stock, you are buying a future earnings flow well into the future, and this Ebola crisis will not affect 99.9 percent of companies in the next month.”
He said that recent fluctuations in the financial markets are more likely to be attributed to a wide range of other issues — including continuing instability in the European economy, uncertainty about retail sales and even interest in Apple products.
While Lo said concerns regarding Ebola likely will not drive Yale’s investment decision making, it is a factor that is worth considering in light of Yale’s future spending plans. He said since Yale will be building two new residential colleges and will require greater liquidity, fluctuations in those types of assets may carry greater weight.
“In that case, liquid markets matter … so they must be fully aware of conditions that would drive these types of market panics,” he said.
Yale’s endowment had a 20.2 percent investment return for fiscal 2014.