Yale’s endowment return for fiscal 2014 not only led the Ivy League — it also performed far better than the national average.
According to the preliminary data released earlier this week in the NACUBO-Commonfund Study of Endowments — a comprehensive survey on higher education endowments — the average return on endowments in the 2014 fiscal year rose to 15.8 percent from 11.7 percent in the prior year. Yale, meanwhile, saw a return of 20.2 percent, putting it in the top tier of the 426 U.S. college and universities surveyed. Still, whether Yale’s endowment can maintain this higher-than-average performance in coming years is far from certain.
“15.8 percent was high across the board because it was a tremendous year in the asset side of the economy — the stock market went up a lot, and one thing we are seeing is a period of very low interest rates in the US … that tends to lead to asset values going up,” Provost Benjamin Polak said. “Second, we finally began to see more illiquid private equity begin to recover from the recession.”
According to the study, larger endowments posted the highest returns for fiscal 2014, with institutions with assets over $1 billion reporting an average net-of-fees return of 16.8 percent.
Yale’s performance bested the returns of peer institutions, including Princeton, Stanford and Harvard, whose 15.4 percent return was the lowest in the Ivy League.
The strong performance of institutions with over $1 billion in assets in fiscal 2014 agrees with findings reported in NACUBO studies for over a decade, Commonfund Institute Executive Director John Griswold said in a statement. He added that larger endowments tend to place investments in a range of both public and private asset classes, which often generate high long-term performance.
William Jarvis ’77, managing director of the Commonfund Institute, said that in normal economic environments, more diversified portfolios tend to outperform perform less diversified portfolios. Greater diversification produces more sources of return, he said.
The Yale Model — pioneered by the University’s Chief Investment Officer David Swensen — is a strategy of investing that places a heavy emphasis on diversifying assets. It is characterized by its reliance on alternative, illiquid assets as opposed to simply investing in fixed income and commodities.
“Yale has typically done better than the average and this was of course a particularly nice year for Yale,” School of Management professor Roger Ibbotson said. “The Yale Model of investing is in a lot of private equity and hedge funds, and that works well if you can actually pick the best ones.”
Swensen declined to comment.
The NACUBO-Commonfund study’s preliminary data indicated that institutions are continuing to shift towards non-traditional investments — such as private equity, venture capital, hedge funds and natural resources — which Yale has done under Swensen’s leadership. Colleges and universities allocated an average of 58 percent of their portfolio to alternative asset classes, an increase of five percentage points from the previous year, the study reported.
But despite this trend towards alternative investment strategies, Yale has appeared to apply this strategy most effectively.
Over the past decade, Yale’s 11 percent average annual return has outperformed broad market results, which showed 8.4 percent annual growth in domestic stocks and 4.9 percent growth for domestic bonds.
“In order to manage the Yale Model well, you need the best manager of it, who is David Swensen,” Ibbotson said. “So people who try to copy the Yale Model may not necessarily succeed unless they actually pick the best private equity investors, since it is not the easiest model to follow.”
Still, some cautioned against expecting double digit gains to continue indefinitely — even with the optimistic report from the NACUBO-Commonfund Study pointing towards positive trends.
Ibbotson said that since the Yale endowment, including its private equity and illiquid assets, is tied to the stock market, the endowment growth will necessarily reflect the broader state of the financial market. He added that although Yale may have some of the best money managers, it is not realistic to expect Yale to always outperform the stock market by this wide of a margin. After the economic recession, the University’s endowment lost nearly a quarter of its value.
“We should never forget that there is risk in this and endowments sometimes can go down — even very well managed endowments,” Polak said.
While Polak said he does not anticipate a large economic downturn, he added that Yale should always be prepared.
Polak added that in terms of Yale’s relative performance to other peer institutions, there is some reason to believe that its lead will be diminished over the years. He said the reason is that many of the chief investments officers at these schools are, in fact, “Yale educated” — at least in their investing strategy.
“If you go around to the other schools and ask who is the David Swensen of the other schools, a lot of them were literally trained at Yale and are working in their endowment offices,” Polak said. “And if that is good too, because one thing that Yale does is disseminate knowledge, and it is wonderful that our investment office disseminates knowledge as well.”
Still, Jarvis noted that while some strategies in endowment investing can be replicated, others are hard to reproduce. He said while Swensen’s method has been largely documented, access to specific money managers, the desire for companies to work with Yale and the support of the Yale Corporation set the University apart.
Final data from the 2014 NACUBO-Commonfund study will be released in late January 2015.