With Yale’s $23.9 billion endowment at a historic nominal high, the University continues to project strong growth rates, according to the annual report released late last week by the Yale Investments Office.

In the 28-page document, the Investments Office detailed both the guiding principles of its investment strategy and predicted how shifting asset allocations would affect growth in the coming years. Though the $4 billion investment gain during fiscal 2014 — a 20.2 percent return — was announced in September, the full report justified the composition of the University’s current holdings and detailed the investment policy for the longer term.

The report also outlined the University’s continued reliance on the endowment as a source of revenue for funding operations. During fiscal 2014, the endowment was responsible for subsidizing nearly 33 percent of the University’s $3.1 billion income. Over the last decade, spending from the endowment has continued to rise at an annual growth rate of roughly 8 percent, nearly doubling from $502 million to roughly $1 billion.

Chief Investment Officer David Swensen declined to comment, but investment experts said the University’s endowment structure — from its heavy allocation to nontraditional assets, including venture capital, real estate and natural resources, to its increase of foreign equity targets — has allowed Yale to consistently rank in the top tier of institutional investors.

“Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management,” the report stated. “The Endowment’s long time horizon is well suited to exploit illiquid, less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber and real estate.”

The report stated that the endowment’s target mix of assets projects an inflation-adjusted long-term growth rate of 6.3 percent with a risk level of 15 percent. Last year, Yale’s target mix of assets under management produced a portfolio expected to grow at 6.3 percent with risk of 14.8 percent. Yale’s equity risk premium — the excess return that equities provide over a risk-free rate — has been around six percent for more than a decade. To many investors, the goal is to attain that kind of long-term equity risk premium without the volatility of investing in a pure equity portfolio.

Massachusetts Institute of Technology finance professor Andrew Lo ’80 said Yale’s long-term horizon for investments allows the University to employ tactics that are not easily replicated for individual investors.

“Yale is making full use of their endowment status because they are really investing for all the future generations of faculty, staff and students,” Lo said. “So that gives them an advantage that many shorter term investors don’t have when they look at all the potential opportunities over the course of say a 10 or 20 year horizon.”

One of the most notable shifts in the endowment structure during fiscal 2014 was its increase in foreign equity from 11 to 13 percent of Yale’s portfolio, a rise that was offset by a two percentage point decrease in real estate targets, the report stated. However, Yale’s investment in the foreign market remains well below the average endowment allocation to this asset class among large endowments. According to the NACUBO-Commonfund Study of Endowments — the most comprehensive annual report on higher education endowments — large endowments, on average, have 18 percent in foreign equity.

According to the report, this type of foreign equity — which includes 5 percent in foreign developed markets, 3 percent in emerging markets and 5 percent to “opportunistic foreign positions” in China, India and Brazil — allows the University’s endowment to become more diversified and earn strong returns through active management.

“There are opportunities that are being created by all these global, geopolitical events, so … I think focusing just on the U.S. is doing a disservice to the investors,” Lo said. “When you focus on international markets, it requires much broader expertise and that is really where Yale’s investment staff have really shown they are able to demonstrate that kind of expertise in a variety of markets and in different countries.”

Although Yale increased its holdings in foreign equities, Lo acknowledged that the University’s investment strategy is distinguished by its heavy asset allocation towards other alternative assets.

The increased investment in foreign equities is part of a larger trend of Yale’s endowment shifting away from fixed income classes, such as bonds, and targeting 95 percent of the funds for investments in assets expected to produce equity-like returns, which include domestic securities, absolute return strategies, real estate, natural resources and private equity.

Current economic conditions make this type of equity bias even more strategic for the Investments Office, School of Management Professor Roger Ibbotson said.

“There are very few opportunities in the fixed income space because … if you think interest rates will rise in the future — which is possible that it might with quantitative easing ending — longer-term bonds are a poor investment and shorter term bonds have smaller yield,” Ibbotson said. “You don’t get much yield for going out there [in the bond market], if interest rates rise those prices will drop.”

Instead, it appears the University will continue its large-scale investments in the field of private equity, such as investments in venture capital and leveraged buyout partnerships. Not only is Yale’s 33 percent allocation to private equity the largest among its eight assets classes, but it is also far greater than the average educational institution’s 10 percent allocation to this type of investment.

Lo said Yale’s large investment in the private equity market is part of a strategy pioneered under Swensen’s leadership and has led peer institutions to emulate Yale’s strategy to varying degrees of success.

“Yale was certainly among the first to get into private equity in a big way, so the Investments Office has established a long track record of these kinds of investments,” he said. “So I think they are following their nose to see where the best opportunities are, and it happens to be in many case to be in private equity markets.”

Over the past two decades, Yale’s private equity investments have earned 36.1 percent per year.


  • carl

    Is this an opinion article?

    This article is largely well written, and it’s about a subject that we all love. But the article presents statements about the Yale investment model as the YDN’s own judgment or as fact.

    For example: “the full report justified the composition of the University’s current holdings.” Did the YIO report really “justify” the asset mix, in Mr. Milstein’s or the YDN’s view? Or did the report attempt to justify that mix? Or even set forth the asset mix, along with the YIO’s argument as to why that mix is justifiable?

    “One of the most notable shifts in the endowment structure….” Do you have a source for the assertion that this shift is among the most notable?

    “most comprehensive annual report on higher education endowments.” Says who?

    “Subsidize,” by the way, is probably the wrong word for what the Yale Endowment does–which is fund Yale. Yale doesn’t “subsidize” itself.

    We can and should be both (i) fans of the Investment Office and the fine work that David Swensen has done for Yale, and (ii) skeptical consumers of a report that makes very complex arguments that very few people without advanced financial training are qualified to judge.

    Please avoid the subtle cheerleading. Give us the facts, and the views of two experts in the field. And let us judge whether the news is excellent for Yale.

    • Nancy Morris

      That’s all picking.

      And anyone receiving financial aid, and any researcher whose funding is in whole or in part being provided by Yale and not outside grants, who doesn’t realize they are being subsidized by the endowment needs a serious reality check.

      • carl

        Leaving aside attempts to guilt-trip with “reality checks,” the reporter was not pointing to students on financial aid or to any research budget.

        The sentence in question is, “During fiscal 2014, the endowment was responsible for subsidizing nearly 33 percent of the University’s $3.1 billion income.”

        Again, the endowment is Yale’s. Yale does not “subsidize” itself. Better words: provide, generate, account for.

        Or even “The endowment payout _was_ nearly 33 percent of the University’s $3.1 billion income.” Simpler can be better.

        • td2016

          Are you making a grammatical point or a substantive one?

          If your point is grammatical, which it now seems to be, why was it included in a critique of “subtle cheerleading,” a substantive criticism?

          And if it’s substantive, which it seemed to be in your initial comment, why are you objecting to a reply pointing out that anyone receiving financial aid who doesn’t realize he or she is being subsidized by the endowment needs a serious reality check? That seems obvious.

          The endowment DOES subsidize Yale’s income.

          • carl

            One can do both, no? And I’m responding both to the original article and to a commenter.

            Yes, my original point w/r/t to the word “subsidize” was largely a usage point. But it was a usage mistake that was probably caused in part by the reporter’s cheerleading POV.

            Then a commenter leapt in, and seemed to assume that I’m a student on financial aid, or a researcher on an endowed fund (I am neither), and that I therefore need a reality check.

            The reality is that *all* Yale students, faculty, and staff should understand that everyone who is not Yale itself, but who benefits from employment or study at Yale, is to one degree or another subsidized by the Yale endowment. This I think is the point that you agreed with below.

            As I thought you were saying below, this point is not limited to students on financial aid, it applies to ALL students–so for a commenter to single out students on financial aid is unfair. Would you not agree?
            But again, this is a bit of a red herring that was drawn across the comment trail. Because subsidizing students, of whatever means, is not what the author wrote.
            The author wrote, and you now repeat, that the endowment “subsidizes” Yale’s “income.” That’s just bad phrasing. The endowment payout is not a subsidy; it’s Yale drawing on its own capital assets to fund itself. It may be a subsidy of people AT Yale, but its not a subsidy of Yale or of Yale’s income.
            The analogy is to Aunt Agatha receiving a dividend from shares of stock that she herself owns. This supplements her income, certainly. But it is not a subsidy.

          • Nancy Morris

            Yes, you can do both in the same sloppy comment, as you now say you did. But then it becomes embarrassing to complain about the article’s own clarity and language use. And you are there.

            Nothing I wrote suggested that I “assume[d] that [you are] a student on financial aid, or a researcher on an endowed fund,” a point utterly irrelevant to what I did write.

            Yes, the endowment subsidizes everyone, but it subsidizes some more than others. It subsidizes those on financial aid more than those who pay full tuition and fees. And those it subsidizes more than other are more out of touch than others in denying the subsidy. It’s not that hard.

            And there is nothing wrong with writing that the endowment subsidizes Yale’s income, despite your hissy fit.

          • carl

            “Sloppy,” “embarrassing,” and “hissy fit.”

            Readers will judge for themselves whose comments truly merit such descriptions.

  • td2016

    That’s exactly right. Everyone at Yale is being subsidized by the endowment, some more than others.