Though the Yale endowment may have over $800 million of “cash” on hand, it is unlikely these funds are just bills sitting in a University bank account.
According to the 2014 Endowment Update released last week, the University Investments Office increased its allocation of cash assets — which includes short-term government bonds — from 1.6 percent to 3.5 percent over the previous fiscal year, bringing Yale’s total holdings of this asset class to over $836 million. This rise comes in contrast to the period following the 2008 financial crisis, in which Yale actively borrowed funds to increase liquidity in 2008, 2009 and 2011. Though the report did not specify the reason for this rise in cash or cash equivalents, financial experts interviewed said Yale is likely pursuing opportunities to put this money back to work.
“What you see here with this 3.5 percent — relatively high in terms of recent years — is the potential that Yale wants to have ‘dry powder’ to invest in things that are well valued in the endowment office’s point of view,” said William Jarvis ’77, managing director of the Commonfund Institute, a nonprofit consulting firm. “This is cash that is being accumulated so when Yale sees investments with those ‘uneconomic sellers’ — things that are priced favorably — they can write a check immediately.”
Jarvis said other parts of Yale’s portfolio may be responsible for this rise in cash allocations, specifically returns from mature private equity programs. He added that another source may be profits from Yale’s investment in limited partnerships in real estate as managers sell property and get cash in return.
School of Management Professor Roger Ibbotson said Yale may either distribute this capital among existing investments in the portfolio, or the University may be “piling up” its cash before investing that sum with a new money manager.
Yale’s 3.5 percent allocation to cash fell in fiscal 2014 slightly below the 4 percent average allocated to short-term securities, cash and other cash equivalents among other institutions with endowments of over $1 billion, according to the NACUBO-Commonfund Study of Endowments — the most comprehensive annual report on higher education endowments.
Still, it appears likely that the University will look to re-invest this cash when the opportunity presents itself. Though Chief Investment Officer David Swensen could not be reached for comment, he has previously spoken publicly about the potential harms of holding cash for the long-term.
“The modest transaction cost incurred in selling assets pale in comparison to the drag on returns created by holding cash as a standard part of an institutional portfolio,” Swensen wrote in his book, Pioneering Portfolio Management. “Based on delivery of poor real returns and failure to serve as a riskless asset for long-term investors, cash plays no significant role in a well-constructed portfolio.”
Swensen added that while some investors argue that cash provides necessary liquidity for endowment funds, there are massive amounts of liquidity already resident in institutional portfolios. This includes interest income, dividend payments and rental streams.
Over the past decade, however, the University has faced moments in which it has been pressed for cash. In November 2009, Yale borrowed money by issuing $1 billion of taxable bonds — a debt that has since been largely repaid, according to the 2013 endowment update.
Ibbotson said it is possible that last year’s 1.6 percent cash allocation was “cutting it pretty thin.” He said cash on hand can often serve transitional purposes as the investment officers move money in and out of accounts.
Still, Jarvis said it is not always easy to immediately return cash to the market since many investments, such as domestic securities, appear to be fairly valued.
Rather, since Yale’s strategy is often driven by a “bottom up” investing philosophy — focusing attention on a specific company or firm — pressures of the market do not often dictate how the University will act.
“In real assets, like other asset classes, Yale seeks value and behaves in a contrarian manner,” the University’s 2010 endowment report stated. “Investments reflect compelling opportunities and the University’s ability to find suitable managers, regardless of activity in the broad market.”
Yale’s Endowment generated a 20.2 percent return in fiscal 2014, bringing its total size to $23.9 billion.