After witnessing record returns in 2014, the Yale endowment is unlikely to have seen similar growth over the most recent fiscal year, experts agreed.
In the coming weeks, Yale Investments Office will release its performance for the period beginning July 1, 2014 and ending June 30, 2015 — the financial year known as fiscal 2015. Though last year the endowment gained a 20.2 percent investment return — bringing it to a historic nominal high of $23.9 billion — it appears unlikely that Yale and other major institutions will be posting returns of similar magnitude due to the volatile stock market performance faced during the previous 12 months.
“Last year was a real outlier in terms of returns, and every once in awhile you do get those, and when you do, you ought to enjoy them — but we certainly shouldn’t get used to those returns,” Massachusetts Institute of Technology Finance professor Andrew Lo ’80 said. “So it will be reasonable to expect these returns to come down from last year. It doesn’t mean there is any kind of underperformance or anything wrong, it just means we are getting back to a normal state of affairs.”
Lo emphasized that lower returns would not imply underperformance or anything wrong, but instead a reversion to a normal state of affairs. Experts said one of the central causes for the relatively lower market returns is the weaker performance of public equities in the 2015 fiscal year, which may have been a drag on portfolios.
According to the MSCI World index, a stock market index of 23 developed market countries, global equities had a 2.06 percent for the year ending June 30 — more than 22 percentage points lower than the returns posted during the prior fiscal year.
However, William Jarvis ’77, managing director of the Commonfund Institute, cautioned against relying on the performance of publicly listed equities as the sole indicator for Yale’s returns. Yale’s portfolio is diversified across multiple asset classes.
“Yale has a combination of a couple things. It has a large allocation to absolute returns, which is supposed to be an all-weather strategy so that it can grind out returns in all kinds of markets and protect the endowment from fluctuations,” he said. “The endowment also has a pretty hefty allocation to private capital and there have been a lot of liquidations coming out of those funds in the last couple of years … so it is hard to tell exactly where this is going … but I would not be surprised if Yale were on the upside of that.”
One industry researcher, who requested anonymity due to company policy, predicted Yale to outperform peer institutions given its large allocation to private equity and its “larger than typical” allocation to real estate investments, which had strong returns in 2015.
He estimated Yale to perform in the 6.6 to 8.6 percent range — significantly higher than the 3.6 percent median return for large endowments for this most recent fiscal year, according to the Wilshire Trust Universe Comparison Service.
“Yale may be a bit higher than everyone else, but it is certainly going to be in that range,” said School of Management Professor Roger Ibbotson.
Several endowments have already released their numbers for 2015, including the University of Texas Investment Management Company at 3.5 percent, Ohio State at 3.8 percent and the Massachusetts Institute of Technology with an investment return of 13.2 percent.
For the 2015 fiscal year, Yale had asset allocation targets of 20 percent invested in absolute returns, 17 percent invested in real estate and 31 percent invested in private equity — its largest allocation among the eight asset classes.
Ibbotson added that private equity tends to perform as a “levered” stock market, which can be both rewarding and risky depending on the market conditions.
“If the market is up, private equity will be a little higher,” Ibbotson said. “And if the market is down, private equity will be a little lower.”
Though the earnings do not include the recent market downturn experienced over the summer, it remains unclear how large of an impact this volatility may have on next year’s returns for the Yale endowment.
Over the past 10 years, Yale has had annual net investment returns of 11 percent.