After bringing the Yale endowment to a historic nominal high in the 2015 fiscal year, the Yale Investments Office is looking ahead, with target asset allocations for the 2016 fiscal year including a notable increase in bonds and cash, as well as a decrease in real estate and domestic equity.
On Sept. 24, the University announced that the Yale Investments Office had beaten market estimates to post a return of 11.5 percent, growing the endowment from $23.9 billion to $25.6 billion over the 2015 fiscal year. The University also outlined the investments office’s asset allocation targets for the upcoming fiscal year. Real estate allocations are targeted to fall from 17 percent to 13 percent, and domestic equity will drop a third, from 6 percent to 4 percent. Bonds and cash are set to increase from 5 percent to 8.5 percent.
Finance experts interviewed said these changes signal the investments office’s recognition that stocks and real estate are becoming overvalued and that Yale should seek opportunities elsewhere.
“Going from 17 to 13 percent [real estate] could simply mean that there were some real estate properties that they felt were fully priced and decided to sell, and that could be where some of that bonds and cash could be coming from,” said William Jarvis ’77, managing director of the Commonfund Institute, an institutional investment firm.
Yale School of Management finance professor Roger Ibbotson added that although equity markets have performed very well since 2009, they have started to weaken in the past few months, prompting speculation that the current market may be overvalued. The investments office would then want to allocate its assets elsewhere in order to maximize returns.
“[The Yale Investments Office] had exceptionally high returns, but it’s very difficult for them to continue with those very high returns,” Ibbotson said. “They don’t want to overall predict anything like that going forward, and they want to say so because they don’t want people to be disappointed when returns drop so much.”
Likewise, Andrew Lo ’80, a professor of finance at the Massachusetts Institute of Technology, said the same reasoning likely applies to Yale’s decreased allocation towards real estate. Lo added that since real estate has done well over the past few years, Yale may feel that the investment has run its course. Chinese real estate values have taken a hit over the last few months, which may have influenced Yale’s decision to reduce allocations to real estate.
Jarvis said Yale employs an investment practice known as having “dry powder,” which refers to keeping liquid assets in reserve for a potential future investment. Though the release does not distinguish the percentage of bonds compared to cash, Jarvis speculated that these assets are mostly cash or “very short-term bonds.” This is because Yale has typically had a low allocation to bonds and because investors are expecting interests rates to rise, which will drive the price of bonds down, Jarvis said.
“The Yale endowment feels that the investment opportunities it sees right now are not particularly compelling, and therefore it wants to have cash in the event that something comes along that is compelling and interesting,” Jarvis said.
Despite speculation, Lo said it is difficult for outside observers to ascertain the reasoning behind differences in asset allocation targets from year to year because the broad categories do not give any details of individual investments. But he also speculated that the University’s targeted increase in liquid assets may be related to the construction of the two new residential colleges, scheduled to be completed by fall 2017.
Furthermore, although the asset allocation targets fluctuate slightly from year to year, Jarvis said the allocations’ relative consistency has been successful in growing the endowment.
“They’re not sitting there and buying and selling the whole portfolio every day,” Jarvis said. “Even if you wanted to, a big thing like this can’t turn on a dime. You can see that they haven’t really made big changes over the last five years. The portfolio seems to work well within the ranges that it is.”
In the past 20 years, Yale’s endowment has grown from $4 billion to $25.6 billion.