If endowments were a collegiate sport, Yale’s performance in fiscal 2016 would have comfortably brought home the Ivy League title.
With all Ivies having reported their endowment performance for the past fiscal year by last Friday, Yale’s 3.4 percent return and Princeton’s 0.8 percent return were the only two positive performances among the eight schools. Columbia University was the only school with negative returns that posted a loss less than 1 percent, and Cornell University’s 3.3 percent loss was the worst among the Ivies.
“The [Yale] Investments Office really knows the industry and its key players and has developed effective methods under a very stable management,” said Roger Ibbotson, a hedge fund manager and emeritus finance professor at Yale School of Management.
Despite the fairly precipitous drop from last year’s 11.5 percent return — and a 20.2 percent return the year before — Yale’s endowment performance in fiscal 2016 stood head and shoulders above its peers in what has been widely recognized as a volatile investment environment. William Jarvis ’77, executive director of the Commonfund Institute, noted that low interest rates worldwide have led to low economic growth, and consequently made it difficult to realize gains from investments.
According to a report from the investment advisory company Wilshire Trust Universe Comparison Service, endowments with more than $500 million in assets saw a median result of a loss of 0.73 percent in fiscal 2016, even without accounting for the high fees collected by external fund managers. Another report from Cambridge Associates, a Boston-based investment advising firm, recorded an average loss of 2.7 percent across colleges and universities over the past year.
This year’s endowment performance results serve as further vindication for the advantages of what many financial experts have referred to as the “Yale Model,” an application of modern investment theory introduced by University Chief Investment Officer David Swensen and Senior Director Dean Takahashi ’80 SOM ’83 in 1985. The model involves relying mainly on external money managers and investing a comparatively high proportion of funds in illiquid asset classes such as venture capital, which can generate a higher rate of return. Endowments at two of the other three schools that have reported positive returns for fiscal 2016 so far — Princeton and the Massachusetts Institute of Technology — are led by former employees of the Yale Investments Office.
In contrast to Yale’s model, Harvard University, for instance, employs a “hybrid” model in which much of the school’s endowment is managed internally. Harvard’s investment office reported a 2 percent loss for fiscal year 2016 and recently hired its fourth new CEO in less than a decade.
The University of Oregon is the fourth school with more than $500 million in assets that reported positive endowment performances so far. In a Sept. 20 interview with Bloomberg Markets, Oregon Chief Investment Officer Jay Namyet suggested that the school’s 2.5 percent return for the year was partially due to serendipitous timing.
“Every once and a while a blind squirrel catches an acorn,” Namyet told Bloomberg. “That’s what it feels like happened here.”
According to Jarvis, in addition to the investment office’s strategic asset allocations and stability in leadership — Swensen has led the office for more than three decades — the University’s careful selection of external money managers provides a significant competitive advantage.
“Some institutional investors take a very arms-length approach to manager selection and basically treat it as if they were buying a product,” Jarvis said. “Yale is equally interested in the character of the people as well as their temperament.”
Both Jarvis and Ibbotson also noted the geographic advantage Yale has in comparison with schools located further away from major financial centers.
One day before reporting this year’s disappointing endowment performance, Cornell announced that its Office of University Investments would be relocating from Ithaca to New York City by late 2017.
“The Investment Committee believes over the long term the relocation to New York City gives us even better access to potential staff who might not be willing to move to Ithaca,” Cornell CFO Joanne DeStefano said in a Sept. 28 press release. “We’ve had great staff hires, but this move will expand the population of potential candidates. And it puts us closer to the world capital markets.”
In recent years, Bowdoin College has opened an investments office in New York City in addition to its location in Brunswick, Maine, and Dartmouth College’s main investments office is now in Boston — no longer Hanover.
While Jarvis said that Yale is fortunate to be located in the New York metropolitan area, Ibbotson added that University’s investment office has developed a reputation that makes the two-hour trip from New York City to Whitney Avenue worthwhile for investment professionals.
“Because we’ve been at this for a while and done so well, many managers are certainly willing to come to us,” Ibbotson said. “There’s a lot of incentive for these funds to be selected by Yale.”
Correction, Oct. 13: An earlier version of this graph misstated the year in which the data was from. The data was in fact from 2016, not 2015.