Allen Chang

At a talk organized by the Council on Foreign Relations in November, Yale’s Chief Investment Officer David Swensen told the audience that, for the first time in his more than three decades in charge of Yale’s endowment, he had been trying to convince the University to lower the expected return on endowment. On Friday, in an email to the News, University Provost Ben Polak did not comment on whether the University has adjusted its expected return since November.

The timing of Swensen’s announcement was surprising. Just a month earlier, in October, Yale announced an 11.3 percent return for the year fiscal year that ended on June 30, 2017 — significantly above the University’s 8.25 percent expectation. According a 2016 presentation available on a University website, Yale’s endowment has to generate a yearly return of 8.25 percent to maintain its current size. Although there have been years when Yale failed to meet that target, such as during the 2008 financial crisis, average annualized returns during Swensen’s leadership are 13.5 percent, giving the University “a substantial cushion” for its budgetary assumption.

“I think, to some extent, we’re victims of our own success, because they’ll say, ‘oh, you’re just Chicken Little; the sky is falling, the sky is falling,’” Swensen said in November. “But, of course, you know, the returns have been generated in a pretty smooth fashion with that one exception in 2008–09.”

In his Friday email, Polak said the economic recoveries and bull markets that lifted Yale’s endowment over the last decade do not last forever, and many economists and investment professionals predict a sustained period of low returns in the future. A representative from the Yale Investments Office declined to comment for this story.

Although Polak did not comment on whether the University is actively considering adjusting the expected return, he did say the provost’s office has worked with each school and unit across the University as part of an annual financial review of how they would respond to a sustained economic downturn. Such “stress tests” have become a regular part of Yale’s annual budget planning, according to Polak.

“Our endowment spending policy smooths the inevitable ups and downs of investment returns from year to year, and also adjusts automatically to periods of faster growth or slower growth,” he said. “But if we were faced with a very long period of slower growth, we would need to adjust our spending down as a university over time.”

In his talk, Swensen hinted he is making progress toward that adjustment but said “the enormous amount of inertia” at places like Yale makes change hard — especially unpopular change.

Charles Skorina, an investment executive recruiter who runs a newsletter for institutional investors, said Swensen’s cautiousness is the mark of a good investment manager but that it would be understandable if the University were reluctant to adopt his suggestion.

“[Reducing expected return] always is in direct conflict to the people who want to spend money,” Skorina said. “I think Swensen and the office is trying to say ‘look guys, we got to be prudent. The endowment is for the next hundred years, not the next five.’”

Swensen joined Yale Investment Office in 1985.

Jingyi Cui |