Yale's endowment grows by 12.3%, against Harvard's 10%

New York

YALE University's endowment, the world's second largest, grew 12.3 per cent in the most recent fiscal year to US$29.4 billion, slightly better than the 11.3 per cent it achieved in the previous year, its officials have said.

Yale announced its results three days after Harvard University said its endowment, the world's largest, had grown 10 per cent, to US$39.2 billion in FY2018, which ended June 30.

Like Harvard's returns, Yale's exceeded the 8.4 per cent gains that a typical 60-40 portfolio of Standard & Poor's 500-stock and aggregate bond index equities would have delivered over the same period, said Jeff Schwartz, president of Markov Processes International, a quantitative research and technology firm.

Like Harvard's, though, Yale's performance trailed results at prominent rivals like the Massachusetts Institute of Technology (MIT), whose endowment gained 13.5 per cent, and the University of Pennsylvania, which experienced a 12.9 per cent increase.

The endowments at both MIT and Penn are run by protégés of Yale's chief investment officer, David F. Swensen. He has overseen the university's endowment since 1985, pioneering a strategy of diversifying beyond stocks and bonds into alternative asset classes like hedge funds and private equity.

Last year, as bonds languished, that approach paid off. The Yale portfolio had roughly 26 per cent of its holdings in absolute-return funds, 18 per cent in venture capital and roughly 15 per cent each in foreign equity and leveraged buyouts, the university said. The rest was invested in real estate, bonds, natural resources and domestic equity.

Endowments are crucial to university budgets. In Yale's case, the endowment provided US$1.4 billion, or roughly 34 per cent, of net revenue, officials said in a news release.

Yale's results were notable because its strategy has drawn criticism in recent years as returns from equity markets have stayed strong and popular alternative investments like hedge funds have lagged. Over the past decade, the Yale endowment has had an average annual return of 7.4 per cent, compared with 8.1 percent for a typical 60-40 portfolio.

Mr Swensen's critics have argued that it would be better to stick with stocks and bonds and avoid the high fees tied to investing in hedge funds and private equity.

No less a figure than Warren E. Buffett has questioned the strategy. In 2016, he wrote in his closely-watched letter to Berkshire Hathaway investors that university endowments, like other "financial elites", were wasting money on high fees because they had "great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars".

Mr Swensen acknowledged the criticism in last year's endowment report, while also noting that Mr Buffett had agreed that a small number of investors had the intellect and character to excel while putting their money in alternative investments.

Mr Swensen noted in a statement on Monday that Yale's endowment had added US$33.3 billion more in value over the past 30 years than a 60-40 portfolio would have.

Charles Skorina, whose firm does executive searches for chief investment officers for non-profits and other institutions, said Yale and the rest of the 10 top university endowments with more than US$10 billion were doing well relative to simple stock-and-bond portfolios.

But, he added, "it has been getting harder for them to find outsize returns in private markets because it is tough to find enough opportunities that will make a significant difference at such large institutions".

Yale also said in its statement that it had kept its investments in illiquid assets to half the portfolio and had targeted a minimum allocation of 30 per cent of the endowment to market-insensitive assets. Even in a turbulent market turmoil, it suggested, the university would not have to sell illiquid assets at distressed prices to meet its needs.

Yale's endowment, like those of virtually all the other major universities except Harvard, has historically relied on outside money managers.

Harvard, which had managed a big chunk of its funds internally, is now shifting in that direction under a new chief investment officer, N. P. Narvekar. NYTIMES