Yale's endowment jumps ahead with new strategy

Yale's new investment strategy might be unusual compared with those of other educational institutions, but slow and steady could still win the race. The Yale Investment Office announced this week that the University's endowment reached $7.2 billion at the end of the last fiscal year, increasing from last year's total of $6.6 billion. The endowment's return of 12.2 percent ranked behind only Harvard and the University of Texas—and ahead of Princeton, Emory, and Stanford—according to the Chronicle of Higher Education.

Yale's investment strategy differs from those of other universities in that it invests less in domestic stocks and government bonds and far more in real estate and real assets such as oil, gas, and timber. "Ten to 15 years ago most of our endowment was in U.S. stocks and bonds, which makes you vulnerable to the U.S. stock market," a member of the Yale Investment Office, who wished to remain anonymous, explained. "We chose to move our investments to oil and gas, hedge funds, and foreign stocks."

COURTESY YALE INVESTMENTS OFFICE The Yale endowment's relative investment performance has increased considerably in recent years.

This explains why Harvard's investment return, which was also 12.2 percent net, was treated as a disappointment. Harvard's investment portfolio, which, at $14.4 billion, doubles Yale's, includes a third more U.S. stocks, including venture capital funds, which are more profitable and also more risky. Harvard's benchmark for the past five years has been a 21 percent return, far above Yale's average of 15 percent. "For most of this century, Harvard's endowment has been roughly twice the size of Yale's," Yale University President Richard Levin, GRD '74, explained. "This is understandable because Harvard has roughly twice as many students and alumni."

Levin, who is also an economics professor, defended Yale's investment strategy. "It is fair to say that Yale's investment office has been the pioneer in using many methods and strategies that are now considered the best practice. Yale was the first to diversify its portfolio into private equity investment. It was also the first to audit the management and accounting practices of the independent money managers it hires." One particularly lucrative investment has been the office building at 717 Fifth Avenue in New York City which has netted nearly 20 percent annual returns over the past 20 years.

Both Harvard and Yale manage their endowments conservatively. Both schools' financial managers have insisted on maintaining endowment value instead of using it on educational expenditures or lowering tuition. In a New York Times interview on Thurs., Oct. 7, Harvard President Neil Rudenstine said, "You have to make sure that the thing can last forever."

Yale is slightly less thrifty, however. Currently, Yale spends five percent of its total endowment value every year whereas Harvard has just this year started spending 4.5 percent, up from 3.65 percent. In 1998, Harvard also followed Yale in deciding to increase each student's financial aid package. Furthermore, this year, Harvard decided to start paying taxes to the town of Cambridge for the first time. Yale started paying taxes on its non-academic property in 1990. Its total tax payment for the 2000 fiscal year will exceed $2 million, making Yale the third-largest payer of real estate property taxes in New Haven.

This year, of the $1.24 billion Yale will spend on its operations, 22 percent will be drawn from the endowment. Over 50 percent of the $1.24 billion will go toward salary and benefits for the faculty and staff. Much of the endowment is restricted in that in can only be spent for the purpose for which it was donated.

As Yale alumni and friends are again beginning to reach for their checkbooks, the Investment, Development, and Provost's offices are looking ahead to another year of maintaining the endowment. John Dumont, TD '78, who gives faithfully to his alma mater every year, said, "To my mind the `value' or appropriateness of any university or college endowment should be judged by the degree to which it improves the quality and accessibility of education at that institution."

Yuka Igarashi contributed to this article.

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