Yale endowment tops $7 bil. after decade of strong growth

NEW HAVEN, Conn. (U-WIRE) -- The Yale endowment has passed the $7 billion mark, according to figures released Monday by the Yale Investment Office. Although the year's return -- at 12.2 percent -- ranks nearly the lowest in the last half-decade, it was a better-than-average year in comparison to other universities' returns. In addition, the endowment has enjoyed an above-median 15 percent annualized investment return over the last decade. Yale analysts stressed that an overview of the endowment since 1989 is more important than this year's figures by themselves. Yale's 15 percent annualized return bested the median 13 percent returns of similar endowments, as calculated by the independent consulting firm of Cambridge Associates. Had Yale's investments followed the 13 percent rate, yesterday's endowment figure would be $1.2 billion lower. In addition to the 10-year overall upswing, this year's endowment performed well in terms of absolute dollars, earning $780 million. Although the percentage increase is less than that of last year, the endowment earned more than it spent and, also in light of Cambridge Associates figures, enjoyed above-median returns. The $780 million earned adds to last year's $6.6 billion endowment figure. The addition of $64 million in gifts to the University brought the endowment to its $7.2 billion benchmark, after adjusting for $256 million in spending. In the past half-decade, the endowment has nearly doubled from the 1994 value of $3.6 billion. The larger endowment may bring Yale a fourth-consecutive balanced budget. This year, the endowment supplies 22 percent of the operating budget, an amount set by Yale's custom-designed formula. Yale's endowment "spending rule" relies on averaging to insulate the annual budget from market fluctuations. By including the last year's expenditures in its formula, the spending rule takes into account the size of Yale's budget over the past three years in order to determine the projected endowment contribution to the next year's operating budget. Developed years ago by Yale economists, the rule limits annual endowment spending to the weighted average of 70 percent of the previous year's spending, adjusted for inflation, plus 30 percent of the targeted long-term 5 percent spending rate applied to the previous year's endowment. Therefore, one investment goal is to maintain annual endowment contributions by earning returns that beat the amount from the previous year's 5 percent spending rate. But more importantly, the investment office gears its investment strategies toward the long term in order to maintain operating independence from the strings usually attached to current income sources such as government grants, tuition and donations. Ten percent of the endowment -- specifically, its bond portfolio -- is managed internally. The rest is outsourced to independent groups. A decade ago, Yale allocated most of its assets to domestic equity and fixed-income investments. It has changed the policy -- by investing in private equity, real estate and natural resources -- in order to make the endowment less dependent on the performance of the stock market.