耶鲁捐赠基金2001年（耶鲁投资办公室年度报告）

Endowment Market Value 1950–2001 $12 $10 $8 Billions $6 $4 $2 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Fiscal Year Contents 1. Introduction 2 2. The Yale Endowment 3 3. Investment Policy 6 4. Spending Policy 14 5. Investment Performance 16 6. Management and Oversight 18 A view of Harkness Tower to the right and Sterling Memorial Library to the left.

Introduction Following a number of years in which Yale posted excellent results in spite of its diversified portfolio, fiscal year 2001 marked a period in which diversification finally paid dividends. For the year ending June 30, 2001, the Yale Endowment enjoyed a return of 9.2 percent in an environment where the domestic stock market registered double-digit declines and most endowments suffered negative returns. Strong active management and a value orientation protected Yale from bearing the costs of the recent market downturn. During the past ten years, the Endowment grew from $2.6 billion to $10.7 billion. With annual net investment returns of 18.3 percent, the Endowment’s performance exceeded its benchmark and outpaced institutional fund indices. The performance stemmed from disciplined and diversified asset allocation policies, superior active management results, and strong capital market returns.

Spending from Endowment grew during the last decade from $95 million to $338 million, an annual growth rate of 13.5 percent. On a relative basis, Endowment contributions grew from 13 percent of total revenues in fiscal 1991 to 25 percent in fiscal 2001. Next year, spending will approach $405 million, or 28 percent of projected revenues. During the decade Yale’s spending and investment policies provided handsome growth in cash flow to the operating budget for current scholars while preserving Endowment purchasing power for future generations.

Endowment Growth Outpaces Inflation 1950–2001 $12 $10 $8 Actual Endowment Billions $6 $4 Endowment Target $2 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Fiscal Year 1950 Endowment Inflated Post-1950 Gifts Inflated Actual Endowment Market Value The Yale Endowment Totaling $10.7 billion on June 30, 2001, the Yale Endowment is an investment pool composed of thousands of funds with a variety of designated purposes and restrictions. Approximately 79 percent of funds are true endowment, gifts restricted by donors to provide long-term funding for designated purposes. The remaining 21 percent of funds are quasi-endowment, monies which the Yale Corporation chooses to invest and treat as endowment.

Donors frequently specify a particular purpose for gifts, creating endowments to fund professorships, teaching, and lectureships (23 percent), scholarships, fellowships, and prizes (18 percent), maintenance (4 percent), books (3 percent), and miscellaneous specific purposes (30 percent). The remaining funds (22 percent) are unrestricted. Thirty-four percent of the Endowment benefits the overall University, with the remaining funds focused on specific units including the Faculty of Arts and Sciences (31 percent), the Professional Schools (21 percent), the library (8 percent), and other entities (6 percent).

Although distinct in purpose or restriction, Endowment funds are commingled in an investment pool and tracked with unit accounting much like a large mutual fund. Endowment gifts of cash, securities, or property are valued and exchanged for units which represent a claim on a portion of the whole investment portfolio. In fiscal 2001, the Endowment provided $338 million, or 25 percent, of the University’s $1,353 million current fund income. Other major sources of revenues were grants and contracts of $382 million (28 percent), net tuition, room, and board of $200 million (15 percent), medical services of $200 million (15 percent), gifts and bequests of $96 million (7 percent), publications income of $22 million (2 percent), and other income of $114 million (8 percent).

Endowment Fund Allocation Operating Budget Revenue in Millions Fiscal Year 2001 Fiscal Year 2001 Maintenance 4% Tuition, Room, Board $200 Medical Services $200 Unrestricted 22% Professorships 23% Publications $22 Other $114 Endowment $338 Books 3% Gifts & Bequests $96 Miscellaneous Specific Purposes 30% Scholarships 18% Grants & Contracts $382 Yale’s Athletics Endowments Creating endowments to support Yale endowment gift to support athletic came about in 1924. Endowed support athletics represents an idea that took programs for women. for the university crew activities took some time to catch on. While donors Many endowment gifts focus on shape in 1958 using proceeds from the began endowing scholarships and central athletic needs, granting the rent, sale, and Government takeover of professorships in the eighteenth century, University flexibility in the use of funds. the site of the original Adee Boathouse, not until 1923 did Yale receive its first The earliest of these, loosely worded for which had been used for Yale crew. athletics endowment: the Ledyard “encouraging the art of swimming,” A more recent gift, in 1997, provides Mitchell Fund (named for a member of the Class of 1904) that provides an award to the winner of a punting competition among varsity football players. From that modest beginning until World War ii, only eight endowments in support of athletics were established at Yale, consisting of modest-sized funds by today’s standards, each generating a few hundred dollars a year to finance student prizes for prowess in football, golf, swimming, tennis, or track.

Since World War ii, donors have endowed sixty-one funds for athletics— an average of about one per year. The most popular sports, as measured by the number and value of the endowments they inspired, are crew, football, golf, hockey, and swimming—with at least six funds apiece. Baseball and lacrosse claim three funds each, while basketball accounts for two, and soccer boasts only one endowed fund.

The best-endowed Yale sport is not Tim Taylor, the Malcolm G. Chace Head Coach of Men’s Hockey, enters his 24th year at Yale with an the one that attracts the biggest crowds. impressive record, including six Ivy League championships. The position was endowed in 1997 by Malcolm G. Chace iii ’56 in honor of his grandfather, Class of 1896s, who captained the very first Yale ice hockey team. The crew teams lead the pack with about a fifth of the total athletics endowment. Football ranks second, with about 16 percent of the total (counting a few funds that are split between football and another activity).

None of the other sports is even close to those two; endowed funds for golf make up about 8 percent of the total, hockey about 5 percent, and all the others lag far behind.

Endowments are not the only form that financial contributions can take, of course. In fact, Yale athletes have enjoyed generous assistance from numerous alumni “Y” Associations, each of which provides regular current use support for its favorite sport.

The nature of endowment gifts for Yale athletics has changed along with the evolving character of the University.

Coeducation at Yale brought about one particularly noteworthy change. In 1984 a group of Yale alumni and friends created an endowment for women’s crew. In 1989, G. Harold Welch, after Frank Keefe, head coach of men’s swimming for the past nineteen years, shown with Yale Athletics Director Thomas Beckett. Mr. Keefe holds the position of Robert J. H. Kiphuth Director of Swimming, thanks to an sending four sons to Yale (Classes of endowment created by Gordon B. Hattersley ’52 in 1997. The title honors Kiphuth, Yale’s legendary swimming 1950, 1953, 1958, and 1961), made an coach from 1918 to 1963.

general support for Yale baseball.

Some sports that do not currently benefit from Endowment support seek to join the club of those that do.

Supporters of Yale squash recently initiated an effort to create an endowment for the general support of the squash program.

In recent years Yale inspired gifts for athletic endowments similar to those that support central academic activity.

While Yale does not award financial aid on the basis of anything except need, it has always been possible for donors who endow undergraduate scholarships to request that awards from their endowments go to athletes when possible, sometimes even in a specific sport, provided always that the student selected meets the basic criterion of financial need. The University solicited and received endowments for the Women’s crew today enjoys regular support from a general-purpose endowment fund established in 1984 with permanent upkeep of certain athletic contributions from many Yale graduates and friends. The endowment helps support travel, general operations, facilities, including maintenance of the and post-season rowing. Contributions were solicited in a 1981 letter from George Pew ’58, which allowed for a five-year pledge period so that younger alumnae could maximize their gifts. Gales Ferry Boathouse, the Ingalls Hockey Rink, and the Yale Golf Course.

Yale reached a milestone in 1988 when an alumnus followed the long-established model for endowing faculty chairs and created the first endowed head coach position at Yale: the Joel E.

Smilow ’54 Coach of Football, a position first filled by Carm Cozza and now by Jack Siedlecki. Similar gifts have led to the naming of Tim Taylor as the Malcolm G. Chace (1896s) Head Coach of Men’s Hockey and Frank Keefe as the Robert J. H. Kiphuth Director of Swimming.

In 1996, when asked by a journalist how a university like Yale retains its top ranking, President Richard C. Levin pointed to several factors, including the independence that comes from a strong Endowment. Today, thanks to Yale’s generous benefactors, athletic activities enjoy some of the same secure Jack Siedlecki, shown during one of his regular post-game talks with the Yale varsity football team, is the second permanent funding as the University Joel E. Smilow ’54 Coach of Football. Created in 1988, the position was held until 1996 by coach Carm Cozza, whose long Yale career included ten Ivy championships. Yale quarterback Peter Lee ’02 appears to the right of as a whole. Coach Siedlecki.

Investment Policy Yale’s portfolio is structured using a combination of academic theory and informed market judgment. The theoretical framework relies on mean-variance analysis, an approach developed by Nobel laureate Harry Markowitz while he was at Yale’s Cowles Foundation. Using statistical techniques to combine expected returns, variances, and correlations of investment assets, the analysis estimates expected risk and return profiles of various asset allocation alternatives and tests the sensitivity of the results to changes in input assumptions.

Because investment management involves as much art as science, qualitative considerations play an extremely important role in portfolio decisions. The definition of an asset class is quite subjective, requiring precise distinctions where none exist. Returns, risks, and correlations are difficult to forecast. Historical data provide a guide, but must be modified to recognize structural changes and compensate for anomalous periods. Finally, quantitative measures have difficulty incorporating factors such as market liquidity or the influence of significant, low-probability events.

The combination of quantitative analysis and market judgment employed by Yale produces the following portfolio: June Current Asset Class 2001 Target Domestic Equity 15.5% 15.0% Fixed Income 9.8 10.0 Absolute Return 22.9 22.5 Foreign Equity 10.6 10.0 Private Equity 18.2 25.0 Real Assets 16.8 17.5 Cash 6.2 0.0 Yale Endowment Target Asset Allocation June 30, 2001 Domestic Equity 15.0% Foreign Equity 10.0% Fixed Income 10.0% Private Equity 25.0% Real Assets 17.5% Absolute Return 22.5% The target mix of assets produces an expected real (after inflation) long-term growth rate of 6.8 percent with a risk (standard deviation of returns) of 11.9 percent. Primarily because of the temporary holdings in cash, the actual allocation produces a portfolio expected to grow at 6.1 percent with a risk of 10.8 percent. The University’s measure of inflation is based on a basket of goods and services specific to higher education that tends to exceed the Consumer Price Index by approximately one percent.

The need to provide resources for current operations as well as preserve purchasing power of assets dictates investing for high returns, causing the Endowment to be biased toward equity. In addition, the University’s vulnerability to inflation further directs the Endowment away from fixed income and toward equity instruments. Hence, 90 percent of the Endowment is targeted for investment in some form of equity, through holdings of domestic and international securities, real assets, and private equity. Over the past fifteen years, Yale has reduced dramatically the Endowment’s dependence on domestic marketable securities by reallocating assets to nontraditional asset classes. In 1986, approximately 65 percent of the Endowment was committed to U.S. stocks, bonds, and cash. Today, target allocations call for 25 percent in domestic marketable securities, while the diversifying assets of foreign equity, private equity, absolute return strategies, and real assets dominate the Endowment, representing 75 percent of the target portfolio.

The heavy allocation to nontraditional asset classes stems from their return potential and diversifying power. Today’s actual and target portfolios have significantly higher expected returns and lower volatility than the 1986 portfolio. Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management. The Endowment’s long time horizon is well suited to exploiting illiquid, less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber, and real estate.

Asset Class Yale’s six asset classes are defined by differences in their expected response to economic conditions, such as price inflation or changes Characteristics in interest rates, and are weighted in the Endowment portfolio by considering risk-adjusted returns and correlations. The University combines these assets in such a way as to provide the highest expected return for a given level of risk.

Domestic Equity Finance theory predicts that equity holdings will generate returns superior to those of less risky assets such as bonds and cash. The predominant asset class in most endowments and other U.S. institutional portfolios, domestic equities represent a large, liquid, and heavily researched market. While the average educational institution invests 43.3 percent of assets in domestic equities, Yale’s target allocation to this asset class is only 15.0 percent. The domestic equity portfolio has an expected real return of 6.0 percent with a standard deviation of 20.0 percent. The Wilshire 5000 Index serves as the portfolio benchmark.

Despite recognizing that the U.S. equity market is highly efficient, Yale elects to pursue active management strategies, aspiring to outperform market indices by a few percentage points annually. Because superior stock selection provides the most consistent and reliable opportunity for generating excess returns, the University favors managers with exceptional bottom-up fundamental research capabilities. Managers searching for out-of-favor securities often find stocks that are cheap in relation to current fundamental measures such as book value, earnings, or cash flow. Yale’s managers tend to overweight small-capitalization stocks, as they are less efficiently priced and offer greater opportunities to add value through active management. Recognizing the difficulty of outperforming the market on a consistent basis, Yale searches for exceptional managers with high integrity, sound investment philosophies, strong track records, superior organizations, and sustainable competitive advantages.

Fixed Income Fixed income assets generate stable flows of income, providing greater certainty of nominal cash flow than any other Endowment asset class. The bond portfolio creates substantial diversification for the Endowment, having a low correlation to other asset classes, and provides a hedge against financial accidents or periods of unanticipated deflation. While educational institutions maintain a substantial allocation to domestic bonds and cash, averaging 23.1 percent, Yale’s target allocation to fixed income is a relatively low 10.0 percent of the Endowment. Bonds have an expected real return of 2.0 percent with risk of 10.0 percent. The Lehman Brothers Government Bond Index (lbgi) serves as the portfolio benchmark. Yale is not particularly attracted to fixed income assets, as they have the lowest historical and expected returns of the six asset classes comprising the Endowment. In addition, the government bond market is arguably the most efficiently priced asset class, offering few opportunities to add significant value through active management. Based on skepticism of active fixed income strategies Active Management of Domestic Equities In spite of a healthy respect for Yale’s overweighing of small- life cycle, Yale monitors relationships efficiency in the pricing of domestic capitalization stocks stems from a carefully to ensure that interests equity securities, Yale attempts to belief that larger stocks tend to be continue to coincide, that assets under add incremental returns by employing better followed and more efficiently management remain at reasonable outstanding domestic equity managers priced than small-capitalization stocks, levels, and that managers remain across an array of market sectors and which offer better opportunities for motivated and capable of earning strategies. Over the past two fiscal superior managers to generate excess substantial returns. years security selection generated returns. In addition, studies indicate The Investments Office monitors extraordinary returns as the University that over the very long term small- the size of actively managed portfolios, outperformed the market by a capitalization stocks tend to generate shifting capital both to rebalance cumulative 56 percentage points. slightly higher risk-adjusted returns market sector exposure and to take The efforts of Yale’s external active than do large-capitalization stocks. advantage of tactical opportunities. managers, aided by a tailwind favoring Thus, small-capitalization stocks have Capital allocation to individual value-oriented and small-capitalization a prevailing, somewhat unreliable, managers takes into consideration the securities, led to this outstanding result. wind at their back. sector exposures of the domestic equity As a consequence of the domestic When engaging active managers, portfolio, the degree of confidence equity portfolio’s unconventional Yale structures relationships that align Yale possesses in a manager, and the structure, Yale experienced significant the University’s interests with the appropriate asset size for a particular underperformance preceding the recent manager’s. Too many money managers strategy. When the University perceives success. From July 1, 1997 to June 30, profit by gathering assets at the expense compelling undervaluation in a sector of 1999, a period when the market favored of generating strong investment returns. the market, Yale may allocate additional large-capitalization growth stocks, the High levels of side-by-side investment capital and, perhaps, hire new managers University dropped 18 percentage points contribute to creating coincidence of to take advantage of the opportunity. relative to the market. Only by sticking interest, as does a manager’s ethical Yale’s domestic equity portfolio with an uncomfortable, contrarian desire to serve the client’s interest. contains a group of intelligent and position did the University ultimately Yale often develops new investment dedicated managers with high integrity, manage to benefit from its unusual management relationships with sound investment philosophies, strong portfolio, with a cumulative promising “young and hungry” track records, superior organizations, outperformance of nearly 33 percentage principals or with an experienced and competitive advantages. In spite of points over the past four years. group working independently for the the difficulty of identifying mispriced In constructing the domestic equity first time. Newer organizations typically securities, with a sufficiently long time portfolio, Yale pays little attention to have small amounts of assets under horizon the University should benefit sectoral allocations. In fact, the current management and something to from the efforts of its domestic equity portfolio consists of a variety of prove. As investment management managers. specialists seeking to apply in-depth organizations progress through their knowledge to concentrated portfolios of securities. The aggregation of individual manager portfolios focused on energy, financials, biotechnology, real estate, Cumulative Value Added by Yale Domestic Equity Managers and technology, along with a number 1991–2001 of less-specialized managers, bears little resemblance to broad-based market $550 indexes. While such a portfolio almost guarantees short term deviation from $450 market returns, the focused application of deep knowledge to the security $350 selection process sows the seeds for longer term investment success. $250 Millions Yale’s portfolio typically favors value and small-capitalization stocks. Value $150 stocks, securities that are cheap in relation to fundamental measures such $50 as book value, earnings, or cash flow, generally outperform the market over -$50 the long term, albeit with higher volatility of returns. Patient investors -$150 reap rewards for taking uncomfortable -$250 positions in out-of-favor sectors and 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 securities.

Relative to Wilshire 5000, net of fees.

and belief in the efficacy of a highly structured approach to bond portfolio management, the Investments Office chooses to manage Endowment bonds internally. In spite of an aversion to market timing strategies, credit risk, and call options, Yale manages to add value consistently in its management of the bond portfolio. Creative, patient portfolio management leads to superior investment results without impairing the portfolio protection characteristics of high-quality fixed income.

Foreign Equity Investments in overseas markets provide diversification along with opportunities to earn above-market returns through active management. Foreign equity, with a 10.0 percent target allocation, gives the Endowment exposure to the global economy. Because Yale has significant commitments to nontraditional diversifying assets, the University’s allocation to foreign equities is lower than the average educational institution’s allocation of 12.4 percent. Emerging markets, with their rapidly growing economies, are particularly intriguing, causing Yale to target one-half of its foreign portfolio to developing countries. Expected real returns for emerging equities are 8.0 percent with a risk level of 30.0 percent, while developed equities are expected to return 6.0 percent with risk of 20.0 percent. The portfolio is evaluated relative to a composite benchmark of 50 percent developed markets, measured by the Morgan Stanley Capital International (msci) Europe, Australia, and Far East Index, and 50 percent emerging markets, measured by the msci Emerging Markets Free Index.

Yale’s investment approach to foreign equities emphasizes active management designed to uncover attractive opportunities and exploit market inefficiencies. As in the domestic equity portfolio, Yale favors managers with impressive bottom-up fundamental research capabilities. Capital allocation to individual managers takes into consideration the country allocation of the foreign equity portfolio, the degree of confidence Yale possesses in a manager, and the appropriate asset size for a particular strategy. In addition, Yale attempts to exploit compelling undervaluations in countries, sectors, and styles by allocating additional capital and, perhaps, by hiring new managers to take advantage of the opportunities.

Absolute Return In October 1989, Yale became the first institutional investor to define absolute return strategies as an asset class, beginning with an allocation of 4.5 percent. Designed to provide significant diversification to the Endowment, absolute return investments seek to generate high long-term real returns by exploiting market inefficiencies. Today, the portfolio is targeted to be 22.5 percent of the Endowment. In contrast, the average educational institution allocates only 9.1 percent to such strategies. Absolute return strategies are expected to generate real returns of 7.0 percent, representing a slight premium to those expected from domestic equities, notwithstanding a lower risk level of 15.0 percent. Unlike traditional domestic and foreign equity investments, absolute return investments provide returns largely independent of overall market moves. Over the twelve-year life of the asset class, the portfolio exceeded expectations, returning 12.1 percent per year with low risk (5.7 percent standard deviation) and essentially no correlation to domestic stock and bond returns.

Yale’s absolute return portfolio consists primarily of marketable securities hedged against broad market moves. Slightly less than half of the portfolio is dedicated to event-driven strategies, which rely on a very specific corporate event, such as a merger, spin-off, or bankruptcy restructuring to achieve a target price. The remaining portion of the portfolio encompasses value-driven and opportunistic strategies, which involve identifying an asset or security with a price that diverges from its underlying economic value.

Private Equity Private equity offers extremely attractive long-term risk-adjusted return characteristics, stemming from the University’s strong stable of value-added managers that exploit market inefficiencies. Yale’s private equity investments include participation in venture capital and leveraged buyout partnerships. The University’s allocation to private equity is 25.0 percent, far exceeding the 6.1 percent allocation of the average educational institution. In aggregate, the private equity portfolio is expected to generate real returns of 12.5 percent with risk of 25.0 percent.

Yale’s private equity program, one of the first of its kind, is regarded as among the best in the institutional investment community. The University is frequently cited as a role model by other investors pursuing this asset class. Since inception, private equity investments have generated a 32.9 percent annualized return to the University. The success of Yale’s program led to a 1995 Harvard Business School case study, “Yale University Investments Office,” by Professors Josh Lerner and Jay Light. The popular case study was updated in 1997 and 2000.

Yale’s private equity assets concentrate on partnerships with firms that emphasize a value-added approach to investing. Such firms work closely with portfolio companies to create fundamentally more valuable entities, relying only secondarily on financial engineering to generate returns. Investments are made with an eye toward long-term relationships—generally, a commitment is expected to be the first of several—and toward the close alignment of the interests of general and limited partners. Yale avoids funds sponsored by financial institutions because of the conflicts of interest and staff instability inherent in such situations.

Liquidity Many market participants place trade. In return, owners receive higher extraordinary value on liquidity. returns. In July, the Investments Office Players seek the ability to trade out of bought pefco 5-5/8 bonds set to yesterday’s loser and acquire today’s hot mature on March 15, 2006 at a yield prospect, to sell during a market panic of 5.18 percent. Compared to U.S. and buy into a bull market. Managers Treasuries maturing on the same date, responsible for large sums of money the pefcos provided an incremental focus on heavily traded securities, yield of 57 basis points. Earning a allowing movement in and out of spread over U.S. Treasuries for U.S. positions with minimal market impact. Treasury equivalent credit makes sense.

However, in pursuing more-liquid Investments in companies backed by securities investors miss out on the venture capital illustrate the rewards of opportunity to establish positions at accepting illiquidity. In December 1997, meaningful discounts to fair value in eToys, an online retailer, received its less frequently traded assets. first round of private financing, valuing Highly liquid large-capitalization the company at $15 million. Obviously, stocks receive extensive coverage, as a privately held start-up, shares generating enormous amounts of public of the concern exhibited extreme data. The widespread availability of illiquidity. When eToys went public information contributes to an on May 20, 1999, the price quadruped environment in which investors have on the first day of trading, and the difficulty obtaining an analytical British Economist John Maynard Keynes company’s value skyrocketed to $7.8 (1883–1946), whose approach to managing edge. In contrast, less-liquid small- billion, representing an extraordinary economic cycles continues to influence capitalization stocks have less available governments today, warned against the “fetish gain for the original private investors. information, creating an opportunity to of liquidity” in the realm of investment. Liquidity of securities tends to be rewarded for uncovering nuggets of increase and decrease as the popularity data relevant to valuation. Rewarding the doctrine that it is a positive virtue of the underlying assets waxes and investments tend to reside in dark on the part of investment institutions wanes. On the day when eToys went corners, not in the glare of floodlights. to concentrate their resources upon the public, approximately $1 billion worth The liquidity so many investors seek holding of ‘liquid’ securities. It forgets of shares traded. Not even two years tends to disappear when most needed. that there is no such thing as liquidity later, when eToys filed for bankruptcy, In the crash of October 1987, market of investment for the community as a trading volume amounted to only makers possessed neither the resources whole.” around $100,000. Clearly, a mindset nor the willingness to absorb the In fact, less frequently traded assets that avoids illiquid start-ups and prefers extraordinary volume of selling demand can provide good returns relative to highly liquid ipos represents a poor that materialized. The liquidity that liquid ones. pefco bonds, obligations foundation for investment strategy. investors paid dearly for evaporated in of the Private Export Funding Once illiquid private investments the panic selling on October 19, just Corporation, enjoy the full faith and succeed, liquidity follows as investors when the ability to make an immediate credit backing of the U.S. Government. clamor for shares of the hot initial sale might have had value. Because pefco bonds are issued in public offering. In contrast, if public, J. M. Keynes argued in The General smaller amounts and receive less liquid investments fail, liquidity dries Theory that “of the maxims of attention than more liquid U.S. up as a company falls from favor or orthodox finance none, surely, is more Treasury bonds, buyers can expect declares bankruptcy. Managers should anti-social than the fetish of liquidity, that they will be more difficult to fear failure, not illiquidity.

Average Endowment Liquidity Yale Endowment Liquidity June 30, 2001 June 30, 2001 Quasi-Liquid Assets 9.1% Illiquid Assets 8.9% Illiquid Assets 35.0% Liquid Assets 42.1% Liquid Assets—Marketable Equity, Bonds, and Cash Quasi-Liquid Assets 22.9% Liquid Assets 82.0% Quasi-Liquid Assets—Absolute Return Illiquid Assets—Private Equity and Real Assets Real Assets Real estate, oil and gas, and timberland share common characteristics: sensitivity to inflationary forces, high and visible current cash flow, and opportunity to exploit inefficiencies. This group of real asset investments provides attractive return prospects, excellent portfolio diversification, and a hedge against unanticipated inflation. Yale’s 17.5 percent long-term policy allocation significantly exceeds the average educational institution’s commitment of 2.8 percent. Expected real returns are 5.5 percent with risk of 15.0 percent.

The real assets portfolio plays a meaningful role in the Endowment as a powerful diversifying asset and a generator of strong returns. Real assets provide relative stability to the Endowment during periods of public market turmoil, at the price of an inability to keep pace during bull markets. Pricing inefficiencies in the asset class and opportunities to add value allow superior managers to generate excess returns over a market cycle. Since its inception in 1978 the portfolio has returned 15.5 percent per annum.

The illiquid nature of real assets combined with the expensive and time-consuming process of completing transactions create a high hurdle for casual investors. Real assets provide talented investment groups with the opportunity to generate strong returns through savvy acquisitions and managerial expertise. A critical component of Yale’s investment strategy is to create strong, long-term partnerships between the Investments Office and its investment managers. In the last decade Yale played a critical role in the development and growth of more than a dozen organizations involved in the management of real assets.

Asset Allocations Yale Educational University Institution Mean Domestic Equity 15.5% 43.3% Fixed Income 9.8 23.1 Foreign Equity 10.6 12.4 Absolute Return 22.9 9.1 Private Equity 18.2 6.1 Real Assets 16.8 2.8 Cash 6.2 3.2 Data as of June 30, 2001.

Spending Policy The spending rule is at the heart of fiscal discipline for an endowed institution. Spending policies define an institution’s compromise between the conflicting goals of providing substantial, sustainable support for current operations and preserving purchasing power of Endowment assets. The spending rule must be clearly defined and consistently applied for the concept of budget balance to have meaning.

Yale’s policy is designed to meet two competing objectives. The first is to release substantial current income to the operating budget in a stable stream, since large fluctuations are difficult to accommodate through changes in University activities or programs. The second is to protect the value of Endowment assets against inflation, allowing programs to be supported at today’s level far into the future.

Yale’s spending rule attempts to achieve these two objectives by using a long-term spending rate of 5 percent combined with a smoothing rule which adjusts spending gradually to changes in Endowment market value. The amount released under the spending rule is based on a weighted average of prior spending adjusted for inflation (70 percent weight) and the amount which would have been spent using 5 percent of current Endowment market value (30 percent weight).

The spending rule has two implications. First, by incorporating the previous year’s spending the rule eliminates large fluctuations, enabling the University to plan for its operating budget needs. Over the last fifty years, annual changes in spending have been only half as volatile as annual changes in Endowment value. Second, by adjusting spending toward the long-term rate of 5 percent of Endowment, the rule ensures that spending levels will be sensitive to fluctuating Endowment levels, providing stability in long-term purchasing power.

Spending Growth Outpaces Inflation 1950–2001 $400 $350 Actual Spending $300 $250 Millions $200 $150 Spending Target $100 $50 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 1950 Spending Inflated Target Spending from Post-1950 Gifts Inflated Actual Spending Spending from the Endowment increased at a hearty pace during the past decade despite the conservative nature of Yale’s spending policy, with pay-out rising from $95 million in fiscal 1991 to $338 million in fiscal 2001. Consequently, Endowment spending plays an ever-greater role in the budget, having risen from 13 percent of expenditures in 1991 to 25 percent in 2001.

Endowment Spending and Investment Goals Educational endowments seek to Because of the increased dependency term stability. From an investment balance the long-term goal of preserving of the operating budget on Endowment perspective, Yale will choose less the purchasing power of assets and the support, the University recently changed volatile asset allocations, emphasizing intermediate-term goal of supporting the definition of a significant decline in the importance of diversification in academic activities through distributions support for the operating budget from a portfolio construction. With regard to to the operating budget. Weighing the real reduction of 25 percent over a five- the spending rule, the University will preservation of purchasing power of year period to a real reduction of 10 examine the possibility of changing the assets too heavily penalizes current percent over the same period. Fifteen weights that determine the tradeoff scholars; valuing too highly the stability years ago, a 25 percent reduction in between spending stability and of flows of income to the operating Endowment support to the operating purchasing power preservation. budget imposes costs on future budget translated into approximately Of course, as long as investment generations. $14 million, or around 3 percent returns remain strong, the stability of Over the past fifteen years, Yale’s of the operating budget. Next year, Endowment flows to the operating dependence on Endowment support because of the increased role of budget poses no problem. Only if the grew dramatically. During the fiscal Endowment support, a 10 percent Endowment experiences negative year ending June 30, 2002, spending reduction in Endowment spending returns do questions arise regarding from the Endowment will total would translate to about $40 million, the stability of support for operations. approximately $405 million, or roughly equivalent to 3 percent of the Fortunately, strong performance of 28 percent of the University budget. operating budget. Endowment investments and generous Budgetary projections show Endowment Lowering the threshold in the donations from our alumni have income amounting to 36 percent of definition of a significant decline in enabled the Yale Endowment to provide the budget by fiscal 2009. In contrast, operating budget support biases ever-increasing flows to the operating during the fiscal year ending June 30, Endowment portfolio choices and budget while maintaining purchasing 1987, spending from the Endowment spending rule structure toward shorter- power of assets for future generations. was $57 million, representing only 11 percent of revenues.

To assess the effects of various investment and spending policies on the Endowment, the Investments Office employs simulations to evaluate a range of policy combinations. Using “Monte Carlo” techniques, random numbers are converted to portfolio return patterns that are consistent with assumed risk and return characteristics for the various classes. The two criteria used in the simulations to analyze the results of various policies are: (1) the likelihood of a significant, sustained drop in support for the operating budget; and (2) the likelihood of a dramatic reduction in Endowment purchasing power. For the first fifteen years of our analysis, a significant decline in support for the operating budget was defined as a real decrease of 25 percent over a five-year Nearly one-fourth of the Yale Endowment supports teaching, sometimes through faculty chairs. period and a dramatic decline in Professor Steven B. Smith, the Alfred Cowles Professor of Political Science (and Master of Branford College), shown teaching a Yale College class, is the sixth incumbent of the chair endowed in 1927 purchasing power was defined as a real “to advance the study of government” as practiced in the United States. The donors, Philip Battell decrease of 50 percent over a fifty-year Stewart and the Cowles family, intended their gift to serve as a memorial to Alfred Cowles, Sr. and, period. besides teaching, to provide for a book collection and a research center “at which communities and students may find wise direction in solving problems of practical government.”

Investment Performance Yale’s investment performance has excelled in recent years. Over the ten-year period ending June 30, 2001, the Endowment earned an annualized 18.3 percent return, net of fees, placing it in the top one percent of large institutional investors. Endowment outperformance is attributable to sound asset allocation policy and superior active management.

Yale’s long-term superior performance relative to its peers and benchmarks created substantial wealth for the University. Over the ten years ending June 30, 2001, Yale added $5.1 billion relative to its composite benchmark and an estimated $4.6 billion relative to a broad universe of college and university endowments.

Performance by Yale’s long-term asset class performance continues to be strong. In the past ten years every asset class outperformed benchmark levels. Asset Class For the decade ending June 30, 2001, the domestic equity portfolio returned an annualized 19.6 percent, outperforming the Wilshire 5000 Index by 5.0 percent per year. Active managers have added value to benchmark returns primarily through stock selection. Yale’s internally managed fixed income portfolio earned an annualized 8.9 percent over the past decade, outpacing the Lehman Brothers Government Bond Index by 1.1 percent per year. By making astute security selection decisions and accepting illiquidity, the Endowment benefited from excess returns without incurring material credit or option risk.

Relative Investment Performance of the Yale Endowment Growth of $1,000 from 1991 to 2001 $6 $5,370 $5 $4 $3,291 Thousands $3 $2 $1,392 $1 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Fiscal Year Yale Endowment Mean of Broad Universe of Colleges and Universities Inflation Over the past decade, the absolute return portfolio has produced an annualized 12.9 percent, exceeding its benchmark of University inflation plus 8.0 percent percent by 1.1 percent per year. Absolute return results exhibited essentially no correlation to traditional marketable securities.

The foreign equity portfolio generated an annual return of 9.4 percent over the ten-year period, outperforming its composite benchmark by 3.8 percent per year. The portfolio’s excess return is due to effective security selection and country allocation by active managers.

Results from Yale’s nonmarketable assets demonstrate the value of effective active management. Private equity returned 35.3 percent annually over the last ten years, surpassing its benchmark of University inflation plus 10 percent by 21.5 percent per year. Since inception in 1973, the private equity program has returned an astounding 32.9 percent per annum.

Real assets generated a 13.4 percent annualized return over the ten-year period, outperforming the benchmark of University inflation plus 6.0 percent by 6.1 percent per year. Yale’s outperformance is due to the successful exploitation of market inefficiencies and timely pursuit of contrarian investment strategies.

Asset Class Returns Relative to Benchmarks 1991–2001 40% Domestic Foreign Fixed Real Private Absolute Equity Equity Income Assets Equity Return Yale Asset Class Benchmark Annualized returns net of fees.

Real assets consists only of real estate prior to 1999.

Management and Since 1975, the Yale Corporation Investment Committee has been Oversight responsible for oversight of the Endowment, incorporating senior-level investment experience into portfolio policy formulation.

6 The Investment Committee consists of at least three Fellows of the Corporation and other persons who have particular investment expertise. The Committee meets quarterly, at which time members review asset allocation policies, Endowment performance, and strategies proposed by Investments Office staff. The Committee approves guidelines for investment of the Endowment portfolio, specifying investment objectives, spending policy, and approaches for the investment of each asset category. Twelve individuals currently sit on the Committee.

Investment Committee Charles D. Ellis ’59, Chairman Holcombe T. Green, Jr. ’61 Senior Adviser Principal Greenwich Associates Green Capital Investors, L.P.

Herbert M. Allison, Jr. ’65 Richard C. Levin ’74 PH.D. President and CEO President Alliance for Lifelong Learning, Inc. Yale University James Allwin ’74 William I. Miller ’78 President Chairman AETOS Capital Irwin Financial Corporation G. Leonard Baker ’64 Theodore P. Shen ’66 Managing Director Former Chairman Sutter Hill Ventures DLJ Capital Markets Joshua Bekenstein ’80 John L. Thornton ’80 MPPM Managing Director President and Bain Capital Co-Chief Operating Officer Goldman Sachs International Robert L. Culver Vice President for Finance Douglas A. Warner iii ’68 and Administration Chairman Yale University J.P. Morgan Chase & Co.

The Exhibition Corridor in Sterling Memorial Library.

The Investments Office manages the Endowment and other University financial assets, and defines and implements the University’s borrowing strategies. Headed by the Chief Investment Officer, the Office currently consists of fourteen professionals.

Investments Office David F. Swensen ’80 ph.d. Michael E. Finnerty Chief Investment Officer Senior Associate Dean J. Takahashi ’80, ’83 mmpm Celeste P. Benson Senior Director Senior Portfolio Manager Alexander C. Banker Randy Kim ’98 Director Senior Financial Analyst Alan S. Forman Ana Yankova Director Senior Financial Analyst Timothy R. Sullivan ’86 Kimberly B. Sargent ’00 Director Financial Analyst Kenneth R. Miller ’71 David B. Slifka ’01 Associate General Counsel Financial Analyst Seth D. Alexander ’95 Alexander S. Taylor ’00 Associate Director Financial Analyst A group from the Yale Investments Office relaxes after a whitewater rafting trip.

From left to right: Randy Kim ’98, Dean Takahashi ’80, ’83 mmpm, Griff Baker ’02, David Swensen ’80 ph.d., Seth Alexander ’95, and Len Baker ’64.

The Origins of the Yale Endowment As Yale’s tercentennial year draws donations addressed immediate needs same year, land owned and rented out to a close, the University celebrates —building a steeple for the chapel, by Yale for income reached 2,243 acres. a rich history of remarkable growth. repairing the rector’s home, or paying A gift of £38 from Yale parent Throughout the centuries, gifts from the tutors’ salaries. Philip Livingston in 1745 provided friends and graduates have played A number of donations of land, seed funding for the first endowed a critical role in supporting the often in locations far away from New professorship. In 1756, upon institution. Even though some of Haven, produced regular income for completion of the fundraising, the earliest gifts provided permanent Yale, thereby functioning in a manner Naphtali Daggett was named the first funding, assessing the role of the similar to today’s Endowment. Indeed, Livingstonian Professor of Divinity. Endowment in Yale’s development Yale records identify an enormous gift Endowing an eighteenth century represents a difficult task, exacerbated of 637 acres of farmland from Major professorship meant providing a by the absence of printed treasurer’s James Fitch in 1701, worth £150, as the fund that would not only cover the reports for the first 130 years of Yale’s origins of the Endowment. Fitch, born professor’s salary, but also build his existence. Unlike the many early gifts in Saybrook in 1649, was the son of house. By the end of the eighteenth given to satisfy current needs, Reverend James Fitch, one of the first century, professors had been appointed endowment gifts come with the settlers of Connecticut. The letter in a number of other subjects, such as expectation that they will support a accompanying the Major’s donation is mathematics and natural philosophy, particular activity in perpetuity. one of only fifteen Yale documents ecclesiastical history (the first history Deciphering three-century-old financial surviving from 1701. In the transmittal professor in the United States), Hebrew, statements and related documents to document, Fitch revealed his hope that and chemistry. Scholars disagree over ascertain the intent of donors and the the gift would produce substantial whether these professorships were function of gifts poses a significant annual income for Yale: “I will allsoe endowed. According to Yale historian challenge. take some paines to put it in a way of Brooks Mather Kelly, it was not until Yale’s archives overflow with yearely profit. 30£ charge I hope will 1822 that a second professorship was documents referring to early donations bring 20£ per yeare in a little time.” endowed: the Dwight Professorship of all sorts. For the first half century of Indeed, his gift produced essential of Didactic Theology. Though the the College’s existence, Yale received support for the fledgling College and Livingstonian Professorship was grants irregularly from the Connecticut provides support even today for the eliminated in 1861, the Dwight Assembly. Individuals gave funds and University’s general purposes. Professorship exists today. gifts in kind to the University. A notable Donations of land established The first general Endowment gift from Elihu Yale secured the some of Yale’s most long-standing fundraising effort did not occur until College’s name in 1718. The College endowments. In 1732 George Berkeley 1831. Prompted by a disastrous received gifts of property and land, gave his 96-acre farm in Rhode Island investment in the Eagle Bank of New which Yale either occupied or rented to Yale to begin a program of post- Haven that wiped out all but $1,800 out; books and materials, such as graduate fellowships, which continues of Yale’s permanent funds in 1825, the globes, microscopes, and portraits; to support students to this day. Along alumni initiated a widespread campaign and provisions, such as bales of corn with a gift of 300 acres of farmland for donations to the College. The and wheat. Many of these grants and from the Connecticut Assembly in the Centum Millia Fund raised over One of the University’s very first donors, Major James Fitch is commemorated by Fitch Gateway in Branford College, which is inscribed with the texts shown here. His gift of land in 1701 was the first gift in Yale’s history to become part of the permanent Endowment.

$100,000, mostly from Yale alumni and officers. Of the total, $83,000 functioned as permanent Endowment, producing a significant gain in permanent funds for the College.

Throughout the nineteenth century Yale accumulated substantial general Endowment funds. In 1831 the departments that would become the Divinity School and Medical School had their own endowments, in 1848 the Law School, in 1861 the Sheffield Scientific School, in 1872 the Art and Architecture School, and in 1895 the Music School. Some of these, such as the Art and Architecture School, were founded because of special endowment gifts. Excerpt from the handwritten list of Yale donors by Thomas Clap, part of the original 1765 manuscript of his Annals or History of Yale College published in 1766. The second gift is listed In the late nineteenth century Yale as “1701, James Fitch of Norwich, Esq. 637 acres of land in Killingly; exchanged for 628 acres of enjoyed a series of large gifts from land in Salisbury.” The gift of land had a value of £150. Clap’s 1766 Annals included a list of all alumni and nonalumni alike, facilitated donors to that time. Courtesy of Manuscripts and Archives, Yale Library. by the accumulation of wealth in the rapidly industrializing United States.

In 1864, major gifts came from Joseph Sheffield and Augustus Street, Endowment funds played a critical that some of the College’s earliest establishing the Sheffield Scientific role in Yale’s financial development donors intended their gifts to sustain School and the Art and Architecture during the past three centuries. In the the institution in perpetuity. Their School, respectively. Railroads played context of an early eighteenth century contributions provided the seeds for a significant role both as investment institution’s struggle to survive day to an Endowment that today totals over vehicles and as a source of gifts. The day, the notion of providing permanent $10.7 billion and continues to serve as family of Henry Farnam (m.a. hon. funds may have seemed a triumph of an essential source of support for Yale’s 1871), a railroad magnate, contributed hope over experience. Still, it is clear operations. some $400,000 to the College in the late nineteenth century. By 1900, total University Endowment funds had reached $5.3 million, representing an impressive annual growth rate after the 1825 debacle of over 11 percent per annum. Yale’s Endowment 1825–1900 Asset allocation of the nineteenth $6 century Endowment differs substantially from Yale’s twenty-first century portfolio. For most of the 1800s the $5 portfolio was heavily allocated toward bonds. In 1831, according to the Treasurer’s Report, notes made up $4 64 percent of the Endowment, with Phoenix Bank Stock accounting for 29 percent and Endowment land 7 percent.

Millions In 1856, bonds made up approximately $3 71 percent of the portfolio, with real estate and stocks making up 16 percent and 13 percent, respectively. $2 Interestingly, the Treasurer’s Report identified “Bonds of Railroads,”which made up 25 percent of the portfolio, $1 as an asset class distinct from “Bonds and Notes.” By 1900, bonds still represented a majority of the portfolio at 64 percent, with real estate at 22 percent, and stocks at 13 percent. 1825 1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 Some Yale Endowment Firsts 1701 1732 1756 First Endowment Fund First Scholarship Fund First Professorship Fund A gift of 637 acres of farmland valued at The George Berkeley Fund was Funds originally donated by Philip £150 from Major James Fitch provided established through a gift of farmland to Livingston, a Yale parent, were allocated annual income for the College. The fund, support scholarships for post-graduate by Yale President Thomas Clap to to which other funds were later added, is study, to be awarded every year on the establish the Livingstonian Professorship now valued in the millions and is used for basis of an examination in Latin and of Divinity. Additional funding came from the general purposes of the University. Greek. The current holders of the grant, other donors, including Clap himself. six students from Yale College and the Graduate School, are using the funds for overseas research projects.

1763 1814 1822 First Library Fund First School of Medicine Fund First Continuing Professorship Fund The Jared Eliot and Thomas Ruggles Anonymous donors formed an A gift from Yale President Timothy Fund, established with a gift of £10, endowment for continuing general Dwight (b.a. 1769) and others established continues to generate funds each year support of the Medical Institution of Yale the Timothy Dwight Professorship of for book acquisition. College, founded in 1813, which became Didactic Theology. The present incumbent the School of Medicine in 1884. of the renamed Dwight Professorship of Theology and Philosophy of Religion is Gene Outka of the Divinity School, appointed in 1981.

1823 1901 1923 First Undergraduate Scholarship Fund First Building Maintenance Fund First Athletics Fund David DeForest gave $5,000 to establish Mrs. Thomas G. Bennet contributed The Ledyard Mitchell Fund, named for a the David C. DeForest Scholarship and $5,000 to establish a permanent member of the Class of 1904, supports Prize Fund, still awarded to two Yale endowment for maintaining the clinical the award for a punting competition held College students per year. facilities of the School of Medicine. each year among varsity football players.

Sources Photo Credits Much of the material in this publication is drawn Page 16 Michael Marsland, Yale Office of Public Affairs from memoranda produced by the Investments Office The Endowment’s annual return for the ten years Yale Sports Publicity for the Corporation Investment Committee. Other ending June 30, 2001 ranks in the top one percent of information is drawn from Yale’s financial records institutional funds as measured by the sei Large Plan Design and Reports of the Treasurer. Additional material Universe. Strong Cohen comes from David Swensen, Pioneering Portfolio Management: An Unconventional Approach to Pages 20–21 Institutional Investment (New York, Free Press, 2000). Historical material is based on documents in the Manuscripts and Archives Collection, Sterling Pages 8–13 Memorial Library, and on George Wilson Pierson, A Average educational institution asset allocations Yale Book of Numbers (New Haven, Yale University, from the Cambridge Associates’ Preliminary Analysis 1983); Pierson, The Founding of Yale: The Legend of of College and University Investment Pool Returns the Forty Folios (New Haven, Yale University Press, Printed on 1988); and Brooks Mather Kelley, Yale: A History recycled paper 2000–2001.

(New Haven, Yale University Press, 1974).