耶鲁捐赠基金2004年（耶鲁投资办公室年度报告）

ris233307 2/11/05 1:43 PM Page I 2004 The Yale Endowment ris233307 2/11/05 1:43 PM Page II Endowment Highlights Fiscal Year 2004 2003 2002 2001 2000 Market Value (in millions) $12,747.2 $11,034.6 $10,523.6 $10,725.1 $10,084.9 Return 19.4% 8.8% 0.7% 9.2% 41.0% Spending (in millions) $ 502.0 $ 470.1 $ 409.3 $ 337.5 $ 280.8 Operating Budget Revenues 1,630.8 1,553.7 1,466.6 1,352.9 1,263.5 (in millions) Endowment Percentage 30.8% 30.3% 27.9% 24.9% 22.2% Asset Allocation (as of June 30) Domestic Equity 14.8% 14.9% 15.4% 15.5% 14.2% Absolute Return 26.1 25.1 26.5 22.9 19.5 Foreign Equity 14.8 14.6 12.8 10.6 9.0 Private Equity 14.5 14.9 14.4 18.2 25.0 Real Assets 18.8 20.9 20.5 16.8 14.9 Fixed Income 7.4 7.4 10.0 9.8 9.4 Cash 3.5 2.1 0.3 6.2 8.1 Endowment Market Value 1950–2004 $14 $12 $10 Billions $8 $6 $4 $2 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Fiscal Year II ris233307 2/11/05 1:43 PM Page 1 Contents 1. Introduction 2 2. The Yale Endowment 3 3. Investment Policy 4 4. Spending Policy 14 5. Investment Performance 16 6. Management and Oversight 19 Front cover: A window in Sterling Memorial Library with a view of the Selin Courtyard Right: Evening view of the Yale campus, facing west ris233307 2/11/05 1:43 PM Page 2 Introduction Yale’s Endowment produced extraordinarily strong results in fiscal year 2004, generating returns of 19.4 percent and producing dollar gains of $2.1 billion. Every asset class, with the exception of bonds, contributed double-digit gains over the course of the year. Once again, Yale benefited from the Endowment’s equity orientation, broad diversification, and active management.

Over the past ten years, the Endowment grew from $3.5 billion to $12.7 billion. With annual net investment returns of 16.8 percent, the Endowment’s performance exceeded its benchmarks and outpaced institutional fund indices. The Yale Endowment’s results over the past two decades are no less impressive, as investment returns of 16.1 percent per annum produced a 2004 Endowment value of more than ten times that of 1984. Yale’s long-term record resulted 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 $132 million to $502 million, an annual growth rate of over 14 percent. On a relative basis, Endowment contributions expanded from 14 percent of total revenues in fiscal 1994 to 31 percent in fiscal 2004. Next year, spending will approximate $562 million, or 32 percent of projected revenues. During the decade Yale’s spending and investment policies provided handsome levels of cash flow to the operating budget for current scholars while preserving Endowment purchasing power for future generations.

Endowment Growth Outpaces Inflation 1950–2004 $14 $12 $10 $8 Billions $6 $4 $2 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 1950 Endowment Inflated Post-1950 Endowment Gifts Inflated Endowment Market Value ris233307 2/11/05 1:43 PM Page 3 The Yale Endowment Totaling $12.7 billion on June 30, 2004, the Yale Endowment is an investment pool composed of thousands of funds with a variety of designated purposes and restrictions. Approximately four-fifths of funds constitute true endowment, gifts restricted by donors to provide long-term funding for designated purposes. The remaining one-fifth represent 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 (31 percent). The remaining funds (21 percent) are unrestricted. Twenty-seven percent of the Endowment benefits the overall University, with remaining funds focused on specific units including the Faculty of Arts and Sciences (38 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 that represent a claim on a portion of the whole investment portfolio. In fiscal 2004 the Endowment provided $502 million, or 31 percent, of the University’s $1,631 million current fund income. Other major sources of revenues were grants and contracts of $491 million (30 percent), medical services of $250 million (15 percent), net tuition, room, and board of $216 million (13 percent), gifts of $76 million (5 percent), other investment income of $21 million (1 percent), and other income of $75 million (5 percent).

Endowment Fund Allocation Operating Budget Revenue Fiscal Year 2004 Fiscal Year 2004 Grants & Contracts Professorships Miscellaneous Specific Purposes Tuition, Room, Board Endowment Unrestricted Scholarships Medical Services Books Maintenance Gifts Other Income Other Investments ris233307 2/11/05 1:43 PM Page 4 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 laureates James Tobin and Harry Markowitz. In fact, both Tobin and Markowitz conducted work on this important portfolio management tool at Yale’s Cowles Foundation. Using statistical techniques to combine expected returns, variances, and covariances of investment assets, Yale employs mean-variance analysis to estimate expected risk and return profiles of various asset allocation alternatives and to test 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 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 2004 Target Domestic Equity 14.8% 15.0% Fixed Income 7.4 7.5 Absolute Return 26.1 25.0 Foreign Equity 14.8 15.0 Private Equity 14.5 17.5 Real Assets 18.8 20.0 Cash 3.5 0.0 Yale Endowment Target Asset Allocation June 30, 2004 Real Assets DomesticEquity Domestic Equity Real Assets FixedIncome Fixed Income Private Equity Absolute AbsoluteReturn Return Foreign Equity Foreign Equity ris233307 2/11/05 1:43 PM Page 5 The target mix of assets produces an expected real (after inflation) long-term growth rate of 6.2 percent with a risk (standard deviation of returns) of 11.7 percent. Primarily because of shortfalls relative to the target in private equity holdings, the actual allocation produces a portfolio expected to grow at 5.8 percent with a risk of 11.0 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, 92.5 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 two decades, Yale has reduced dramatically the Endowment’s dependence on domestic marketable securities by reallocating assets to nontraditional asset classes. In 1984, more than three-quarters of the Endowment was committed to U.S. stocks, bonds, and cash. Today, target allocations call for 22.5 percent in domestic marketable securities, while the diversifying assets of foreign equity, private equity, absolute return strategies, and real assets dominate the Endowment, representing 77.5 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 1984 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.

ris233307 2/11/05 1:43 PM Page 6 Asset Class Yale’s six asset classes are defined by differences in their expected Characteristics response to economic conditions, such as price inflation or changes 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 broad group of educational institutions invest 36.8 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 emphasize 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 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 has a low covariance with other asset classes, and provides a hedge against financial accidents or periods of unanticipated deflation. While educational institutions maintain a substantial allocation to fixed income instruments and cash, amounting to 20.7 percent, Yale’s target allocation to fixed income constitutes only 7.5 percent of the Endowment. Bonds have an expected real return of 2.0 percent with risk of 10.0 percent. The Lehman Brothers U.S. Treasury Index serves as the portfolio benchmark.

ris233307 2/11/05 1:43 PM Page 7 Yale is not particularly attracted to fixed income assets, as they have the lowest historical and expected returns of the six asset classes that make up 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 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. Willingness to accept illiquidity leads to superior investment results without impairing the portfolio protection characteristics of high-quality fixed income.

Foreign Equity Investments in overseas markets give the Endowment exposure to the global economy, providing diversification along with opportunities to earn above-market returns through active management. Emerging markets, with their rapidly growing economies, are particularly intriguing, causing Yale to target one-half of its foreign portfolio to developing countries. Yale’s foreign equity target allocation of 15.0 percent stands slightly below the overall educational institution allocation of 15.6 percent. Expected real returns for emerging equities are 8.0 percent with a risk level of 25.0 percent, while developed equities are expected to return 6.0 percent with risk of 20.0 percent. The portfolio is measured against a composite benchmark of 50 percent developed markets, measured by the Morgan Stanley Capital International (MSCI) Europe, Australasia, and Far East Index, and 50 percent emerging markets, measured by the MSCI Emerging Markets 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 strong 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.

ris233307 2/11/05 1:43 PM Page 8 History of Yale’s Spending Policy Until the mid 1960s, the University annual spending, while lower long-term average of 70 percent of the previous limited the Endowment’s annual returns would lead to reduced spending. year’s spending, adjusted for inflation, contribution to the operating budget to Unfortunately, the University Equation plus 30 percent of the targeted long-investment yield—the interest, dividend, did not adjust rapidly enough to term spending rate of 4.5 percent and rental income generated by the changes in Endowment market value. applied to the previous year’s Endowment. In 1967, recognizing that As a result, in the 1970s, when the rate Endowment’s market value. The 70 simply spending yield could result in too of inflation increased and market percent weight on prior year spending high or too low a spending rate and returns dropped, the University spent promised budgetary stability, while the could bias investment decisions toward an unsustainably high portion of the 30 percent weight on current market securities with high yield but low Endowment to support current value provided purchasing power appreciation potential, Yale adopted a operations. sensitivity.

“total return” spending policy. Under In 1977, recognizing that the rate of Since 1982, the spending rule has the total return policy, the University spending was eroding the real value of been adjusted three times. In 1992 the supported operations with current the Endowment, the Yale Corporation Corporation authorized an increase in yield plus a prudent portion of the voted to cap spending at the existing the long-term spending rate from 4.5 appreciation of Endowment market level (adjusted for inflation) until the percent to 4.75 percent. In 1995, Yale value. spending rate was brought in line with adopted a further increase in the target Concurrent with the decision to the expected real (after-inflation) rate to 5.0 percent. In 2004 the employ a total return concept, Yale return from the Endowment. The Corporation increased the spending rate instituted a formal method, called the Endowment’s expected real return was to 5.25 percent and changed the University Equation, to calculate the taken to be 4.5 percent, consistent smoothing rule from 70/30 to 80/20. total amount that could responsibly be with historical experience. The increase in spending rate resulted spent from the Endowment. The In 1982, upon bringing the spending from improvement in Endowment method set spending in a given year by level to an appropriate level, the portfolio characteristics. The change in adjusting the previous year’s spending Corporation adopted a spending rule weight assigned to budgetary stability by the difference between the that attempted to produce substantial stemmed from recognition that University’s long-term investment return income for current scholars and increased budgetary dependence on (measured over the prior twenty-year preserve purchasing power of the Endowment income required greater period) and the current percentage of Endowment for future generations. stability in flows of Endowment income the Endowment being spent. Higher Under the new rule, Endowment to support operations. long-term returns would lead to higher spending amounted to the weighted Yale’s Endowment Spending Rate 1950-2004 8.0% 7.0% 6.0% 5.0% Spending Rate 4.0% 3.0% 2.0% 1.0% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Spending Rate ris233307 2/11/05 1:43 PM Page 9 Absolute Return In July 1990, Yale became the first institutional investor to pursue absolute return strategies as a distinct asset class, beginning with a target allocation of 15 percent. Designed to provide significant diversification to the Endowment, absolute return investments seek to generate high long-term real returns by exploiting market inefficiencies. Approximately 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 other half of the portfolio contains value-driven strategies, which involve hedged positions in assets or securities that diverge from underlying economic value. Today, the absolute return portfolio is targeted to be 25.0 percent of the Endowment. In contrast, the educational institutions allocate only 15.1 percent of assets to such strategies. Absolute return strategies are expected to generate real returns of 6.0 percent with risk levels of 10.0 percent for event-driven strategies and 15.0 percent for value-driven strategies.

Unlike traditional marketable securities, absolute return investments provide returns largely independent of overall market moves. Over the past ten years, the portfolio exceeded expectations, returning 12.2 percent per year with essentially no correlation to domestic stock and bond markets.

An important attribute of Yale’s investment strategy concerns the alignment of interests between investors and investment managers. To that end, absolute return accounts are structured with performance-related incentive fees, hurdle rates, and clawback provisions. In addition, managers invest a significant portion of their net worth alongside Yale, enabling the University to avoid many of the pitfalls of the principal-agent relationship.

ris233307 2/11/05 1:43 PM Page 10 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 participations in venture capital and leveraged buyout partnerships. The University’s target allocation to private equity of 17.5 percent and its actual allocation of 14.5 percent both far exceed the 5.5 percent actual allocation of educational institutions. In aggregate, the private equity portfolio is expected to generate real returns of 11.4 percent with risk of 29 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 30.6 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, 2000, and 2003.

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.

ris233307 2/11/05 1:43 PM Page 11 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. Real asset investments provide attractive return prospects, excellent portfolio diversification, and a hedge against unanticipated inflation. Yale’s 20.0 percent long-term policy allocation significantly exceeds the educational institution commitment of 6.3 percent. Expected real returns are 6.0 percent with risk of 15.0 percent. The real assets portfolio plays a meaningful role in the Endowment as a powerful diversifying tool 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 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 creates 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 Institutions Domestic Equity 14.8% 36.8% Fixed Income 7.4 17.5 Foreign Equity 14.8 15.6 Absolute Return 26.1 15.1 Private Equity 14.5 5.5 Real Assets 18.8 6.3 Cash 3.5 3.2 Data as of June 30, 2004.

ris233307 2/11/05 1:43 PM Page 12 Monte Carlo Simulations To assess the efficacy of various Monte Carlo simulations applied Endowment, disruptive spending drop combinations of investment and to the Endowment’s current asset risk fell to 24 percent and purchasing spending policies, the Investments Office allocation and spending policies indicate power impairment risk declined to developed a model that uses simulations a 22 percent chance of real spending 14 percent. to evaluate the impact of a range of falling by more than 10 percent over Investment and spending policies of policy combinations on Yale’s a five-year span. Although the other educational institutions provide Endowment and operating budget. Endowment’s real growth rate is more disturbing results. Using Monte Using “Monte Carlo” techniques, the expected to outpace the 5.25 percent Carlo simulations and the typical model employs random numbers to target spending rate, a roughly 10 endowment spending rule (5 percent produce portfolio return patterns percent chance exists that the target rate applied to a three-year consistent with assumptions regarding purchasing power of the Endowment moving average of endowment value), asset class expected risk and return would drop by more than 50 percent the Investments Office estimates the characteristics. The resulting path of after fifty years. average endowment faces a 37 percent simulated returns determines Using the metrics of stable operating chance of a 10 percent spending drop Endowment values and spending levels, budget support and purchasing power over five years and runs a 32 percent based on the modeled investment and preservation, the Endowment chance of losing half of its purchasing spending policies. Thousands of demonstrated substantial improvement power over a fifty-year period. simulations provide a robust picture of over the past fifteen years. As Yale After fifty years, the median ending the potential effectiveness of any given allocated more of the Endowment to purchasing power of the average policy combination. the alternative asset classes of absolute endowment amounts to only 73 percent The two criteria used to analyze the return, private equity, and real assets, of its beginning purchasing power. In results of various policies are: 1) the risks plummeted for both a significant general, educational institutions spend likelihood of a significant, sustained decline in spending and a dramatic at rates far too high to be supported intermediate-term drop in Endowment reduction in Endowment purchasing by undiversified portfolios that contain support for the operating budget; and power. In 1990, when alternative asset too many low-return assets. Yale’s 2) the likelihood of a dramatic long- classes accounted for only 15 percent of simulations show relatively significant term reduction in Endowment the Endowment, Yale faced a 34 percent probabilities of circumstances that purchasing power. A significant decline chance of real spending dropping by 10 would be traumatic for educational in support for the operating budget is percent over five years and a 31 percent institutions, highlighting the tenuous defined as a real reduction of 10 percent chance of real Endowment values balance between protecting Endowment over a five-year period. A dramatic diminishing by 50 percent over fifty purchasing power and maintaining a decline in Endowment purchasing years. By 2000, when absolute return, steady and substantial stream of power is defined as a 50 percent drop private equity, and real assets accounted spending. over a fifty-year horizon. for nearly 60 percent of the The Monte Carlo simulations represent a substantial extension of (and improvement over) conventional Yale’s Changes in Asset Allocation Dramatically Reduce mean-variance optimization techniques. Spending Volatility and Risk to Purchasing Power Mean-variance analysis simply identifies a set of efficient portfolios, namely portfolios with the highest return for a given level of risk or portfolios with the lowest risk for a given level of return.

Purchasing Power Preservation Risk The mean-variance framework provides no intuitive mechanism for portfolio choice and fails to incorporate the impact of spending policy. In contrast, by extending the analysis with Monte Carlo simulations, decision makers enjoy the opportunity to assess the trade-off between easily understood criteria: stable operating budget support (probability of losing 10 percent of Endowment spending) and purchasing power preservation (probability of losing 50 percent of Endowment purchasing power).

ris233307 2/11/05 1:43 PM Page 13 2004 Change in Spending Policy Yale changes spending policy Yale transformed the Endowment into Along with the modification in the infrequently. Since the concept of a well-diversified, equity-oriented spending rate, Yale changed the budgetary balance acquires real portfolio with superior risk and return smoothing rule to reflect the growing meaning only with a well-defined, characteristics. As the portfolio importance of Endowment spending to faithfully implemented spending rule, improved, Yale increased its payout the operating budget. In fiscal 1986, changes in the rule should be few and rate accordingly. spending from Endowment amounted far between. Yet Yale must ensure that In October 2004 the Yale to a mere 10 percent of revenues. its spending policy strikes an Corporation authorized the third By 2004, spending amounted to appropriate balance between the twin change in spending policy, voting to approximately 31 percent of University goals of stable, substantial support for increase the spending rate from 5.0 revenues. While the actual impact of a the operating budget and maintenance percent to 5.25 percent and to change drop in Endowment value depends on of the Endowment’s purchasing power. the smoothing rule from 70/30 (i.e., a the recent history of returns, all else As a result, spending policy must be 70 percent weight on last year’s actual equal, a decline today would have more reviewed in light of structural changes Endowment spending and 30 percent than three times the impact on the in the Endowment’s investment weight on the current year’s target budget as would a comparable decline portfolio and in the operating budget’s Endowment spending) to 80/20. Like in 1986. By increasing the weighting on reliance on Endowment support. the spending rate increases in 1992 and last year’s spending, Yale increases the In the twenty-two years following 1995, the 2004 spending rate increase spending rule’s ability to act as a shock the inception of Yale’s modern spending stemmed from changes in the absorber and dampens the volatility of rule in 1982, the University changed its Endowment’s asset allocation that the flow of funds to the operating spending policy three times. In 1992 the boosted expected return and lowered budget.

Yale Corporation authorized an increase expected volatility. In fact, Yale’s in the long-term spending rate from 4.5 portfolio attributes improved percent to 4.75 percent. In 1995 the sufficiently between 1995 and 2004 spending rate was increased again, this so that the 2004 Endowment with time to 5.0 percent. These spending rate the higher spending rate exhibited increases were supported by changes in approximately the same risk of the Endowment’s investment portfolio. purchasing power degradation as Starting in the early 1980s with a did the 1995 Endowment with the traditional portfolio that consisted lower spending rate. primarily of domestic stocks and bonds, Endowment Supports 32 Percent of the Fiscal 2005 Budget ris233307 2/11/05 1:43 PM Page 14 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 goal is to release substantial current income to the operating budget in a stable stream, since large fluctuations in revenues are difficult to accommodate through changes in University activities or programs. The second goal 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 5.25 percent combined with a smoothing rule that 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 (80 percent weight) and the amount that would have been spent using 5.25 percent of current Endowment market value (20 percent weight).

Spending Growth vs. Inflation 1950–2004 $600 $500 $400 Millions $300 $200 $100 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 1950 Spending Inflated Target Spending from Post-1950 Gifts Inflated Actual Spending ris233307 2/11/05 1:43 PM Page 15 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 twenty years, annual changes in spending have been less than a third as volatile as annual changes in Endowment value. Second, by adjusting spending toward the long-term rate of 5.25 percent of Endowment, the rule ensures that spending levels will be sensitive to fluctuating Endowment levels, providing stability in long-term purchasing power.

Spending from the Endowment increased at a hearty pace during the past decade despite the conservative nature of Yale’s spending policy, with distributions rising from $132 million in fiscal 1994 to $502 million in fiscal 2004. Consequently, Endowment spending plays an ever-greater role in the budget, having risen from 14 percent of expenditures in 1994 to 31 percent in 2004.

Tower in Timothy Dwight College ris233307 2/11/05 1:43 PM Page 16 Investment Performance Yale has produced excellent investment returns. Over the ten-year period ending June 30, 2004, the Endowment earned an annualized 16.8 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, 2004, Yale added $5.4 billion relative to its composite benchmark and an estimated $5.6 billion relative to the average return of a broad universe of college and university endowments.

Performance by Yale’s long-term asset class performance continues to be Asset Class outstanding. In the past ten years every asset class posted superior returns, in almost every case significantly outperforming benchmark levels.

For the decade ending June 30, 2004, the domestic equity portfolio returned an annualized 17.0 percent, outperforming the Wilshire 5000 by 5.5 percent per year and the Russell Median Manager return by 5.3 percent per year. Yale’s active managers have added value to benchmark returns primarily through stock selection. Yale’s internally managed fixed income portfolio earned an annualized 7.8 percent over the past decade, exceeding the Lehman Brothers U.S. Treasury Index by 0.7 percent per year and the Russell Median Manager return by 0.6 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.

Over the past decade, the absolute return portfolio produced an annualized 12.2 percent, exceeding its passive benchmark of the One-Year Constant Maturity Treasury plus 6 percent by 1.2 percent per year and matching its active benchmark of hedge fund manager $4,720 $2,836 $1,417 ris233307 2/11/05 1:43 PM Page 17 returns. For the ten-year period, absolute return results exhibited essentially no correlation to traditional marketable securities.

The foreign equity portfolio generated an annual return of 10.1 percent over the ten-year period, outperforming its composite benchmark by 5.9 percent per year and the Russell Median Manager return by 5.4 percent per year. The portfolio’s excess return is due to effective security selection and country allocation by active managers.

Results from Yale’s non-marketable assets demonstrate the value of superior active management. Private equity earned 37.6 percent annually over the last ten years, outperforming the return of a pool of private equity managers compiled by Cambridge Associates by 14.7 percent per year. Since inception in 1973, the private equity program has earned an astounding 30.6 percent per annum.

Real assets generated a 16.8 percent annualized return over the ten-year period, outperforming an active benchmark of real assets manager returns by 2.1 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 1994–2004 Active Benchmarks Passive Benchmarks Domestic Equity: Frank Russell Median Manager, U.S. Equity Domestic Equity: Wilshire 5000 Fixed Income: Frank Russell Median Manager, Fixed Income Fixed Income: Lehman Brothers U.S. Treasury Index Absolute Return: csfb Composite Absolute Return: 1-year Constant Maturity Treasury +6% Foreign Equity: Frank Russell Median Manager Composite, Foreign Equity: 50% msci eafe Index, 50% msci em Index Foreign Equity Private Equity: University Inflation +10% Private Equity: Cambridge Associates Composite Real Assets: University Inflation +6% Real Assets: ncreif and Cambridge Associates Composite ris233307 2/11/05 1:44 PM Page 18 Yale Corporation Investment Committee The Yale Investment Committee plays individual asset classes to specific managers, educators, and non-profit an integral part in the management investment managers. In the winter and leaders provide disparate viewpoints of the Endowment. With ultimate spring the Committee focuses attention and specialized knowledge that inform authority over the University’s on a single asset class or a particular the decision-making process. Healthy investment policy, the eleven-member investment opportunity. In the summer debate and discussion set the stage for committee consists of the President of the Committee engages in a review of consensus decisions. As Hume noted, the University, members of the Yale the University’s policy portfolio. “Truth springs from argument amongst Corporation, and leaders from the Since beginning its oversight of the friends.” corporate, financial, and non-profit Endowment in 1975, the Investment By challenging the Investments Office sectors. Yale’s Investment Committee Committee has brought together staff to operate at the highest level, the also plays a critical role in spending remarkable men and women from Investment Committee plays a critical policy deliberations. various backgrounds, united in their role in Yale’s investment process. A Investment Committee meetings support of the mission of the University. sounding board as well as an oversight follow a regular cycle. In the fall the The diversity of the Committee serves body, the Investment Committee has Committee reviews the previous fiscal as a source of strength in the been an important driver of the year’s investment results, at levels management of the Endowment. exemplary investment performance ranging from the overall Endowment to Corporate executives, investment achieved by the University.

Donaldson,Lufkin & Jenrette,Inc.

SUTTER HILL VENTURES FALCON ris233307 2/11/05 1:44 PM Page 19 Management and Since 1975, the Yale Corporation Investment Committee has been responsible for oversight of the Endowment, incorporating senior-Oversight 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. Eleven individuals currently sit on the Committee.

Investment Committee Charles D. Ellis ’59, Chairman Henry F. McCance ’64 Former Managing Partner President Greenwich Associates Greylock Management G. Leonard Baker ’64 Jane L. Mendillo ’80, ’84 mba Managing Director Chief Investment Officer Sutter Hill Ventures Wellesley College Joshua Bekenstein ’80 William I. Miller ’78 Managing Director Chairman Bain Capital Irwin Financial Corporation Roland W. Betts ’68 Theodore P. Shen ’66 Chairman Former Chairman Chelsea Piers Management DLJ Capital Markets James Leitner ’75 Douglas A. Warner iii ’68 President Former Chairman of the Board Falcon Investment Management J.P. Morgan Chase Richard C. Levin ’74 ph.d.

President Yale University ris233307 2/11/05 1:44 PM Page 20 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 sixteen professionals.

Investments Office David F. Swensen ’80 ph.d. Randy Kim ’98, ’04 mba Chief Investment Officer Senior Associate Dean J. Takahashi ’80, ’83 mppm Robert F. Wallace ’02 Senior Director Senior Associate Seth D. Alexander ’95 Celeste P. Benson Director Senior Portfolio Manager Alexander C. Banker Shuba V. Raghavan Director Senior Research Associate Alan S. Forman David B. Slifka ’01 Director Senior Financial Analyst Timothy R. Sullivan ’86 Jay L. Kang ’02 Director Senior Financial Analyst Kenneth R. Miller ’71 Daniel G. Kilpatrick ’03 Associate General Counsel Financial Analyst Michael E. Finnerty Carrie A. Abildgaard Associate Director Financial Analyst Windows in Berkeley College ris233307 2/11/05 1:44 PM Page 21 Endowed Funds for Prizes At University Commencement, hundreds of graduates come away with more than a coveted Yale diploma. To recognize exceptional performance in academics, athletics, community service, and other extracurricular fields of endeavor, Yale awards a vast array of prizes. The University bestows so many prizes, in fact, that it takes a series of ceremonies throughout Commencement weekend to confer them.

Yale’s Endowment provides financial support for many of the awards, whether they take the form of a book, a stipend, cash, or a certificate.

Endowed funds earmarked for specific awards have existed for nearly two centuries.

Early Prizes and the Role of Oratory Justice Potter Stewart (standing, third from left), on the Supreme Court, 1962. In 1823, David C. DeForest of New Haven, one of Yale’s most generous Law School’s John Currier Gallagher nineteenth-century donors, established a Prize in 1956 for excellence in the scholarship and a prize that still bear preparation of cases. In 1941, Charles his name. Ranking as the longest- L. Black, Jr., the attorney who argued standing Yale award, the David C. Brown v. Board of Education in 1954, DeForest Prize goes each year to the was honored in the Gallagher Prize senior “who shall write and pronounce competition. an English Oration in the best manner.” Attorney General Edwin Meese won Despite the role of oratory and the Thacher Memorial Prize in 1951–53 debating in U.S. presidential campaigns, for “prowess in extemporaneous none of the Yale-educated U.S. debate,” as did Yale President presidential candidates won the Kingman Brewster (1941) and frequent DeForest Prize. Instead, the best-known prizewinners William P. Bundy (1939), DeForest winners include: presidential McGeorge Bundy (1940), columnist advisers William P. Bundy (1939) and and author William F. Buckley, Jr. McGeorge Bundy (1940); Bay of Pigs (1948, 1949), John F. Kerry (1964–66), negotiator Henry D. Harfield, Jr. (1934); Henry J. TenEyck and author and columnist David Frum and two Yale academics, H. Bradford (1981).

Westerfield (1947), the Damon Wells Studies and Political Science, and Among several awards for oratory Professor Emeritus of International Stephen Kellert (1985), the Tweedy/ and debating, Senator Kerry won first Ordway Professor of Social Ecology. place in the Henry J. TenEyck, B.A. Prominent names populate the list 1879 Prize competition in 1965; this of winners for another of Yale’s early awards, created in 1843 by the Isaac H.

Townsend Fund in honor of a Yale law professor. The Townsend Prize, bestowed for oratory, honored U.S.

Supreme Court Justice Potter Stewart (1937), U.S. Senator David L. Boren of Oklahoma (1963), and U.S. Senator John F. Kerry of Massachusetts (1966).

An oratorical prize at the Law School, the John Fletcher Caskey Prize, lists among its winners U.S. Senator John C. Danforth (1963), civil rights leader and Chief Judge of the Third Circuit Court of Appeals A. Leon Higginbotham, Jr. (1952), and New York City Mayor John V. Lindsay David C. DeForest (1948). Senator Arlen Specter won the Kingman Brewster ris233307 2/11/05 1:44 PM Page 22 award, created by Members of the Scully Professor of the History of Art Kingsley Trust Association (Scroll and Mary E. Miller (1981), and Holcombe Key Society of Yale College), recognizes T. Green Curator of American Paintings distinguished work by juniors. and Sculpture Helen A. Cooper (1986). Honorees include poet Stephen Vincent Since its inception in 1981, the Louis Benet (1918), William F. Buckley, Jr. Sudler Prize in the Performing and (1949), and legal scholar and author Creative Arts recognized Yale students Deborah Rhode (1973). who have pursued active and successful Former Senator Gary Hart took artistic careers, from filmmaker Jennie the Law School’s Colby Townsend M. Livingston (1983) to violinist Memorial Prize in 1963 for “the best Haldan Dai Tung Martinson (1994). honors work done by a second-year The prize takes its name from Louis student in the School of Law.” Sudler, B.A. 1925, who was a generous Recognizing distinction in public supporter of arts programs at the service, the Frank Miner Patterson University. The Thorndike Oliver Acting Prize went in 1964 to U.S. Senator Award recognized the achievements of Joseph I. Lieberman. well-known actors Walter S. (Stacy) Keach, Jr. (1964), Meryl Streep (1975), The Arts and Humanities Mary E. Miller and Mark Lynn Baker (1979).

Yale awards more prizes in the arts and Prizes in a Range of Disciplines humanities than in any other category. Professor of the Humanities Harold Attorney General John D. Ashcroft Bloom (1956); School of Management In the nineteenth century, Yale’s prizes won the John Addison Porter Prize in professor and author William H. emphasized oratory. Since the early American History in 1964 during his Goetzmann (1957); and Sterling twentieth century, as the Yale senior year at Yale. John E. Pepper, Jr., Professor of History Jonathan D. curriculum expanded into new fields, former CEO of Procter and Gamble, Spence (1965). The Porter Prize was so have the subjects for prizes. established by the Kingsley Trust The George Beckwith Medal, Association (Scroll and Key Society of established with an endowed fund in Yale College). 1926, commemorates the publisher of The Donald Annis Prize, recognizing Beckwith’s Almanac and recognizes the “that student who has made the best undergraduate most proficient in some record in English and German during branch of astronomy or mathematics. Freshman and Sophomore years,” The 1981 prize was won by Charles E. honored individuals who became well- Bailyn, the Thomas E. Donnelley known writers and scholars, including Professor and Chair of the Yale Yale History Professor George W. Astronomy department.

Pierson (1924–25), Yale College Dean For more than a century, Yale Richard H. Brodhead (1967), and honored students for “excellence in author and New Yorker magazine biological and geological studies” by contributor Elizabeth R. Kolbert conferring the William R. Belknap (1983). Prize, established in 1872 by a graduate Novelist Louis S. Auchincloss in of the Sheffield Scientific School. The 1937 won the Henry W. Scott Prize, 1937 Belknap laureate, entrepreneur which is awarded each year, in the form of a book, for excellence in modern John Addison Porter languages (mainly French and German).

The John Hersey Prize, endowed in 1985 by students of the late author, now Yale Vice President for Finance goes “to a senior or junior for a body and Administration, received the prize of journalistic work reflecting the spirit in 1960. and ideals of John Hersey: engagement An interdepartmental honor, the with moral and social issues, John Addison Porter University Prize, responsible reportage and consciousness rewards the “best work of scholarship of craftsmanship.” Winners include —presented in such literary form as to David M. Halbfinger (1990) and make the product of general human Motoko Rich (1991), both New York interest.” George W. Pierson, later a Times reporters, and an author on noted Yale historian, received the prize current events, Jacob Weisberg (1985). in 1933. Other winners include: History of Art graduate students distinguished drama critic and scholar aspire to the Frances Blanshard Eric R. Bentley (1941); authors Hugh Fellowship Prize for scholarly Kenner (1950) and Richard D. Ellmann distinction. Winners include feminist (1947); noted critic and Sterling author Naomi Wolf (1981), Vincent Paul R. Krugman ris233307 2/11/05 1:44 PM Page 23 and philanthropist Perry Richardson Mathematical Prize, whose ranks Bass, of Fort Worth, Texas, fathered include Edward B. Rothstein (1970, four sons who also attended Yale. His 1971), the author and music critic of gifts to the University include funding The New York Times. The prize, for the Nancy Lee and Perry R. Bass endowed by Benjamin F. Barge, a Center for Molecular and Structural graduate of the class of 1857, has also Biology. The 1987 winners of the been awarded to Robert S. Rubin Belknap Prize included Miranda S. (1950), former managing director of Fram, who became a prominent Smith Barney; robotics expert Hillel J. geologist at the University of California Chiel (1972); mathematician and author (Davis), and Daniel R. Feikin, an Jonathan D. Rogawski (1974); and epidemiologist with the Centers for video game creator Nathaniel Glasser Disease Control, whose studies of SARS (1982, 1983). have attracted considerable attention.

The Charles Heber Dickerman Prizes for High Scholarship Memorial Prize for the best senior essay or Character in economics was awarded to Princeton The Alpheus Henry Snow Award ranks economist and New York Times among the most important “prizes for high scholarship or character” that are awarded annually as a traditional part McGeorge Bundy of Class Day ceremonies. Honoring Mr.

Snow, B.A. 1879, the prize recognizes advisers Eugene V. Rostow (1933) and “the senior who, through the McGeorge Bundy (1940) as well as N. combination of intellectual achievement, Strobridge (Strobe) Talbott III (1968), character, and personality, shall be former deputy secretary of state, now adjudged by the faculty to have done president of the Brookings Institution. most for Yale by inspiring classmates Snow laureates headed Columbia with an admiration for scholarship.” University Law School (Lance M. Winners of the Snow Award have Liebman, 1962) and the New York gone on to distinguished careers in a Parks Commission (August Heckscher, variety of fields. A world-of-letters 1936). Snow honoree Gaylord sampling includes: authors Francis Otto Donnelley (1931) was a conservationist Matthiessen (1923), Jan G. Deutsch and philanthropist affiliated with the (1955), and Andre Schiffrin (1957); Yale School of Forestry & literary agent Arthur M. Klebanoff Environmental Studies; Maynard Mack (1969); and New Republic editor Peter (1932) became a Yale faculty member A. Beinart (1993). From government, and literary historian; John E. Ecklund, Benjamin Scharps the prize winners include presidential Jr. (1938) left his mark as the Yale columnist Paul R. Krugman (1974) and author and professor of management Jeffrey A. Rosensweig (1979). The prize also went to a series of non-economists, including sculptor Daniel J. Cline (1978), Harvard surgeon and transplant specialist Hugh D. Auchincloss, Jr.

(1971), and Federal Judge Guido Calabresi (1953).

The Law School awards the Benjamin Scharps Prize to “a member of the third-year class for the most meritorious essay or research on some legal subject designated by the faculty, under prescribed regulations.” The list of winners includes Victor S. Navasky (1959), author and editor of The Nation, and David Boies (1966), an attorney noted for work ranging from the Microsoft antitrust lawsuit to Bush v. Gore. The McKim Prize recognizes a graduating senior or seniors majoring in political science, The versatility of Yale students economics, history, or a related field, who have shown marked improvement in their academic becomes apparent in the list of standing in upperclass years and who have made a significant contribution in one or more recipients of the Benjamin F. Barge activities outside the classroom. Adam Schemp, Annette Saunooke, and Allison Phinney shared the award at the 2003 Class Day ceremonies.

ris233307 2/11/05 1:44 PM Page 24 Treasurer in the 1960s and 1970s; and Prize Winners and Yale’s Endowment Cord Meyer, Jr. (1942) gained renown The annals of Yale student prize as a CIA operative and author. winners contain the names of several The Hart Lyman Prize recognizes members of the Yale Corporation “a junior for character and Investment Committee, past and achievement.” Kurt L. Schmoke, present. Former Committee Chairman mayor of Baltimore and a Yale John Madden, who was Managing Corporation member in the 1990s, Partner of Brown Brothers Harriman won the Lyman Award in 1970. and Company, had the distinction of winning two undergraduate prizes, the Alpheus Henry Snow Award in 1941 and the Hart Lyman Prize in 1940.

In 1956, H. Edward Woodsum received the Law School’s C. LaRue Munson Prize, which was endowed in 1921 by Mr. Munson, an 1875 graduate of the school, to recognize “excellence in the investigation, preparation, and (where permitted) John Madden presentation of cases.” The Isaac Townsend Prize was awarded in 1963 received the F. Wilder Bellamy, Jr., to former Investment Committee Memorial Prize in 1979. Among staff member and later U.S. Senator members, Chief Investment Officer David Boren, and in 1959 to current David F. Swensen was awarded a Committee Chairman Charles D. Ellis. Berkeley Master’s Prize in 1980 and Two other current Committee Robert F. Wallace received the E. members received distinguished awards: Francis Riggs Memorial Prize in 1999 G. Leonard Baker won the Benjamin F. for outstanding performance in Special Barge Mathematical Prize in 1961 and Courses in the Humanities for Kurt L. Schmoke again in 1962, and Joshua Bekenstein Freshmen.

Opposite: Architectural detail, Branford College Sources Photo Credits Much of the material in this publication is Front cover: Tom Strong Page 22 (bottom right) drawn from memoranda produced by the Photo of P. Krugman by Dan Deitch Investments Office for the Yale Corporation Pages 1, 15, 20, 22 (top), 23 (bottom), 24 (left), Investment Committee. Other material comes inside back cover Pages 21–23 (except where indicated above) from Yale’s financial records, Reports of the Michael Marsland, Yale Office of Public Affairs Sterling Memorial Library Manuscripts and Treasurer, and Reports of the President. Archives Pages 6–11 Page 24 (right) Logos and trademarks courtesy of the Educational institution asset allocations respective institutions Photo of John Madden courtesy of from Cambridge Associates. Brown Brothers Harriman & Co.

Page 21 (bottom left) Page 16 Design Painting of David C. DeForest by Samuel F. B.

The Endowment’s annual return for the ten Strong Cohen Morse, Yale University Art Gallery, gift of years ending June 30, 2004 ranks in the top Mrs. Pastora Jacoba DeForest Griffin one percent of institutional funds as measured by the S E I Large Plan Universe.

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