耶鲁捐赠基金2017年（耶鲁投资办公室年度报告）

The Yale Endowment

Endowment Highlights

Fiscal Year

2017 2016 2015 2014 2013

Market Value (in millions) $27,176.1 $25,408.6 $25,572.1 $23,894.8 $20,780.0 Return 11.3% 3.4% 11.5% 20.2% 12.5%

Asset Allocation (as of June 30)

Endowment Market Value 1950–2017 $30

$25

$20

Billions $15

$10

$5

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Front cover: Stairway in the Yale University Art Gallery’s older wing, designed by Egerton Swartwout, b.a. 1891, and dating to 1926.

Right: A new Yale landmark: Bass Tower, in Pauli Murray College, at a height of 190 feet, adds a distinctive note to the northern area of campus. Pauli Murray and Benjamin Franklin colleges, opened in 2017, allow Yale College to increase enrollment by 15% to 6,200. Major supporters of the new residential colleges were Charles B. Johnson, b.a. 1954, and Edward P. Bass, b.s. 1968.

Contents

Introduction 2 The Yale Endowment 6 Investment Policy 7 Spending Policy 18 Investment Performance 22 Management and Oversight 26

Introduction Yale’s Endowment generated an 11.3% return, net of fees, in fiscal 2017. Over the past ten years, the Endowment grew from $22.5 billion to $27.2 1 billion. With annual returns of 6.6% during the ten- year period, the Endowment’s performance exceeded its benchmark and outpaced institutional fund indices. For seven of the past ten years, Yale’s ten-year record ranked first in the Cambridge Associates universe. Spending from the Endowment grew during the last decade from $684 million to $1.2 billion, an annual growth rate of 6.0%. Next year, spending will amount to $1.3 billion, or 34% of projected revenues. Yale’s spending and investment policies provide substantial levels of cash flow to the operating budget for current scholars, while preserving Endowment purchasing power for future generations.

Endowment Growth Outpaces Inflation 1950–2017 $30 $28 $26 $24 $22 $20 $18 Billions $16 $14 $12 $10 $8 $6 $4 $2 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Fiscal Year 1950 Endowment Inflated Post-1950 Endowment Gifts Inflated Endowment Market Value 2

Endowed Funding for Residential Colleges

During Yale’s tercentennial celebra- for the purpose of implementing the tion, then-President Richard C. Levin residential college system. Harkness’s remarked: “The residential college contribution allowed the university to system is a major reason why students construct Yale’s first six residential choose to come to Yale and a major colleges and adapt existing buildings reason why Yale College students to create another four. In time, stureport greater satisfaction with their dents came to identify themselves education than students at most peer not just as Elis, but as Berkeleyites, institutions. Our residential system Saybrugians, or Sillimanders. o≠ers its students both the intimacy Since the inauguration of the first of a small college environment and seven colleges in 1933, donor gifts of the vast resources of a major research endowed funds supported and enhanuniversity.” President Levin echoed ced residential college life. Impressed the sentiments of generations of Yale by the success of the residential colalumni when he described the resi- lege program, Harkness followed his dential college system as “one of the glories of Yale.” 1 In the years following World War I, increasing undergraduate enrollment led to crowded living conditions in the University’s dormitories, forcing large numbers of students to live o≠ campus. Concerned that the dispersion of the student body would weaken bonds within the Yale com- 4 munity, the University sought a plan that would promote cohesion among the undergraduate classes. With the encouragement of longtime Yale benefactor Edward S. Harkness, b.a. 1897, 7 1 Branford Yale o∞ cials formu- 2 Saybrook lated a plan for ten 3 Trumbull 4 Hopper Edward S. Harkness residential colleges 5 Jonathan that drew its inspiration from the Edwards college systems of Oxford and 6 Davenport Cambridge. 7 Pierson The plan called for each residential college to occupy a plot roughly the 9 size of a city block, with interconnected buildings enclosing a courtyard. Each college would appoint a master (now called head) to supervise and guide student activities. To create tightly knit communities, each college was to house only a few hundred stu12 dents who lived in close proximity to faculty and enjoyed access to their own library, dining hall, common room, and other activity spaces. In 1928, Harkness made a contribution of $12 million (the equivalent of approximately $170 million today)

initial gift with an additional contribution of roughly $5 million to create an endowment to be “added to the University’s General Funds, the income of which is to be used over a reasonable period of time for Head Masters’ salaries and the Student Aid Fund.” The residential college system— which grew to ten colleges by 1940, 12 by 1963, and 14 by 2017—came to define the undergraduate Yale experience. In addition to providing a close community that undergirds social life at Yale College, residential colleges

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8 Berkeley 8 9 Timothy Dwight 10 Silliman 11 Ezra Stiles 12 Morse 13 Franklin 14 Murray

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provide forums for learning. In 1936 a responded to concerns expressed by the social and academic development generous contribution from Hendon some faculty members that the resi- of students. Mellon’s funding further Chubb, ph.b. 1895, created the dential colleges were overly focused supports the Scholars of the House Hendon Chubb Fund, which brought on social life at the expense of educa- program, which allows one student in distinguished professionals in public tional pursuits. An endowment estab- each college to receive individual life, science, and the lished through Mellon’s Old instruction in creative endeavors or arts to speak at the Dominion Foundation provided fund- advanced scholarship. residential colleges. ing for small seminar courses to be Long after they leave Yale, alumni Thanks to funds o≠ered in each college. Today, the res- identify strongly with their college from Chubb and idential college seminar program, and the residential college system. other sources, in which o≠ers two courses per term in One sign of this bond is the tradition informal sessions each residential college, allows stu- of philanthropy by alumni on behalf known as College dents to explore topics outside of Yale of the residential colleges. Donors Hendon Chubb Teas, students inter- College’s core curriculum. Class topics have given generously to establish act with extraordinary speakers, are evaluated by a committee of stu- additional College Tea and guest lecincluding over the years Harry dents and graduate a∞liates within turer programs, visiting writer proTruman, Ellen Johnson Sirleaf, Gerald each residential college, after which grams, book collections, arts activities, Ford, Sandra Day O’Connor, Jimmy the seminar proposals undergo three social functions, debates, contests, and Carter, Maya Angelou, Kurt levels of faculty review. The current prizes. The college intramural sports Vonnegut, Margaret Marshall, Ronald academic listings include college semi- program inspired a number of Reagan, John Kenneth Galbraith, nars such as Exiles and Migrants in Endowment gifts, including the Meryl Streep, Henry Louis Gates, Jr., Literature and Film, The Mystery of William and Martha Ford Fund, Robert Redford, and Yevgeny Sleep, Espionage and International established in 1981 to support residenYevtushenko. Law, Prison Law and Policy, and The tial college intramurals, and the Paul A vital aspect of the development Literature of Capitalism. Haviland Memorial Fund, established of Yale’s residential Paul Mellon’s support increased in in 1935 to support intramural golf. On college system came subsequent years, with gifts in 1958 the academic side, Jonathan Edwards through the gen- that allowed the construction of two is the host college for the Alan S. erosity of one of the new colleges, Ezra Stiles College and Tetelman ’58 Fellowship and Fund to university’s most Morse College. At the same time, Support Science and Quantitative enthusiastic sup- Mellon financed the appointment of Reasoning in Yale College, which porters, Paul residential college deans in all of the supports a visiting fellowship for Mellon, b.a. 1929. colleges. Deans reside in each college engineers and applied scientists to Paul Mellon In 1952, Mellon and have day-to-day responsibility for meet with students and faculty. It was

Guest Speakers at the Residential Colleges

Harry Truman Ellen Johnson Sirleaf Gerald Ford Sandra Day O’Connor Jimmy Carter Maya Angelou Kurt Vonnegut

Margaret Marshall Ronald Reagan John Kenneth Galbraith Meryl Streep Henry Louis Gates, Jr. Robert Redford Yevgeny Yevtushenko

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Tom Herman and students in his residential college seminar on The Press, Business, and the Economy, photographed during a class visit to the New York Stock Exchange.

A student in Adam Van Doren’s residential college seminar Mastering the Art of Watercolor. established by Damon Wells, b.a. 1958, in memory of Tetelman, “an outstanding young scientist who loved Yale, and whose life was tragically cut short in an airplane accident in 1978.” Today, with the creation of two new colleges, Yale celebrates the first expansion of the residential college system in a half-century. Benjamin Franklin College and Pauli Murray College, which welcomed their first students in 2017, carry on the tradition of integrated social and academic life that defines the Yale undergraduate experience. New allegiances will be forged and Trumbull College intramural softball team. traditions created, contributing to the unparalleled richness of Yale’s undergraduate student life.

Undergraduate Intramurals 2017–2018

Fall Swimming Touch Football Inner-tube Water Polo Men’s Touch Football Bowling Soccer Broomball Tennis Indoor Soccer Cross Country Volleyball Spring Golf Golf Doubles Pickleball Ultimate Soccer Winter Softball Men’s Basketball Spikeball Women’s Basketball Badminton Squash Dodgeball Morse College intramural cross country team.

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The Yale Endowment Totaling $27.2 billion on June 30, 2017, the Yale Endowment contains thousands of funds with various purposes and restrictions. Approximately 2 84% of funds constitute true endowment, gifts restricted by donors to provide long-term funding for designated purposes. The remaining funds represent quasi-endowment, monies that 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 (24%); scholarships, fellowships, and prizes (17%); maintenance (4%); books (3%); and miscellaneous specific purposes (27%). Twenty-five percent of funds are unrestricted. Eighteen percent of the Endowment benefits the overall university, with remaining funds focused on specific units, including the Faculty of Arts and Sciences (35%), the professional and arts schools (25%), the library (7%), and other entities (14%). 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 total investment portfolio. In fiscal 2017 the Endowment provided $1.2 billion, or 33%, of the university’s $3.7 billion operating income. Other major sources of revenues were medical services of $905 million (25%); grants and contracts of $768 million (21%); net tuition, room, and board of $347 million (9%); gifts of $161 million (4%); and other income and transfers of $285 million (8%).

Endowment Fund Allocation Operating Budget Revenue Fiscal Year 2017 Fiscal Year 2017

Other Income and Transfers Maintenance Books Gifts Unrestricted Endowment Scholarships Tuition, Room, and Board

Professorships Medical Services Miscellaneous Specific Purposes Grants and Contracts

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Investment Policy Yale’s portfolio is structured using a combination of academic theory and informed market judgment. The theoretical framework relies on mean3 variance analysis, an approach developed by Nobel laureates James Tobin and Harry Markowitz, both of whom 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 sensitivity of 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 subjective, requiring precise distinctions where none exist. Returns and correlations are di∞cult to forecast. Historical data provide a guide, but must be modified to recognize structural changes and compensate for anomalous periods. Quantitative measures have di∞culty incorporating factors such as market liquidity or the influence of significant, low-probability events. In spite of the operational challenges, the rigor required in conducting mean-variance analysis brings an important perspective to the asset allocation process. The combination of quantitative analysis and market judgment employed by Yale produces the following portfolio:

June 2017 June 2017 Asset Class Actual Target

Absolute Return 25.1% 25.0% Domestic Equity 3.9 4.0 Fixed Income 4.6 5.0 Foreign Equity 15.2 15.5 Leveraged Buyouts 14.2 14.0 Natural Resources 7.8 7.0 Real Estate 10.9 10.0 Venture Capital 17.1 17.0 Cash 1.2 2.5

Head of College House at Benjamin Franklin College. 7

The target mix of assets produces an expected real (after inflation) longterm growth rate of 6.9% with risk (standard deviation of returns) of 13.7%. Because actual holdings di≠er slightly from target levels, the actual allocation produces a portfolio with slightly higher expected growth rate and risk level. 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 percentage point. At its June 2017 meeting, Yale’s Investment Committee adopted changes to the university’s policy portfolio allocations. The committee approved increases in the absolute return target from 22.5% to 25%, in the venture capital target from 16% to 17%, and in the foreign equity target from 15% to 15.5%. The committee approved decreases in the real estate target from 12.5% to 10%, in the leveraged buyouts target from 15% to 14%, and in the natural resources target from 7.5% to 7%. Over the longer term, Yale seeks to allocate approximately onehalf of the portfolio to the illiquid asset classes of leveraged buyouts, venture capital, real estate, and natural resources. The Endowment has made significant progress in reducing illiquidity in the years since the financial crisis. Providing resources for current operations and preserving purchasing power of assets dictate investing for high returns, causing the Endowment to be biased toward equity. The university’s vulnerability to inflation further directs the Endowment away from fixed income and toward equity instruments. Hence, more than 90% of the Endowment is targeted for investment in assets expected to produce equity-like returns, through holdings of domestic and international equities, absolute return strategies, real estate, natural resources, leveraged buyouts, and venture capital. Over the past three decades, Yale dramatically reduced the Endowment’s dependence on domestic marketable securities by reallocating assets to nontraditional asset classes. In 1987, nearly 80% of the Endowment was committed to U.S. stocks and bonds. Today, target allocations call for 11.5% in domestic marketable securities and cash, while the diversifying assets of foreign equity, absolute return, real estate, natural resources, leveraged buyouts, and venture capital dominate the Endowment, representing 88.5% 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 than the 1987 portfolio with lower volatility. Alternative assets, by their very nature, tend to be less e∞ciently priced than traditional marketable securities, providing an opportunity to exploit market ine∞ciencies through active management. The Endowment’s long time horizon is well suited to exploit illiquid, less e∞cient markets such as real estate, natural resources, leveraged buyouts, and venture capital.

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Yale’s New Residential Colleges

On June 6, 2008, the Yale Corporation Benjamin Franklin College made the decision to expand Yale The southern of the two new colleges, College, unanimously approving two Benjamin Franklin College recognizes new residential colleges for construc- the recipient of a Yale honorary degree tion. Benjamin Franklin College and (Hon. m.a. 1753) whose immense Pauli Murray College o∞cially opened accomplishments span the arts, the their doors in August 2017, enabling sciences, government, and service to Yale to expand its total undergraduate society. The forty-one published volenrollment by approximately 15% to umes of Franklin’s papers contain the 6,200 and bringing 800 additional record of his life correspondence and qualified undergraduates to study at stand among the Yale Library’s most Yale every year. The larger undergrad- important collections. The Franklin uate population allows the university Papers, which represent the work of to provide a greater service to society many scholars and editors, shed light by educating a greater number of on Franklin’s relationship with Yale, as promising individuals. The expansion he carried on a decades-long correof Yale College was fully funded by spondence with President Ezra Stiles donors, including transformative gifts on subjects from scientific research to from Charles B. Johnson, b.a. 1954, the growing collections of Yale’s and Edward P. Bass, b.s. 1968. library. Designed by former School of Franklin was a member of the Architecture Dean Robert A.M. Stern, Committee of Five that drafted the m.arch. 1965, the new residential col- Declaration of Independence; a signaleges occupy a tory of that document, of the Treaty of triangle of land Paris, and of the U.S. Constitution; just south of minister to Sweden and France; and Ingalls Rink. The facilities create a new sense of Yale’s geography by enlarging the footprint of Yale College and Robert A.M. Stern connecting Science Hill with the historic center of campus. The colleges’ gothic architecture echoes the character of Yale’s central campus. The dramatic growth in Yale’s Endowment over the past three decades played a critical role in supporting the decision to increase enrollment in Yale College. Expansion the first U.S. Postmaster General. requires more resources to teach, feed, Franklin was a polymath, an innovator house, and entertain the undergradu- and self-taught scientist, as well as a ate population. In 2008, when Yale founding father. He invented the made the decision to build the new lightning rod, glass harmonica, colleges, the University’s Endowment Franklin stove, bifocal glasses, and he per Student (E/S) was $2,011,142. At made key scientific discoveries related the end of fiscal 2017, Yale’s E/S to electricity, the wave theory of light, reached $2,138,164, and with the meteorology, and oceanography. He expansion of Yale College, the increase was the founder of two great academic in enrollment brings Yale’s E/S to institutions. In 1755, Franklin and his $2,105,040, above the 2008 level in associates opened the College of nominal terms and only slightly below Philadelphia, which in 1791 became after adjusting for inflation. the University of Pennsylvania. In 1787

he founded Franklin College, which in 1853 merged with Marshall College to become Franklin and Marshall College. History records Franklin’s past as both a slaveholder and an abolitionist. He owned slaves throughout much of his life, yet toward the end of his life became a leader in the emerging abolitionist movement. In 1787 he was elected president of the Pennsylvania Abolition Society, an organization that dedicated itself to political activism against slavery, as well as the provision of legal aid and education to slaves and other African Americans. One of Franklin’s last acts before his death in 1790 was to petition Congress to “devise means for removing this Inconsistency [slavery] from the Character of the American People.” Urging “mercy and Justice,” he insisted that “equal liberty was originally the Portion” and “is still the Birthright of all men.” Benjamin Franklin’s accomplishments as a scientist, statesman, philosopher, and writer shaped our nation.

Head of Benjamin Franklin College, Charles Bailyn

Head Charles Bailyn has been a member of the Yale community since his undergraduate years, earning his b.s. in astronomy and physics from Yale College in 1981 and returning to campus in 1990 to join the faculty ranks. In 2010 he was named the A. Bartlett Giamatti Professor of Astronomy and

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Physics. From 2011 to 2016 he served as the inaugural dean of the faculty of Yale-NUS College in Singapore. Bailyn studies black holes and related sources of celestial X-rays, as well as dense star clusters and the e≠ects of collisions between stars. His work on measuring the masses of black holes was awarded the 2009 Bruno Rossi Prize from the American Astronomical Society. He has carried out research with a wide variety of ground- and space-based telescopes, including NASA’s Hubble Space Telescope. Bailyn was awarded the Dylan Hixon Prize, Yale’s highest honor for teaching excellence in the natural sciences, in 2004. One of his courses, Frontiers and Controversies in Astrophysics, was among the first to be put online as a part of the Yale Open Courses initiative. In 2014 he published What Does a Black Hole Look Like? with Princeton University Press, to introduce the empirical study of black holes at the undergraduate level. At Yale-NUS, he led a seminar on black holes and was part of the team that developed and delivered the Scientific Inquiry course taken by all students in their first semester. As a Yale undergraduate, Bailyn was awarded the George Beckwith Prize in astronomy and was an avid participant in the a cappella singing scene. After completing his Yale College degree, he pursued graduate work at the University of Cambridge and at Harvard University, receiving his ph.d. from Harvard in 1987 and spending three years as a member of Harvard’s Society of Fellows before returning to Yale as an assistant professor of astronomy. He has served both as chair and as director of undergraduate studies in the Department of Astronomy and was a member of the 2001–2003 Committee on Yale College Education, which reviewed Yale’s undergraduate curriculum. He twice chaired the Teaching, Learning, and Advising Committee in Yale College. In his five years at Yale-NUS, he led the recruitment of more than 100 faculty members and supervised the development of the college’s common curriculum.

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Pauli Murray College The northernmost college, sited closest to Science Hill, Pauli Murray College honors a Yale alumna (j.s.d. 1965, Hon. d.div. 1979) noted for her achievements in law and religion, and for her leadership in civil rights and the advancement of women. Pauli Murray enrolled at Hunter College in the 1920s, graduating in 1933 after deferring her studies during the Great Depression. Later, she began an unsuccessful campaign to enter the all-white University of North Carolina. Murray’s case received national publicity and she became widely recognized as a civil rights activist. A graduate of Howard Law School, Murray had an extraordinary legal career as a champion of racial and gender equity. United States Supreme Court Justice Thurgood Marshall cited her book States’ Laws on Race and Color for its influence on the lawyers fighting segregation laws. President John F. Kennedy appointed her to the Committee on Civil and Political Rights of the President’s Commission on the Status of Women. Awarded a fellowship by the Ford Foundation, Murray pursued a doctorate in law at Yale in order to further her scholarly work on gender and racial justice. She co-authored Jane Crow and the Law: Sex Discrimination and Title VII, in which she drew parallels between gender-based discrimination and Jim Crow laws. In 1965 she received her j.s.d. from Yale Law School, the first African American to do so. Her dissertation was titled “Roots of the Racial Crisis: Prologue to Policy.” Immediately thereafter, she served as counsel in White v. Crook, which successfully challenged discrimination on the basis of sex and race in jury selection. She was a cofounder, with thirty-one others, of the National Organization for Women. Murray was a vice president of Benedict College in Columbia, South Carolina; she left to become a professor at Brandeis University, where she earned tenure and taught until 1973. She was the first person to teach African American studies and women’s studies at Brandeis.

The final stage of Murray’s career continued a life marked by confronting challenges and breaking down barriers. At age sixty-three, inspired by her connections with other women in the Episcopal Church, she left Brandeis and enrolled at the General Theological Seminary. She became the first African American woman ordained as an Episcopal priest. Pauli Murray represents the best of Yale: a preeminent intellectual inspired to lead and to serve her community and her country.

Head of Pauli Murray College, Tina Lu Tina Lu, the inaugural head of Pauli Murray College, joined Yale’s Department of East Asian Languages and Literatures (eall) in 2008, with a secondary appointment in the Department of Comparative Literature. She served as eall’s director of graduate studies (2009–2010), director of undergraduate studies (2012–2013), and chair (since 2013). In 2009 she was a visiting professor with the Yale-PKU program in Beijing; since 2013, she has been a consulting faculty member to YaleNUS College, where she taught as a visiting professor in spring 2015. Specializing in Chinese literature from 1550 to 1750, Lu has written three books–Persons, Roles, and Minds: Identity in Peony Pavilion and Peach Blossom Fan; Accidental Incest, Filial Cannibalism, and Other Peculiar Encounters in Late Imperial Chinese Literature; and the most recent (still

Pauli Murray’s photo on the cover of the civil rights activist’s 2017 biography, Jane Crow, by Rosalind Rosenberg.

being completed) about materiality. Her current work examines time travel and its pre-modern antecedents. With colleagues at other universities in art history and social history, she is

at work on a collaborative book about Xu Wei, the sixteenth-century polymath, playwright, and painter. One of her major ongoing projects is “The Ten Thousand Rooms,” a web-based platform she is developing with grant support from the Mellon Foundation (and in collaboration with her colleague Mick Hunter) that will allow scholars around the world to work together on the transcription, translation, and discussion of premodern Chinese sources. She has been an invited speaker and panelist at dozens of universities and other forums in the United States and internationally. In 2009 she was awarded the Gustav Ranis Prize for Best Book on an International Subject by a Yale Faculty Member. From 2005 to 2011, she was a Mellon Foundation New Directions Fellow. She has served on numerous Yale advisory groups, from the Humanities Program Executive Committee to the Digital Humanities Executive Committee to the Yale-NUS

Advisory and Curriculum Review committees. Her undergraduate courses include The Chinese Tradition, an overview of Chinese culture and history from antiquity to the twentieth century. Lu earned her a.b. in East Asian languages and civilizations and ph.d. in comparative literature from Harvard University. Prior to coming to Yale, she was a member of the faculty at the University of Pennsylvania from 1998 to 2008, earning tenure in 2004.

A gateway carving in Benjamin Franklin College depicts the Angel of History, the Angelus Novus cited in an essay by the critic and philosopher Walter Benjamin, being blown violently backwards into the future.

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Asset Class Yale’s eight asset classes are defined by di≠erences in their expected Characteristics response to economic conditions, such as economic growth, price inflation, or changes in interest rates, and are weighted in the Endowment portfolio by considering their risk-adjusted returns and correlations. The university combines the asset classes in such a way as to provide the highest expected return for a given level of risk, subject to fundamental diversification and liquidity constraints.

Absolute Return In July 1990, Yale became the first institutional investor to define absolute return strategies as a distinct asset class, beginning with a target allocation of 15.0%. Designed to provide significant diversification to the Endowment, absolute return investments are expected to generate high long-term real returns by exploiting market ine∞ciencies. The portfolio is invested in two broad categories: event-driven strategies and value-driven strategies. Event-driven strategies rely on a very specific corporate event, such as a merger, spin-o≠, or bankruptcy restructuring, to achieve a target price. Value-driven strategies involve hedged positions in assets or securities with prices that diverge from their underlying economic value. Today, the absolute return portfolio is targeted to be 25.0% of the Endowment, above the average educational institution’s allocation of 21.8% to such strategies. Absolute return strategies are expected to generate a real return of 4.8% with risk of 8.6%. The Barclays 9 to 12 Month Treasury Index serves as the portfolio benchmark. Unlike traditional marketable securities, absolute return investments have historically provided returns largely independent of overall market moves. Over the past twenty years, the portfolio exceeded expectations, returning 8.9% per year with low correlation to domestic stock and bond markets.

Domestic Equity Equity owners reasonably expect to receive returns superior to those produced by less risky assets such as bonds and cash. The predominant asset class in most U.S. institutional portfolios, domestic equity represents a large, liquid, and heavily researched market. While the average educational institution invests 20.7% of assets in domestic equities, Yale’s target allocation to this asset class is only 4.0%. The domestic equity portfolio has an expected real return of 6.0% with a standard deviation of 18.0%. The Wilshire 5000 Index serves as the portfolio benchmark. Despite recognizing that the U.S. equity market is highly e∞cient, Yale elects to pursue active management strategies, aspiring to outperform the market index by a few percentage points, net of fees, annually. Because superior stock selection provides the most consistent and reliable opportunity for generating attractive 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 fundamental measures such as asset value, future earnings, or cash flow. Yale’s domestic equity portfolio has posted returns of 12.2% per year over the past twenty years.

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Fixed Income Fixed income assets generate stable flows of income, providing more certain nominal cash flow than any other Endowment asset class. The bond portfolio exhibits a low covariance with other asset classes and serves as a hedge against financial accidents or periods of unanticipated deflation. While the typical educational institution’s allocation to fixed income and cash instruments is 12.5%, Yale’s target allocation to fixed income and cash is 7.5%. Bonds have an expected real return of 0.5% with risk of 3.0%. The Barclays Capital 1 to 3 Year Treasury Index serves as the portfolio benchmark. Yale is not particularly attracted to fixed income assets, as they have the lowest expected returns of the eight asset classes that make up the Endowment. In addition, the government bond market is arguably the most e∞ciently priced asset class, o≠ering few opportunities to add significant value through active management. Based on skepticism of active fixed income strategies and belief in the e∞cacy of a highly structured approach to bond portfolio management, the Investments O∞ce chooses to manage Endowment bonds internally. Over the past twenty years, the fixed income portfolio has generated returns of 4.5% per annum.

Foreign Equity Foreign equity investments give the Endowment exposure to the global economy, providing diversification and the opportunity to earn outsized returns through active management. Yale allocates 7.0% of its portfolio to foreign developed markets and 8.5% to emerging markets. Yale’s foreign equity target allocation of 15.5% stands below the average endowment’s allocation of 23.6%. Expected real returns for emerging equities are 7.5% with a risk level of 23.0%, while developed equities are expected to return 6.0% with risk of 18.0%. The portfolio is benchmarked against a composite of developed markets, measured by the msci Europe, Australasia, and Far East (eafe) Investable Market Index, and emerging markets, measured by a blend of the msci Emerging Markets Investable Market Index and the msci China A-Share Investable Market Index. Yale’s investment approach to foreign equities emphasizes active management designed to uncover attractive opportunities and exploit market ine∞ciencies. As in the domestic equity portfolio, Yale favors managers with strong fundamental research capabilities. Capital

Lunchtime in the Benjamin Franklin College dining hall. 13

allocation to individual managers takes into consideration the country allocation of the foreign equity portfolio, the degree of confidence that Yale possesses in a manager, and the appropriate size for a particular strategy. In addition, Yale attempts to exploit mispricings in countries, sectors, and styles by allocating capital to the most compelling opportunities. Twenty-year returns for Yale’s foreign equity portfolio stand at 14.1% per year.

Leveraged Buyouts Leveraged buyouts o≠er extremely attractive long-term risk-adjusted returns, stemming from the University’s strong stable of managers that exploit market ine∞ciencies. The University’s target allocation to leveraged buyouts of 14.0% far exceeds the 5.6% actual allocation of the average educational institution. The leveraged buyout portfolio is expected to generate real returns of 10.0% with risk of 23.6%. Yale’s leveraged buyout strategy emphasizes partnerships with firms that pursue 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. Over the past twenty years, the leveraged buyout program has earned 12.6% per annum.

Natural Resources Equity investments in natural resources—oil and gas, timberland, and agriculture—share common risk and return characteristics: protection against unanticipated inflation, high and visible current cash flow, and opportunities to exploit ine∞ciencies. At the portfolio level, natural resource investments provide attractive return prospects and significant diversification. Yale has a 7.0% policy allocation to natural resources with expected real returns of 6.5% and risk of 24.5%. Yale’s policy allocation is slightly below the 7.8% natural resources allocation of the average endowment. Superior operators have demonstrated the ability to generate excess returns through a market cycle. Over the past twenty years, Yale’s natural resources portfolio has generated an impressive 15.2% per annum.

Real Estate Investments in real estate provide meaningful diversification to the Endowment. A steady flow of income with equity upside creates a natural hedge against unanticipated inflation without sacrificing expected return. Yale’s 10.0% policy allocation significantly exceeds the average endowment’s commitment of 3.2%. Expected real returns are 5.5% with risk of 15.0%. While real estate markets sometimes produce dramatically cyclical returns, pricing ine∞ciencies in the asset class and opportunities to add value allow superior managers to generate excess returns over long time horizons. Twenty-year returns for the portfolio stand at 10.3% per annum.

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Venture Capital Venture capital investments provide compelling option-like returns as the university’s premier venture managers gain exposure to innovative start-up companies from an early stage. Yale’s target venture capital allocation of 17.0% exceeds the 4.8% actual allocation of the average educational institution. The venture capital portfolio is expected to generate real returns of 16.0% with risk of 37.8%. Yale’s venture capital program, one of the first of its kind, is regarded as among the best in the institutional investment community and the university is frequently cited as a role model by other investors. Yale’s venture capital managers field strong, cohesive, and hungry teams with proven ability to identify opportunities and support talented entrepreneurs. The university’s venture capital portfolio contains an unparalleled set of manager relationships, significant market knowledge, and an extensive network. Over the past twenty years, the venture capital program has earned an outstanding 106.3% per annum. 1

Yale Educational Asset Allocations University Institution Mean as of June 30, 2017 Absolute Return 25.1% 21.8% Domestic Equity 3.9 20.7 Fixed Income 4.6 8.7 Foreign Equity 15.2 23.6 Leveraged Buyouts 14.2 5.6 Natural Resources 7.8 7.8 Real Estate 10.9 3.2 Venture Capital 17.1 4.8 Cash 1.2 3.8 1 Yale employs time-weighted returns to assess manager tions during the Internet boom. Since such a calculaperformance in marketable equities and absolute tion assumes reinvestment of proceeds from the portreturn, because the cash flows to and from the asset folio during the period at the same rate of return for classes are determined by the university. Returns the rest of the period, it is inappropriate to compound reported for leveraged buyouts, venture capital, real the 106.3% return over the twenty-year time horizon. estate, and natural resources are dollar-weighted inter- For reference, the twenty-year time-weighted return nal rates of return, because the managers of illiquid of Yale’s venture capital portfolio is 25.5%. Returns asset classes determine when to buy and sell assets. for other illiquid asset classes are not subject to large Yale’s 106.3% venture capital return over the past distortions. twenty years is heavily influenced by large distribu-

Philanthropist Ellen Battell Stoeckel, in one of the stone portraits from Yale’s new colleges (by Paul Russo, of The John Stevens Shop). 15

Financial Aid

The expansion of Yale through Benjamin Franklin and Pauli Murray colleges allows admission of greater numbers of qualified undergraduate students. Yale’s deep commitment to need-blind admissions and financial aid ensures that Yale College remains open to all students, not just those who can a≠ord the full cost of attendance. In 1964, Yale was the first private research university in America to adopt a need-blind admissions policy for undergraduates, backed by a promise to meet their full demonstrated need for financial aid. In 2001, Yale expanded this policy to international students; today, it is one of just five American universities o≠ering global need-blind admissions. By admitting students based on ability—not ability to pay—and by meeting the full financial need of all admitted students (with no loans required), the university ensures that a Yale College education is accessible to the most talented people from around the world, regardless of family income. The Endowment is a critical contributor to Yale’s generous financial aid policies, ensuring that the university remains accessible to students from all backgrounds. In fiscal 2017 the university provided $381 million in financial aid–including $128 million for Yale College students–with 49% coming from Endowment funds restricted or designated for financial aid, 14% from other restricted funds such as grants and spendable gifts, and the balance from unrestricted university funds, including unrestricted Endowment funds. The magnitude and impact of student aid at Yale is impressive. For more than fifty years, the university has been committed to ensuring that cost and ability to pay are not barriers for any student who wishes to attend Yale College. As a result, Yale’s financial aid policies are among the most robust of all U.S. colleges and universities. In meeting 100% of students’ demonstrated financial need, Yale is joined by just 5% of colleges and universities, according to U.S. News. In fact, Yale’s commitment to meeting the full demonstrated financial need of every undergraduate student for all four years of attendance makes it one of the most a≠ordable colleges in the country. No parent with an income under $65,000 (which is above the U.S. median family income), with typical assets, is asked to make a contribution toward their child’s Yale College education. Beginning in 2017, students at this income level receive additional aid in the form of a Start-Up

16

Yale’s first scholarship program was created in 1732 with income from Bishop George Berkeley’s gift of a farm near Newport, Rhode Island. The endowed fund supported graduate studies: Berkeley Scholars over the centuries have included Eleazar Wheelock, first president of Dartmouth College; Eugene

Eleazar Wheelock Eugene Schuyler

Schuyler, the first American ph.d.; and renowned scientist Josiah Willard Gibbs. Yale later named one of the residential colleges for Berkeley. Portrait of Bishop Berkeley by John Smibert, National Portrait Gallery.

Josiah Willard Gibbs

The first endowed scholarship for undergraduate education was established in 1823 through a gift of $5,000 from David DeForest (1774–1825).

Fund, for expenses such as a computer, a winter coat, or the ability to visit family during breaks in the academic year. For families earning between $65,000 and $200,000 (and sometimes beyond), with typical assets, contributions are determined as a percentage of annual income, on a sliding scale that begins at 1% and moves toward 25%. During the 2017–2018 academic year, over 50% of Yale College undergraduates will receive financial aid, with an average grant of $49,575. For students on financial aid, the median annual

Portrait of DeForest by Samuel F.B. Morse, Yale University Art Gallery.

net cost of tuition, room and board, books, and personal expenses is approximately $12,500. Robust financial aid places Yale students at an advantage relative to their peers: 84% of Yale undergraduates graduated debt-free in 2017 and the average debt of those who did borrow totaled just $13,050. In contrast, only 32% of students from all public and private nonprofit colleges graduated debt-free in 2015 (the most recent data available) and the average debt of those who borrowed totaled $30,100.

The university’s generous financial aid allows students to succeed. Yale’s four-year graduation rate of 90% and its six-year graduation rate of 98% are in the 99th and 100th percentiles, respectively, among 1,180 four-year, private, non-profit colleges and universities surveyed by The Chronicle of Higher Education. In an era of growing inequality, higher education is one of the most reliable paths to the American Dream. Yale has strong programs to support first-generation and low-income students and continues to work to increase access to the college. Data indicate that ten years after graduation, Yale alumni achieve similar levels of degree attainment, income, and life satisfaction, regardless of their socio-economic status when they enroll. In an e≠ort to reach low-income students who may not have considered applying to Yale due to a misperception regarding a≠ordability, the university launched educational and outreach campaigns to inform low-income families about the net cost of a Yale College education. Applications from targeted students have increased significantly over the past four years. A record high of 16% of students in the class of 2021 are expected to be the first in their families to graduate from a fouryear college or university, up from 12% in the class of 2017. In another measure of breadth of access, 253 of the U.S. citizens and permanent residents in the freshman class are eligible for federal Pell grants for low-income students, up from 157 in the class of 2017. Yale is committed to an admission policy that does not consider a student’s ability to pay and a financial aid policy that meets the full need of all students, with no loans required. These two principles— need-blind admissions and need-based financial aid—ensure that a Yale education is a≠ordable for everyone, regardless of family background.

17

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 4 conflicting goals of providing 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. The Endowment spending policy, which allocates Endowment earnings to operations, balances the competing objectives of providing a stable flow of income to the operating budget and protecting the real value of the Endowment over time. The spending policy manages the trade-o≠ between these two objectives by combining a long-term spending rate target with a smoothing rule, which adjusts spending in any given year gradually in response to changes in Endowment market value. The target spending rate approved by the Yale Corporation currently stands at 5.25%. According to the smoothing rule, Endowment spending in a given year sums to 80% of the previous year’s spending and 20% of the targeted long-term spending rate applied to the fiscal year-end market value two years prior. The spending amount determined by the formula is adjusted for inflation and constrained so that the calculated rate is at least 4.0%, and not more than 6.5%, of the Endowment’s inflation-adjusted market value two years prior. The smoothing rule and

Ribbon-cutting ceremony at the new colleges, 2017, in the presence of the heads of college, Yale o∞cers and trustees. Left to Right: Tina Lu, Marvin Chun, Charles Bailyn behind Salovey, Peter Salovey, Marta Moret, Josh Bekenstein, G. Leonard Baker, Jr., Anita Bekenstein, Charles Johnson, Edward P. Bass, Jane Levin, Richard C. Levin, Robert A.M. Stern, Mayor Toni Harp. 18

the diversified nature of the Endowment are designed to mitigate the impact of short-term market volatility on the flow of funds to support Yale’s operations. The spending rule has two implications. First, by incorporating the prior year’s spending, the rule eliminates large fluctuations, enabling the university to plan for its operating budget needs. Over the last twenty years, the standard deviation of annual changes in actual spending has been approximately 70% of the standard deviation of Endowment returns. Second, by adjusting spending toward the long-term target spending level, the rule ensures that spending will be sensitive to fluctuating Endowment market values, providing stability in long-term purchasing power. Distributions to the operating budget rose from $684 million in fiscal 2007 to $1.2 billion in fiscal 2017. The university projects spending of $1.3 billion from the Endowment in fiscal 2018, representing approximately 34% of revenues.

Spending Growth Surpasses Inflation 1950–2017 $1,400

$1,200

$1,000

$800 Millions

$600

$400

$200

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Active Management of Endowment Assets

In his 2016 investor letter, Warren the Wilshire 5000 Stock Index, the Bu≠ett decries university endow- Yale and Peers Produce Strong 6.9% return of a classic 60% U.S. ments’ pursuit of market-beating Long-Term Results equity and 40% U.S. bond portfolio,1 returns through active management, Top Ten 20-Year Performers and the 5.2% return of the Barclays suggesting that they would be better Returns Ending June 30, 2017 U.S. Aggregate Bond Index. In terms served by adopting a passive indexing of impact on the university, Yale’s strategy. According to Bu≠ett, human 12.1% 5.2% incremental return over the clasbehavior causes endowments to feel sic 60/40 portfolio added $27.5 billion that “they deserve something ‘extra’ in Yale in the form of higher levels of support investment advice,” precluding them for the operating budget and increased from “meekly” investing in index 11.5% Endowment values. funds, which are available to the Yale is not alone in producing general public. Princeton extraordinary, market-beating results. Yet, Bu≠ett acknowledges that Consider the endowment world’s top identification of high-quality man- 11.4% ten 20-year performers. Each instituagers likely to outperform in the long tion surpassed by a comfortable marrun is “not impossible.” In fact, in his Duke gin the returns of stocks, a stock/bond article “The Superinvestors of mix, and bonds. The high-return 11.4% Graham-and-Doddsville,” Bu≠ett portfolios share a common commitwrites of nine investors he pre-iden- MIT ment to diversification, equity orientatified as winners based on “their tion, and active management, employframework for investment decision- ing a heavy dose of alternative assets. 11.0% making” and “some personal knowl- The alternatives of absolute return, edge of their intellect, character and University private equity, venture capital, natural temperament.” of Virginia resources, and real estate provide not While Bu≠ett appropriately recog- only diversification benefits, but also nizes the challenges investors face in 10.7% abundant opportunities for astute manager selection—perhaps most managers to add value in the investAmherst notably that the vast majority of man- ment process. Bu≠ett notes that alteragers who attempt to outperform fail native assets often carry high fees, but 10.7% after taking into account fees and net returns matter, not gross fees. The expenses—his conclusion goes too far. Notre Dame top performers clearly overcame the The superior results of Yale and a fee burden to post extraordinary number of peers strongly suggest that results. 10.4% active management can be a powerful High-returning endowments began tool for institutions that commit the with much larger allocations to alterStanford resources to achieve superior, risk- natives than other endowments, but adjusted investment results. the margin declined over the years as 10.3% Like Bu≠ett’s identification of the other endowments followed the high Superinvestors, astute observers of returners. On June 30, 1997, the top Dartmouth the investment world could have ten performers committed an average identified more than two decades ago of 48% of endowment funds to nona number of thoughtfully managed 10.2% traditional assets (relative to 9% for all endowments that adopted common other endowments). Twenty years Williams principles: portfolio diversification; later, as of June 30, 2017, the top perequity orientation; and active manage- forming institutions had an average of Wilshire 5000 7.5% ment of ine∞ciently priced assets. Stock Index 63% of endowment assets invested in Critical to the investment programs’ alternatives (relative to 42% for all success is that these principles were 60/40 Portfolio 1 6.9% other endowments). implemented by high-quality invest- Simply articulating appropriate ment professionals overseen by Barclays U.S. targets for alternatives is far from Aggregate Bond 5.2% impressive committees of fiduciaries. su∞cient to achieve investment sucIndex The results have been extraordi- cess. Far more important is to dedicate nary, as demonstrated by Yale’s record. 1 In the 60/40 portfolio, which is rebalanced adequate resources to investment monthly, the equity component is based on For the twenty-year period ending management. Top performers possess the Wilshire 5000 and the bond component June 30, 2017, Yale produced a 12.1% is based on the Barclays U.S. Aggregate strong, dedicated, and skilled investreturn, outpacing the 7.5% return of Bond Index. ment sta≠s that fashion sensible asset

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allocations and identify world-class letter, Bu≠ett writes that institutions majority of individuals and institutions investment funds. Investment profes- may be lured by the “siren song of a that are unable (or unwilling) to comsionals develop networks from which high-fee manager” and that “this year mit the resources (human and financial) they learn of compelling investment the magic potion may be hedge funds, necessary for active management opportunities and conduct due diligence next year something else.” While success. Yet, Bu≠et’s advice is not on prospective managers. They struc- Bu≠ett’s claims may be true of some appropriate for the cohort of endowture fund investments with aligned poorly managed institutions, Yale’s ments that possess the capabilities incentives to drive superior net-of-fee prospective managers are thoroughly to pursue successful active manageresults. researched and carefully considered; ment programs. Even though a sta≠-driven process manager hiring decisions are made with The results of the top ten performers is required to navigate today’s complex the hope of establishing enduring rela- amaze. Their well-diversified portfolios investment landscape, e≠ective over- tionships. In fact, Yale’s manager crush the returns produced by U.S. sight by a strong investment committee turnover averaged 7.7% over the past stocks, adding untold billions of dollars plays an important role in investment decade, implying a thirteen-year holding to support the educational missions of success. In normal markets, strong period. Similarly, asset allocation deci- their institutions. The fabulous returns governance improves outcomes by sions are not driven by the flavor-of- generated by the top performers result demanding that investment profession- the-month, but by underlying asset class from long-standing commitments to als bring their best e≠orts. In times of characteristics and opportunities. That sound investment principles implementmarket disruption, support from invest- decisions are influenced by the allure of ed by top-notch investment teams ment committees allows maintenance a “magic potion” could not be further under the oversight of world-class govof sensible policies, even while other from the truth. ernance bodies. Not only has the model investors react perversely. In advocating the adoption of a pas- worked for the past two decades, it will Yale and other top endowments sive indexing strategy, Bu≠ett provides work for decades to come. operate with a long time horizon. In his sound investment advice for the vast

The Ti≠any window in Woodbridge Hall, the administrative building that contains o∞ces for the president and secretary as well as the Yale Corporation Room.

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Investment Performance Yale has produced excellent long-term investment returns. Over the tenyear period ending June 30, 2017, the Endowment earned an annualized 5 6.6% return, net of fees, placing Yale among the top 4% of colleges and universities. Over the same period, domestic stocks returned 7.3% and domestic bonds returned 4.5%. Endowment performance stems from sound asset allocation policy and superior active management. Yale’s long-term superior performance relative to its peers and benchmarks creates substantial wealth for the university. Over the ten years ending June 30, 2017, Yale added $5.3 billion relative to the average return of a broad universe of college and university endowments and $3.5 billion relative to its passive benchmark.

Performance by Yale’s long-term asset class performance continues to be outstanding. Asset Class In the past ten years, nearly every asset class posted superior returns, outperforming benchmark levels. Over the past decade, the absolute return portfolio produced an annualized 4.8% return, exceeding the passive Barclays 9 to 12 Month Treasury Index by 3.6% per year and besting its active benchmark of hedge fund manager returns by 3.4% per year. For the ten-year period, absolute return results exhibited little correlation to traditional marketable securities. The domestic equity portfolio returned an annualized 10.9% for the ten years ending June 30, 2017, outperforming the Wilshire 5000 by 3.6% per year and the bny Median Manager return, net of estimated fees, by 4.1% 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 2.6% over the past decade, underperforming the passive index and exceeding the bny Median Manager return, net of estimated fees, by 0.2% per year. Because the fixed income portfolio serves as the University’s primary source of liquidity, the Endowment generally forgoes opportunities to generate excess returns in less liquid securities.

Yale’s Performance Exceeds Peer Results June 30, 2007 to June 30, 2017, 2007=$100 $200

$100 of $100 Growth

The foreign equity portfolio generated an annual return of 11.4% over the ten-year period, outperforming its composite passive benchmark by 8.7% per year and the bny Median Manager return, net of estimated fees, by 9.5% per year. The portfolio’s excess return is due to astute country allocation and e≠ective security selection by active managers. Leveraged buyouts generated an annualized 8.8% return over the decade, outperforming the composite passive benchmark by 2.7% per year and performing in line with the pool of buyout and growth equity managers compiled by Cambridge Associates. Yale’s natural resources portfolio produced an annualized return of 5.8% over the past decade, surpassing its composite passive benchmark by 7.1% per year and the Cambridge Associates natural resources manager pool by 1.2% per year. Yale’s strong performance results from partnership with superior operators. Real estate generated a 2.1% annualized return over the ten-year period, underperforming the msci u.s. reit Index by 2.4% per year and the pool of Cambridge Associates real estate managers by 1.9% per year. The venture capital portfolio earned an annualized return of 14.0% for the ten years ending June 30, 2017, exceeding its composite passive benchmark by 6.0% per year and the Cambridge Associates venture capital manager pool by 4.6% per year. Yale’s venture capital program focuses on premier firms that are likely to generate superior returns by emphasizing a value-added approach to company building.

Yale Asset Class Results Beat Most Benchmarks June 30, 2007 to June 30, 2017 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Absolute Domestic Fixed Foreign Leveraged Natural Real Venture Return Equity Income Equity Buyouts* Resources* Estate* Capital* Yale Return Active Benchmark Passive Benchmark * Yale Returns and Active Benchmarks are dollar-weighted. Active Benchmarks Passive Benchmarks Absolute Return: Credit Suisse and HFRI Hedge Fund Composite Absolute Return: Barclays 9-12 Month Treasury Domestic Equity: bny Median Manager, U.S. Equity, with fee Domestic Equity: Wilshire 5000 adjustment of 78 basis points per annum Fixed Income: Barclays 1-3 Year Treasury (Barclays 1-5 Year Fixed Income: bny Median Manager, Fixed Income, with fee Treasury from July 2008 to September 2013, LB Treasury adjustment of 33 basis points per annum Index from July 2007 to June 2008) Foreign Equity: bny Median Manager Composite, Foreign Foreign Equity: Blend of msci eafe Investable Market Index, Equity, with fee adjustment of 80 basis points per annum msci Emerging Markets Investable Market Index, msci for developed equity and 98 basis points per annum for China A-Share Investable Market Index emerging equity Leveraged Buyouts: Blend of Russell 2000, msci acwi ex-U.S. Leveraged Buyouts: Cambridge Associates Leveraged Buyouts Small-Cap Index Composite Natural Resources: Blend of Custom Timber reit Basket, S&P Natural Resources: Cambridge Associates Natural Resources O&G Exploration & Production Index, Euromoney Global Real Estate: Cambridge Associates Real Estate Mining Index Venture Capital: Cambridge Associates Global Venture Capital Real Estate: msci u.s. reit Index Venture Capital: Blend of Russell 2000 Technology, msci China Small-Cap Index, msci India Small-Cap Index 23

Manager Sourcing

Long-term investment success begins with the identification of top-tier managers. Yale searches rigorously to find exceptional managers who demonstrate a sound investment philosophy, a passion for investing, and a competitive edge. Common among the portfolio’s diverse partnerships is a strict adherence to first principles: intellectual honesty, analytical rigor, high integrity, and a passion for markets. The combination of these qualities forms the foundation to achieve market-beating returns over a longterm horizon. E≠ective manager sourcing requires deep knowledge of market participants across the investment landscape. The university regularly considers opportunities and strategies ignored by other investors. With an emphasis on the merits of an idea and the people pursuing it, Yale established early partnerships with groups that are now considered premier managers in mar-

Architectural detail at Pauli Murray College.

24

ketable securities, leveraged buyouts, venture capital, real estate, absolute return, and natural resources. Start-up and early-stage firms play a central role in the Endowment’s sourcing process. While many institutions seek established managers with long-standing audited track records, Yale keeps an open mind to nontraditional firms and looks beyond standard metrics to assess the integrity and skills of investment professionals. Yale pays particularly close attention to start-up and early-stage firms run by seasoned principals, believing that investment talent and entrepreneurial drive outweigh the risks of backing an unproven firm. Yale works diligently with new firms to build close relationships and o≠ers introductions to other high-quality endowments and foundations. This approach does not preclude Yale from pursuing established firms with strong track records. Yale’s repu-

tation often places the university in a prime position for allocations with the most sought-after managers, even if they are reluctant to open to outside capital. O∞ce sta≠ maintain conversations, sometimes for years, before a window to invest with a manager opens. Over several decades, the Investments O∞ce has established a robust and sophisticated sourcing process, enhancing the university’s natural advantages and employing a number of innovative approaches. Yale’s network provides unrivaled access to high-caliber deal flow. Nearly half of the new managers hired by the Investments O∞ce over the last decade were discovered through existing managers, alumni, and industry professionals. The Endowment’s portfolio frequently generates high-quality leads, creating a virtuous circle that underscores the importance of elite manager identification. In addition,

the university’s accomplished alumni scale pools of capital or operate as provide an important pipeline for new one-person shops. Several unconvenopportunities. Former Investments tional managers rank among Yale’s O∞ce employees and interns extend longest-lasting and most fruitful Yale’s reach across the investment partnerships. management industry, providing The Investments O∞ce closely important introductions. tracks the investment landscape and Yale attracts hundreds of inbound directly contacts intriguing prospective inquiries from prospective managers managers. Public information about every year. The university’s track investment firms has grown and record as a leading long-term partner become more searchable, allowing Yale makes it a sought-after target for firms to pursue desktop research as a sourcraising capital. While the yield is low, ing strategy. Online databases, industhe Investments O∞ce reviews and try publications, and social media protracks every inbound solicitation. In vide useful channels to aid the discovaddition, Yale collaborates with place- ery of top fund managers. Filings ment agents, particularly in real estate, required for SEC registration, such as leveraged buyouts, and natural Form ADV, contain information about resources, to increase inbound deal the principals and investment strateflow and receive early looks at new gies at registered firms. In addition, funds. We fully encourage investors of Yale’s investment process requires sta≠ all types – large or small, traditional members to spend time on the road or nontraditional – to contact the overseeing managers and understandInvestments O∞ce and recognize that ing the global opportunity set. Ontalented prospects may manage sub- the-ground e≠orts, including atten-

The Lighten Theater, located in Pauli Murray College, serves both of the new colleges.

dance at industry conferences, generate direct outreach that would not arise from the university’s existing network, inbound solicitations, or desktop research. While the sourcing process inevitably produces many dead ends, a deep internal sta≠, close mentorship, and intra-o∞ce collaboration encourage the sharing of useful insights regarding new initiatives. As the industry evolves, the Investments O∞ce will employ its expertise, network, and resources to enhance the university’s competitive advantages, to promote innovative thinking and, ultimately, to identify more marketbeating managers.

Please e-mail [email protected] to begin a conversation. All inquiries are welcome!

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Management and Since 1975, the Yale Corporation Investment Committee has been responOversight sible for oversight of the Endowment, incorporating senior-level investment experience into portfolio policy formulation. The Investment 6 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 O∞ce sta≠. The committee approves guidelines for investment of the Endowment portfolio, specifying investment objectives, spending policy, and approaches for the investment of each asset category.

Investment Committee Douglas A. Warner, iii ’68 Ann Miura-Ko ’98 Chairman Co-Founder Former Chairman Floodgate J.P. Morgan Chase & Co. Kevin Ryan ’85 Francis Biondi ’87 Chairman and Founder Managing Member MongoDB, Zola, Workframe, King Street Capital Management and Nomad Health

Michael J. Cavanagh ’88 John Shrewsberry ’92 mppm Senior Executive Vice President and cfo Senior Executive Vice President and cfo Comcast Corporation Wells Fargo & Company

Charles W. Goodyear iv ’80 Peter Salovey ’86 ph.d. President President Goodyear Investment Company Yale University

Ben Inker ’92 Carter Simonds ’99 Partner Former Managing Director gmo Blue Ridge Capital

Paul Joskow ’72 ph.d. Dinakar Singh ’90 President Emeritus ceo and Founding Partner Alfred P. Sloan Foundation tpg-Axon Capital

A window facing one of the internal courtyards of Pauli Murray College. 26

The Investments O∞ce manages the Endowment and other University financial assets, and defines and implements the University’s borrowing strategies. Headed by the Chief Investment O∞cer, the o∞ce currently consists of 31 professionals.

Investments O∞ce David F. Swensen ’80 ph.d. ’14 l.h.d. Michael E. Finnerty Chief Investment O∞cer Associate Director Dean J. Takahashi ’80, ’83 mppm Patrick K. Sherwood ’13 m.b.a. Senior Director Associate Director

Carrie A. Abildgaard Celeste P. Benson Director Senior Portfolio Manager

Alexander C. Banker Michael Knight Director Senior Business Associate

Alan S. Forman Bertan Akin Director Senior Performance Associate

R. Alexander Hetherington ’06 Amy M. Chivetta Director Senior Associate

Lisa M. Howie ’00, ’08 m.b.a. Timothy H. Hillas ’13 Director Senior Associate

Matthew S. T. Mendelsohn ’07 Daniel J. Otto ’12 Director Senior Associate

John V. Ricotta ’08 E. Benjamin VanGelder ’13 Director Senior Associate

Timothy R. Sullivan ’86 Laura W. Bass ’15 Director Senior Investment Analyst

Xinchen Wang ’09 Sophia B. Jia ’14 Director Senior Investment Analyst

Kenneth R. Miller ’71 Robert J. Pecoraro ’15 Senior Associate General Counsel Senior Investment Analyst Deborah S. Chung John T. Ryan ’14 Senior Associate General Counsel Senior Investment Analyst

Stephanie S. Chan ’97 Jonathan W. Lam ’16 Associate General Counsel Investment Analyst Sohail S. Ramirez ’10 jd Ahmed L. Sarhan ’16 Associate General Counsel Investment Analyst

Peter N. Steinwachs Associate General Counsel

27

Sources Financial and Investment Information Educational institution asset allocations and returns from Cambridge Associates.

Much of the material in this publication is drawn from memoranda produced by the Investments O∞ce for the Yale Corporation Investment Committee. Other material comes from Yale’s financial records, Reports of the Treasurer, and Reports of the President.

Yale’s New Residential Colleges Information comes from the following pages on the university Web site (www.yale.edu):

Yale College, Benjamin Franklin College

Yale College, Pauli Murray College

Yale University O∞ce of the President

Yale University: The New Residential Colleges

Financial Aid at Yale The Chronicle of Higher Education. “College Completion.” Accessed at http://collegecompletion.chronicle.com/

cofhe Alumni Survey (2009). Data provided by Yale’s O∞ce of Institutional Research (oir).

A confidentiality agreement with cofhe allows Yale-specific data to be cited, but not findings based on the overall cofhe sample.

The Institute for College Access & Success. “Student Debt and the Class of 2015.” October 2016. Accessed at http://ticas.org/sites/default/files/pub_files/ classof2015.pdf.

Powell, Farran. “Colleges That Claim to Meet Full Financial Need.” U.S. News & World Report, September 19, 2016. Accessed at https://www.usnews.com/education/bestcolleges/paying-for-college/articles/2016-09-19/ colleges-that-claim-to-meet-full-financial-need.

Victor, Jon. “Cornell Changes to Need-aware Policy.” Yale Daily News, February 24, 2016. Accessed at http://yaledailynews.com/blog/2016/02/24/cornellchanges-to-need-aware-policy/

Yale University Financial Aid

Yale University O∞ce of Admissions

Yale University O∞ce of Financial Planning and Analysis

Photo Credits Front cover photo and pages 1, 10, 21: Michael Marsland, Yale O∞ce of Public A≠airs & Communications. Portrait (page 16) of Bishop George Berkeley, oil on canvas, by John Smibert, National Portrait Gallery, Smithsonian Institution, gift of the Morris and Gwendolyn Cafritz Foundation. Portrait (page 17) of David C. DeForest, oil on canvas, by Samuel F.B. Morse, Yale University Art Gallery, gift of Mrs. Pastora Jacoba DeForest Gri∞n, 1893. Inside back cover and pages 25, 28 : Peter Aaron/Otto Archives l.l.c. Additional photos: Tony Fiorini Intramural Sports O∞ce, Yale Athletics Patrick Pinnell Yale Residential College Seminar Program Design Strong Cohen llc/L. Feher Captions: Page 28: Yale rotc cadets in the main gateway to Benjamin Franklin College, with its ornate wrought-iron and brickwork construction. This page: View of Pauli Murray College facing west from Prospect Street, with Bass Tower in the distance. Back cover: Aerial view of Yale's new colleges, with Bass Tower at left.