Yale Endowment Grows 28 Percent, Tops $22 Billion

The Yale Endowment, which has led the academic world in investment performance over the last decade, posted a 28 percent return Wednesday for the fiscal year ended June 30, bringing its total value to $22.5 billion.

The endowment, which has been run by David F. Swensen since 1988, outperformed all its competitors, according to preliminary data widely circulated among endowment offices.

The Yale Endowment has had a 17.8 percent average annual return over the last decade, beating Harvard, its nearest rival in size, by 2.8 percentage points. During that 10-year period, Princeton came closest to Yale, with a 16.2 percent return.

The second-best-performing school last year was Amherst College, which generated a 27.8 percent return, to raise its value to $1.7 billion. Generally the larger university endowments do better than the smaller ones, according to data compiled by the National Association of College and University Business Officers.

Among the top 10 performing endowments last year, Notre Dame, Duke, Michigan, Virginia and Northwestern all had returns over 25 percent. Notre Dame came in third behind Yale and Amherst at 25.9 percent. Harvard, which has been in the news lately because of the sudden departure of its investment chief, Mohamed A. El-Erian, posted a 23 percent return, bringing its endowment to $34.9 billion.

Many indexes also posted very strong results in the fiscal year. The Wilshire 5000 was up 19.6 percent, and the Standard & Poor’s 500-stock index rose 18.36 percent, while the Morgan Stanley Emerging Markets index rose 41.76 percent.

Nevertheless, Mr. Swensen, who was an early leader in creating a strategy of investments diversified beyond stocks and bonds, outperformed rivals. He argued in his book “Pioneering Portfolio Management” that depending solely on stocks and bonds would not necessarily provide enough protection to a fund. His approach has led Yale’s endowment into hedge funds, private equity funds and hard assets like timber and oil and gas, and made his performance one that is closely watched by Wall Street.

A growing number of schools have followed suit. “What Swensen taught everyone to do was not to get the preferred return on bonds because it was too low and to control risk by diversification and careful selection of managers, and he is very good at picking managers,” said Bruce C.N. Greenwald, professor of finance at Columbia University Business School.

While fiscal 2007 was a generally bullish time for markets, the last several months have been tumultuous as the housing market debacle took its toll on many investors. Mr. Swensen said that in the last three months, the university had posted “modest positive investment returns.”

But he was noncommittal about the coming months. “Things look tough to me, but that is always the case,” he said.

While Yale’s 28 percent return appears to be the best return last year for a university endowment, in 2000 Yale had a 41 percent return, Mr. Swensen said in an e-mail message. “But the dollar gains were less because we were working with a lower base,” he wrote. “Our $5 billion of fiscal year 2007 investment gains amazes me.”

The endowment’s performance has become increasingly crucial to Yale. Projected spending from the endowment in the university’s 2007-8 fiscal year is $843 million, or 37 percent of Yale’s net revenue. The endowment’s contribution to Yale’s operating budget has increased nearly fourfold in 10 years, and is its single largest source of support.

Yale’s endowment continues to be diversified, but Mr. Swensen declined to say which asset class performed best. His target asset allocation for fiscal 2008 is fairly similar to the allocation for 2007. The biggest allocation — 28 percent of Yale’s funds — is in real assets. Last year, those included real estate, oil and gas and timberland, Yale’s report showed.

The second-largest allocation is to what Yale calls absolute return investments, which generally means hedge funds. Yale is slightly reducing that stake to 23 percent, from 25 percent, according to Mr. Swensen.

The endowment is also planning a slight reduction in domestic equities to 11 percent, from 12 percent. Fixed-income and private equity will remain at 4 percent and 15 percent respectively, and private equity is increasing 2 percentage points to 19 percent, Mr. Swensen said.

Mr. Swensen said yesterday that nearly all the numbers that universities reported were above the Cambridge Associates median 19.3 percent for colleges and universities. “This is another case of the larger endowments (with diversified, equity-oriented portfolios) doing better than the smaller endowments,” he said.

The endowment world is extremely competitive. As one expert on endowments noted, it was an easy year to have a relatively high number, but for endowment managers the question was how they did against the internal benchmarks they create for each asset class. For equities, that could be the Wilshire 5000 or the S&P, for example. For hedge funds, it might be the performance of funds of funds that own a range of hedge funds. An equally important measure is how the endowment did against its peers.