Yale Endowment

Lately there are many universities ask supports from their students, student families to more funding so that tuitions can be tamed. Under the gun of legislation, such pursuit may not always work. Let's see how Yale, a private ivory university, as a case study.

The performance of university endowments is vital to the survival of a university. It is very difficult for universities to finance itself on tuition alone, and alumni contributions to meet the shortfall (how much is the return rate for those contribution appeal letters from university fellows?). During a time that many public and private universities are screaming for funding, it is a good case study on Yale Endowment performance.

Yale was founded in 1701, but the endowment was created in early 1800s to seek the independence of the college. Alumni contributed gifts. The treasurer and two trustees were responsible for the endowment. However, the first generation trustees almost sank the whole endowment because they put money solely in a bank they founded it.

Yale survived the trustee's bungling. By 1900 the endowment was $5M and still supervised informally and casually by the treasurer and the trustees. A board of trustees meets on the affairs of the university. In the Great Recession, Yale was 42% in equity so it was hit hard. After that, Yale mostly put their endowment in fixed income, which underperformed significantly during the 60s-80s bull market.

Changes came in 70s when Yale started to own partially a company called Endowment Management &Research (EMR). EMR invested most of the endowment in high growth stocks which started to peak in late 70s. EMR was terminated by Yale.

In 1985, David Swensen was recruited by Yale. That is the real turning point for the endowment. In the coming 20 years, the endowment grew at 21.1% with $22.6B asset. Very little invested in domestic and a lot in real estate, foreign equities, income strategies, and timber. The investing principles are 1) be owner of equities 2) diversified portfolio 3) select great investment managers 4) use outside managers 5) reward outside managers accordingly.
What are outside managers? They are hedge fund managers. Since these outside managers had added one more layer in endowment management and they are eager to demonstrate their performance, performance is the best in all universities while Swensen was in charge. According to Charlie Munger, Warren Buffet's partner, if one layer of fund management works, one more must be better.

In this case, fund management plays a critical role in Yale's success. It is always not late to learn.