Yale endowment performance on par with peers in slow year for university investment returns

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Tim Tai, Senior Photographer

Yale’s investment return of 1.8 percent for the 2023 fiscal year puts its performance on par with peer institutions. Although Yale’s return was positive, the total value of its endowment dipped to $40.7 billion — down from $41.4 billion in 2022 — after accounting for budget disbursements. 

Of peers that have reported endowment returns for fiscal year 2023, Columbia University saw a 4.7-percent gain, Stanford University a 4.4-percent gain, Cornell University a 3.6-percent gain, Harvard University a 2.9-percent gain, Brown University a 2.7-percent gain and the University of Pennsylvania a 1.3-percent gain. Duke University posted a 1-percent loss, Princeton University a 1.7-percent loss and the Massachusetts Institute of Technology a 2.9-percent loss.

This year marks the first time in 45 years that Yale’s endowment has decreased in value two years in a row; the University’s 0.8-percent return last year also caused the endowment to decrease in value from $42.3 to $41.4 billion. The last time the endowment suffered back-to-back losses — in 1977 and 1978 — the endowment was valued at around $550 million.

But these results also come on the heels of a historic performance in 2021, when the Investments Office reported a 40.2 percent return on its investments, and the endowment’s value soared from $31.2 billion to $42.3 billion. The growth was largely a result of U.S. economic policy during the COVID-19 pandemic, when the Federal Reserve lowered interest rates and the government pumped trillions of dollars into the economy. 

Over the last year and a half, however, the Fed has imposed 11 separate interest rate hikes in an effort to combat pandemic-era inflation. When interest rates rise, the economy cools and stock prices generally fall.

“Given the macroeconomic conditions that we have (higher interest rates for longer), I think that we are going to see poor performance in the next one or two years as well,” Frank Zhang, a professor at the School of Management, wrote to the News. 

Zhang’s prediction falls in line with Chief Investment Officer Matthew Mendelsohn’s prediction of “challenging times ahead” in last year’s endowment press release. Mendelssohn cited rising interest rates, inflation and a tumultuous geopolitical environment as factors that could cause “stiff headwinds” for the Investments Office.

Mendelsohn, now in his third year as Yale’s CIO, did not include a statement in this year’s press release, in a departure from recent custom. Following the initial report, however, he did address the Yale community in a letter outlining the office’s goals for the future. 

“As a 322-year-old institution, Yale benefits from the rare ability to invest with a truly long time horizon,” he wrote in the letter. “Given this, we measure our success over decades, not days, months, or even years.”

Mendelsohn was appointed to the position two months after the death of David Swensen, who had served in the role since 1985.

Under Swensen’s leadership, the Office underwent a priority shift from its investment in traditional assets — stocks and bonds — to “alternative assets,” such as international stock funds, emerging market funds and real estate. Yale’s investment approach under Swensen became known as the “Swensen Model” and is now the standard approach for most large university endowments.

Because of the Swensen Model, most of Yale’s holdings are in alternative assets, which are generally illiquid — they cannot be readily converted to cash. Unlike traditional stocks and bonds, these assets do not have a clearly defined market value before they are sold. 

In his letter, Mendelsohn highlighted the office’s ability to “be patient” with long-term, illiquid assets as one of their “key competitive advantages.”

Some experts argue that these assets make it difficult to analyze Yale’s endowment on a year-to-year basis

“I would be surprised if the endowment returns Yale and others report are completely accurate,” Matthew Spiegal, a professor at the School of Management wrote. “They all invest in quite a few illiquid assets, and it will take time (perhaps years) before they are accurately marked-to-market.”

Of the educational institutions that yielded the highest returns in 2023, most are land-grant universities, such as the University of Nebraska, the University of Illinois and the University of Arkansas, which posted returns of 9.8 percent, 9 percent and 8.2 percent, respectively. This is likely because these institutions favor a more traditional “60-40” approach to stocks and bonds. According to the University of Nebraska’s 2023 investment report, 43.3 percent of its portfolio is invested in an S&P 500 index fund, which responds to the aggregate performance of 500 of the largest publicly traded companies in the U.S.

David Yermack, a professor of finance at New York University’s Stern School of Business, called Yale’s 2023 report “dreadful,” pointing out that from July 2022 to July 2023, stock funds had risen an average of 15.3 percent and bond funds 2.5 percent.  If Yale had had a 60-40 mix of stocks and bonds, he argued, “you would have expected something like a 10.2% return.”

“Large institutional investors like Yale should really be passive investors, trying to diversify as much as possible and minimize costs,” he continued in an email to the News. “If Yale had done that last year, its investment returns would have been 8.4% better. Given the starting value of $41.4 billion, that’s about $3.5 billion that’s been lost due to Yale’s overconfidence about being able to identify attractive alternative investments. Even if this strategy has worked for Yale in the past, it gets harder and harder as an investor grows large.”

But John Longo, the former chief investment officer of Beacon Trust and a professor at Rutgers Business School, told the News that the 60-40 model is not an appropriate benchmark to judge the performance of Yale’s endowment.

He noted that Yale’s peers all follow an alternative investment model, too.

“Performance over a one-year period is not meaningful for an institution like Yale which has a very long-term horizon,” he told the News. “Despite the somewhat disappointing short-term returns, in my opinion, Yale’s approach to managing its investment remains sound.”

Yale’s endowment was first established in 1718 with a donation of 562 British pounds from Elihu Yale.

 

​The value of Yale’s endowment fell for the second consecutive year, but experts told the News that the performance is probably a symptom of broader market trends and not an immediate cause for concern. The value of Yale’s endowment fell for the second consecutive year, but experts told the News that the performance is probably a symptom of broader market trends and not an immediate cause for concern. 

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