耶鲁捐赠基金2013年（耶鲁投资办公室年度报告）

The Yale Endowment Endowment Highlights Fiscal Year 2013 2012 2011 2010 2009 Market Value (in millions) $20,780.0 $19,344.6 $19,374.4 $16,652.1 $16,326.6 Return 12.5% 4.7% 21.9% 8.9% -24.6% Spending (in millions) $1,024.0 $994.2 $ 986.8 $ 1,108.4 $ 1,175.2 Operating Budget Revenues $2,968.6 $2,851.7 $2,734.2 $2,681.3 $2,559.8 (in millions) Endowment Percentage 34.5% 34.9% 36.1% 41.3% 45.9% Asset Allocation (as of June 30) Absolute Return 17.8% 14.5% 17.5% 21.0% 24.3% Domestic Equity 5.9 5.8 6.7 7.0 7.5 Fixed Income 4.9 3.9 3.9 4.0 4.0 Foreign Equity 9.8 7.8 9.0 9.9 9.8 Natural Resources 7.9 8.3 8.7 8.8 11.5 Private Equity 32.0 35.3 35.1 30.3 24.3 Real Estate 20.2 21.7 20.2 18.7 20.6 Cash 1.6 2.7 -1.1 0.4 -1.9 Endowment Market Value 1950–2013 $25 $20 $15 Billions $10 $5 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Fiscal Year Contents 1. Introduction 2 2. The Yale Endowment 4 3. Investment Policy 5 4. Spending Policy 14 5. Investment Performance 16 6. Management and Oversight 18 Front cover: Window of Sterling Memorial Library, east façade.

Right: Detail of gate leading to Old Campus from Elm Street.

Introduction Yale’s Endowment generated a 12.5 percent return in fiscal 2013, produc-ing an investment gain of $2.29 billion. Over the past ten years, the Endowment grew from $11.03 billion to $20.78 billion. With annual net ten-year investment returns of 11.0 percent, the Endowment’s performance exceeded its benchmark and outpaced institutional fund indices. For nine of the past ten years, Yale’s ten-year record ranked first in the Cambridge Associates universe. The Yale Endowment’s twenty-year record of 13.5 percent per annum produced a 2013 Endowment value of over six times the 1993 value. Yale’s excellent long-term record stems from disciplined and diversified asset allocation policies and superior active management results. Spending from the Endowment grew during the last decade from $470 million to $1.02 billion, an annual growth rate of approximately 8 percent. On a relative basis, Endowment contributions expanded from 30 percent of total revenues in fiscal 2003 to 34 percent in fiscal 2013. Next year, spending will amount to $1.05 billion, or 35 percent 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 1950–2013 $26 $24 $22 $20 $18 $16 $14 Billions B $12 $10 $8 $6 $4 $2 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Fiscal Year 1950 Endowment Inflated Post-1950 Endowment Gifts Inflated Endowment Market Value The Yale Model The Yale model of endowment investing oriented investments and, over long peri- half of its current value of $20.78 billion. has come under intense scrutiny for its per- ods of time, fail to generate the returns Furthermore, the spending distribution to formance during the recent financial crisis. required to support current University fund University operations during fiscal Skeptics suggest that the Yale Endowment, operations while preserving the purchasing 2013 would have totaled approximately with its emphasis on diversification and power of assets. $440 million, significantly below Yale’s active management of equity-oriented, Yale’s portfolio, positioned for strong actual spending distribution of $1.02 often-illiquid assets, failed to deliver on long-term returns, lacked significant expo- billion. Cumulative spending over the its promise. sure to low-expected-return Treasury secu- twenty-five-year period would have been Critics argue that Yale’s model lacked rities and su≠ered in the market meltdown. approximately 40 percent below actual diversification in times of crisis, evidenced The Endowment’s decline of 24.6 percent spending levels, which surpassed $11.60 by the Endowment’s 24.6 percent decline underperformed peer returns of -22.0 per- billion for the period. for the fiscal year ending June 30, 2009. cent and a classic 60 percent U.S. equity In periods both before and after the In the global financial crisis, as in the 1998 and 40 percent Treasury bond portfolio crisis, Yale’s Endowment performed Asian financial crisis and the 1987 stock return of -13.2 percent. Critics presented admirably. In nine of the past ten years, the market crash, global markets exhibited Yale’s short-term underperformance as University’s ten-year returns stood atop the concurrent broad-based declines. Correla- validation of traditional asset allocations Cambridge Associates universe. In fiscal tions of risky assets increased markedly as focused heavily on public equities and 2004, when Yale failed to post the top ten-market participants expressed extreme fixed income. Although the Endowment year return, the University placed second. preferences for liquidity and quality. While produced painful losses in fiscal 2009, the Even in an environment that included an these were painful periods for equity-ori- results of any one-year period tell very extraordinary financial crisis, the Yale ented investors, they were short lived as little about the e∞cacy of a long-term model excelled. individual countries and markets soon investment strategy. Performance over While traditional asset allocations held reverted to fluctuating in response to coun- longer horizons demonstrates the strength up well during fiscal 2009 and in the try- and asset-specific drivers of perform- of Yale’s investment program. immediate aftermath of the crisis, that ance. During the bleak period of poor per- While Yale’s diversified, equity-oriented short-term outperformance came at a heavy formance and high correlation, full faith portfolio underperformed during the cost to the growth of a portfolio’s value and credit holdings of the U.S. government financial crisis, it handsomely outper- over the long term. During periods when provided the only safe harbor. The short- formed a traditional U.S. stock and bond traditional portfolios outperform, critics term protection to investor portfolios pro- portfolio over the past twenty-five years. are quick to cast aspersions on the Yale vided by U.S. Treasury securities comes at If Yale’s assets had been invested in the 60 model, but traditional 60 percent equity/40 a high long-term price, however. Expected percent equity/40 percent bond portfolio percent bond portfolios are not diversified, returns for fixed income instruments fall since 1988, the Endowment would be val- not equity-oriented, and not appropriate short of expected returns for equity- ued at only $9.11 billion today, less than for long-term investors.

Aerial view showing Yale Divinity School (top), Betts House and Greenberg Conference Center (middle), and Leitner Observatory and Planetarium (bottom right).

The Yale Endowment Totaling $20.78 billion on June 30, 2013, the Yale Endowment contains thousands of funds with various purposes and restrictions. Approximately 85 percent 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 per-cent); scholarships, fellowships, and prizes (17 percent); maintenance (4 percent); books (3 percent); and miscellaneous specific purposes (27 percent). Twenty-five percent of funds are unrestricted. Twenty-two percent of the Endowment benefits the overall University, with remaining funds focused on specific units, including the Faculty of Arts and Sciences (37 percent), the professional schools (26 percent), the library (7 per-cent), and other entities (7 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 total investment portfolio.

In fiscal 2013 the Endowment provided $1.02 billion, or 34 per-cent, of the University’s $2.97 billion operating income. Other major sources of revenues were grants and contracts of $680 million (23 per-cent); medical services of $616 million (21 percent); net tuition, room, and board of $272 million (9 percent); gifts of $135 million (5 percent); and other income and transfers of $241 million (8 percent).

Endowment Fund Allocation Operating Budget Revenue Fiscal Year 2013 Fiscal Year 2013 Books Other Income and Transfers Maintenance Gifts Unrestricted Endowment Scholarships Tuition, Room, and Board Medical Services Professorships Miscellaneous Specific Grants and Contracts Purposes 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, 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 quite 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 2013 June 2013 Asset Class Actual Target Absolute Return 17.8% 20.0% Domestic Equity 5.9 6.0 Fixed Income 4.9 5.0 Foreign Equity 9.8 11.0 Natural Resources 7.9 8.0 Private Equity 32.0 31.0 Real Estate 20.2 19.0 Cash 1.6 0.0 Berkeley College, a winter view of the windows of the Common Room.

The target mix of assets produces an expected real (after inflation) long-term growth rate of 6.3 percent with risk (standard deviation of returns) of 14.8 percent. Because actual holdings di≠er from target levels, the actual allocation produces a portfolio expected to grow at 6.2 percent with risk of 14.8 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 percentage point. At its June 2013 meeting, Yale’s Investment Committee adopted a number of changes to the University’s policy portfolio allocations. The Committee approved increases in the absolute return target from 18 per-cent to 20 percent, in the foreign equity target from 8 percent to 11 per-cent, in the natural resources target from 7 percent to 8 percent, and in the fixed income target from 4 percent to 5 percent. Those increases were funded by a three percentage point decrease in the real estate target and a four percentage point decrease in the private equity target. Over the longer term, Yale seeks to allocate approximately one-half of the portfolio to the illiquid asset classes of private equity, real estate, and natural resources. The Endowment has made significant progress on this dimension over the past five years.

Providing resources for current operations and preserving the 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, 95 percent of the Endowment is targeted for investment in assets expected to produce equity-like returns, through holdings of domestic and international securities, absolute return strategies, real estate, natural resources, and private equity. Over the past two decades, Yale dramatically reduced the Endow-ment’s dependence on domestic marketable securities by reallocating assets to nontraditional asset classes. In 1993, 47 percent of the Endow-ment was committed to U.S. stocks, bonds, and cash. Today, target allo-cations call for 11 percent in domestic marketable securities, while the diversifying assets of absolute return, foreign equity, natural resources, private equity, and real estate dominate the Endowment, representing 89 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 than the 1993 portfolio with similar 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 manage-ment. The Endowment’s long time horizon is well suited to exploit illiquid, less e∞cient markets such as venture capital, leveraged buyouts, oil and gas, timber, and real estate.

Liquidity Since market participants routinely overpay pay dividends, real estate produces rents, Takahashi and former Director Seth for liquidity and since less liquid markets energy reserves provide both returns on Alexander’s article, “Illiquid Alternative exhibit more ine∞ciencies than their liquid capital and returns of capital (through Asset Fund Modeling,” published in the counterparts, illiquid markets create oppor- depletion), and private equity partnerships Journal of Portfolio Management in winter tunities for astute investors to identify mis- distribute proceeds from realizations. The 2002, described Yale’s illiquid asset model. pricings and generate outsized returns. Investments O∞ce carefully forecasts how Yale continues to use the same basic Furthermore, operational, strategic, and these distributions will behave under a model, albeit with some improvements company-building skills of control-orient- range of economic scenarios. and modifications. The Investments O∞ce ed, illiquid asset managers can add tremen- Holdings of marketable securities pro- periodically revises model parameters to dous value to portfolio holdings. Investors vide a source of non-disruptive liquidity, reflect historical experience and incorpo-willing to accept less liquid alternatives namely liquidity generated in a manner rates adjustments reflecting current market enhance the opportunity to outperform the that does not change the Endowment’s conditions. For instance, during the finan-market. Intelligent pursuit of illiquidity is asset class exposure. For example, bonds cial meltdown, the model was adjusted to well suited to endowments, which operate and stocks can serve as collateral for repur- depress Endowment growth rates and with extremely long time horizons. chase agreements (repos) and security reflect the anticipated slower pace of capi-Yale’s belief in the attractive market lending, respectively. The owner of the tal calls and distributions. Furthermore, opportunity among less liquid assets led securities generates liquidity through the Investments O∞ce employs the illiquid the University to allocate a significant proceeds produced by the repo and secur- asset model to stress-test Yale’s liquidity portion of the Endowment to the illiquid ity lending activity, while retaining the position under a range of economic assets of private equity, real estate, and economic exposure associated with the scenarios. natural resources. Yale maintains a reason- securities. High-quality forecasting tools eluci-able allocation to marketable asset classes, External borrowing represents another dated the Endowment’s liquidity position however, in order to preserve su∞cient source of non-disruptive liquidity. As a during the financial crisis and enabled Yale liquidity to support current University result of Yale’s planning well before the to steer the Endowment through the crisis operations, satisfy capital commitments to advent of the crisis, the University had with su∞cient liquidity. The Endowment investment partnerships, take advantage of access to nearly $2 billion of commercial met all of its liquidity requirements, includ-attractive investment opportunities, and paper funding, a level substantially in ing private equity, real estate, and natural provide support for the University’s excess of the University’s crisis-related resources capital calls; spending distribu-financing activities. needs. In November 2009, after the crisis tions for University operations; and debt The evaporation of liquidity during the subsided, Yale issued $1 billion of five-year repayments. financial crisis highlighted the importance fixed-rate taxable bonds with attractive Economic and financial market turbu-of prudent liquidity management. Because pricing to refund the commercial paper lence during 2008 and 2009 highlighted Yale had long recognized the necessity of draws. That debt is now largely repaid. the importance of monitoring and manag-understanding and monitoring the Endow- In the late 1990s, Yale developed a flexi- ing Endowment liquidity. Fortunately, ment’s liquidity profile, the University had ble and responsive model for projecting Yale’s careful forecasting and in-place substantial internal and external sources of illiquid fund contributions, distributions, liquidity mechanisms enabled the Univer-liquidity at its disposal. Even a portfolio and net asset values based on the levels sity to meet its cash needs. Although the characterized by high percentages of illiq- of future fund commitments, asset class financial crisis has passed, liquidity manuid, long-term assets contains more liquidi- investment returns, the pace of fund com- agement and monitoring remain ongoing ty than might be immediately apparent. mitment calls and fund distributions, and Endowment priorities and the Investments Yale’s holdings generate a fair amount of overall Endowment returns. Yale Invest- O∞ce continues to refine and test its liq-natural liquidity: bonds pay interest, stocks ments O∞ce Senior Director Dean uidity model.

Education, 1890, by Louis Comfort Ti≠any and Ti≠any Studios, a stained-glass window created for Yale’s Linsly-Chittenden Hall.

Asset Class Yale’s seven 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 percent. 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 tar-get 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 20.0 percent of the Endowment, below the average educational institution’s allocation of 24.4 percent to such strategies. Absolute return strategies are expected to generate a real return of 5.25 percent with risk of 12.5 percent. Unlike traditional marketable securities, absolute return invest-ments have historically provided returns largely independent of overall market moves. Since its 1990 inception, the portfolio exceeded expectations, returning 11.2 percent per year with low correlation to domestic stock and bond markets.

Domestic Equity Financial theory predicts that equity owners should expect to receive returns superior to those expected from 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 20.1 percent of assets in domestic equities, Yale’s target allocation to this asset class is only 6.0 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 e∞cient, Yale elects to pursue active management strategies, aspiring to outper-form 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 man-agers 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. Over the past twenty years, Yale’s domestic equity portfolio has posted returns of 13.1 percent per year.

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 educational institutions typically maintain a substantial allocation to fixed income instruments, averaging 10.1 percent, Yale’s target allocation to fixed income and cash is only 5.0 percent of the Endowment. Bonds have an expected real return of 2.0 percent with risk of 8.0 percent. The Barclays Capital 1-3 Year U.S. 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 seven 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 struc-tured approach to bond portfolio management, the Investments O∞ce chooses to manage Endowment bonds internally. Though averse to market timing strategies, credit risk, and call options, Yale manages to add value consistently in its management of the bond portfolio. Over the past twenty years, the fixed income portfolio has generated returns of 5.6 percent 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 5.0 percent of its port-folio to foreign developed markets and 2.0 percent to emerging markets. In addition, Yale dedicates 4.0 percent of the portfolio to opportunistic foreign positions, with the expectation that holdings will be concentrated in markets that o≠er the most compelling long-term opportunities, particularly China, India, and Brazil. Yale’s foreign equity target allocation of 11.0 percent stands below the average endowment’s allocation of 20.1 percent. Expected real returns for emerging equities are 7.5 percent with a risk level of 22.5 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 (a) developed markets, measured by the Morgan Stanley Capital International (MSCI) Europe, Australasia, and Far East (EAFE) Investable Market Index; (b) emerging markets, meas-ured by a blend of the MSCI Emerging Markets Investable Market Index and the MSCI China A-Share Index; and (c) opportunistic investments, measured by a custom blended 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 allo-cation to individual managers takes into consideration the country allo-cation 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 compelling undervaluations in countries, sectors, and styles by allocating capital to the most compelling opportunities. The twenty-year return of Yale’s foreign equity portfolio is 14.1 percent per year.

The Death of Alpha?

As endowments, foundations, and other venture capital (inflated by the 1990s under management and are consistently institutional investors have increasingly technology bubble), a comparison of oversubscribed, they rarely, if ever, accept shifted into private equity, real assets, the most recent decade with the decade new investors. As a result, institutions and hedge funds over the past decade, before shows roughly comparable that are new to alternative assets face these “alternative” assets have become performance spreads. The operational, di∞culties in accessing top managers. more mainstream. Some market observ- strategic, and company-building skills of While alpha is not dead, opportunities ers contend that as alternative asset class- private equity and real assets managers to access it may not be available to all es have become more crowded and com- have the potential to add tremendous investors. petitive, the ability to outperform has value to portfolio holdings, creating Yale has consistently demonstrated its essentially disappeared. alpha and di≠erentiating the strongest ability to identify high-quality active Yale has never viewed the mean return performers. Investors with the ability managers. For the twenty years ending for alternative assets as particularly com- to select top managers can certainly June 30, 2013, 57 percent of Yale’s pelling. The attraction of alternatives lies generate outsized returns. outperformance relative to the median in the ability to generate top quartile or In asset classes such as venture capital Cambridge Associates endowment was top decile returns. As long as individual and private equity, elite firms create a attributable to the value added by Yale’s managers exhibit substantial dispersion virtuous cycle in which investment active managers. Over the past two of returns and high-quality investment success begets investment success. decades, the Endowment returned a funds dramatically outperform their less Because franchise firms have demon- cumulative 1,152 percent relative to the skilled peers, Yale enjoys the opportunity strated exceptional judgment, strategic Cambridge median of 402 percent, an to produce attractive returns for the insight, and company-building skills, outperformance of 5.1 percent per Endowment and to demonstrate that entrepreneurs and owner-managers seek annum. If Yale had employed its actual manager alpha (excess return) is alive to partner with them. Top-tier managers asset allocation, but had earned the rate and well. benefit from extraordinary deal flow, a of return of the median manager in each The figure below shows the disper- stronger negotiating position, and supe- asset class, it would have outperformed sion in returns between the top and rior access to capital markets, and thus the Cambridge median manager by 2.2 bottom quartiles in collections of actively are well positioned to outperform their percent per year, the value added by managed illiquid asset portfolios with peers. Academic research supports the Yale’s asset allocation. The remaining 2.9 vintage years ranging from 1993 through notion of franchise firm performance percent per annum of the Endowment’s 2012. Top quartile venture capital, lever- persistence in venture capital and, to a outperformance results from Yale’s active aged buyout, natural resources, and lesser extent, in leveraged buyouts.* management. The Endowment was able real estate managers have consistently Although new fund entrants certainly to generate alpha even as alternative surpassed their bottom quartile peers can and do post impressive returns, they assets became increasingly capitalized by substantial margins, with annualized face significant challenges in breaking and competitive. Manager selection spreads averaging double-digit percent- into the top tier. Furthermore, because remains an important di≠erentiating ages. With the exception of dispersion in elite venture capital firms limit assets factor for Yale.

Alternative Asset Returns Exhibit Significant Dispersion Source: Cambridge Associates Mean Dispersion of Upper and Lower Quartile Returns (%) 1993-2002 2003-2012 U.S. Venture Capital U.S. Leveraged Buyouts Natural Resources Real Estate *Steven N. Kaplan and Antoinette Schoar, “Private Equity Performance: Returns, Persistence, and Capital Flows,” Journal of Finance, no. 4 (August 2005): 1791.

Cumulative Return for Twenty Years Ending June 30, 2013 Source: Yale, Cambridge Associates 1400% 1200% 13.5% per annum 1000% 800% Asset Allocation Value Add: 2.2% Manager Value Add: 2.9% 10.6% per annum 600% Total Value Add: 5.1% 400% 8.4% per annum 200% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Fiscal Year Yale Returns Yale Asset Allocation x Median Manager Returns Cambridge Median She∞eld-Sterling-Strathcona Hall, viewed from courtyard.

Natural Resources Equity investments in natural resources – oil and gas, timberland, and metals and mining – share common risk and return characteristics: protection against unanticipated global 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 an 8.0 percent long-term policy allocation to natural resources with expected real returns of 6.35 percent and risk of 20.3 percent. Yale’s current natural resources allocation is in line with that of the average endowment.

Superior operators have demonstrated the ability to generate excess returns over a market cycle. The inception-to-date return of Yale’s oil and gas (1986), timber (1996), and mining (2011) portfolio clocks in at an impressive 16.0 percent per annum.

Private Equity Private equity o≠ers extremely attractive long-term risk-adjusted returns, stemming from the University’s strong stable of value-adding managers that exploit market ine∞ciencies. Yale’s private equity portfolio includes investments in venture capital and leveraged buyout partnerships. The University’s target allocation to private equity of 31.0 percent far exceeds the 9.5 percent actual allocation of the average educational institution. In aggregate, the private equity portfolio is expected to generate real returns of 10.5 percent with risk of 26.8 percent.

Yale’s private equity 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 private equity 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. Since inception in 1973, the private equity program has earned an astounding 29.9 percent 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 a sacrifice of expected return. Yale’s 19.0 percent long-term policy allocation signifi-cantly exceeds the average endowment’s commitment of 4.2 percent. Expected real returns are 6.0 percent with risk of 17.5 percent. 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. Since inception in 1978 the portfolio has returned 11.6 percent per annum.

The illiquid nature of private real estate and the time-consuming process of completing transactions create a high hurdle for casual investors. A critical component of Yale’s investment strategy is to create strong, long-term partnerships between the Investments O∞ce and its investment man-agers. Over the past two decades, Yale played a critical role in the develop-ment and growth of a number of successful real estate investment organizations.

Asset Allocations Yale Educational University Institution Mean Absolute Return 17.8% 24.4% Domestic Equity 5.9 20.1 Fixed Income 4.9 10.1 Foreign Equity 9.8 20.1 Natural Resources 7.9 8.3 Private Equity 32.0 9.5 Real Estate 20.2 4.2 Cash 1.6 3.2 Data as of June 30, 2013 Architectural detail, stone carving from the entrance to the Hall of Graduate Studies.

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 support for current operations and preserv-ing 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 spend-ing 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 cur-rently stands at 5.25 percent. According to the smoothing rule, Endow-ment spending in a given year sums to 80 percent of the previous year’s spending and 20 percent 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 4.5 percent, and not more than 6.0 per-cent, of the Endowment’s inflation-adjusted market value two years prior. The smoothing rule and 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.

Lessons from the Crisis The financial crisis highlighted a number responded to market declines by further idiosyncratic portfolios, which can, at of important issues and lessons that invest- reducing their already diminished equity times, appear imprudent. Unless instituors would be wise to heed. The crisis made exposure. In both cases, however, as mar- tions maintain contrarian positions clear the importance of a long-term orien- kets rebounded, Yale’s equity positions pro- through di∞cult times, the resulting damtation and underscored the need to support duced outsized returns. Those that chose age of buying high and selling low imposes a diversified, equity-oriented, active-man- an untimely reversal of strategy missed the severe financial and reputational costs. agement strategy with adequate organiza- benefits of the recovery. The financial crisis highlighted the tional resources and capabilities. The crisis emphasized that the Yale importance of understanding, forecasting, Organizations, investment teams, and model is only appropriate for organizations and managing portfolio liquidity, which committees that lack commitment to a long with a strong, dedicated, and skilled invest- can change dramatically during periods of time horizon make sub-optimal decisions ment sta≠. Although the fundamental prin- turmoil. Investors with large allocations to during periods of tumult and uncertainty. ciples of the Yale model are straightfor- illiquid assets must possess a sophisticated During 2008 and 2009, for example, some ward, execution of an active management understanding of the liquidity tools at their institutions overreacted to short-term strategy demands a significant commit- disposal and must dedicate su∞cient orga-concerns surrounding portfolio perform- ment of resources, particularly during nizational resources to modeling, tracking, ance and volatility, choosing to reduce chaotic and uncertain times. Identifying and stress-testing portfolio liquidity. equity exposure near the market’s nadir. high-quality active managers with the abil- The Yale model of endowment investing Yale instead sought to maintain equity ity to generate alpha consistently requires is not appropriate for everyone. Investors exposure, aggressively managing liquidity dedicated sourcing, researching, and moni- must address the particular investment and prudently employing debt. Similarly, toring of investment funds. Demands on policy needs of their institutions and take after the October 1987 stock market crash, management are amplified during market into consideration their resources and Yale made a rebalancing purchase of nearly dislocations when sensibly reallocating temperament. Only those organizations $100 million of equities (representing funds between managers and making chal- with a true long-term perspective and more than 5% of Endowment value) fund- lenging rebalancing decisions depend upon su∞cient sta≠ resources should pursue an ed by a corresponding sale of nearly $100 the knowledge and input of experienced active, equity-oriented, alternatives-focused million of bonds. In the context of crisis- investment sta≠. Establishing and main- investment strategy. The costly game of induced gloom, Yale’s actions appeared taining an unconventional investment active management guarantees failure for rash, particularly as many institutions profile require acceptance of uncomfortably the casual participant.

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 66 percent of the standard deviation of annual changes in Endowment value. 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.

Despite the conservative nature of Yale’s spending policy, distributions to the operating budget rose from $470 million in fiscal 2003 to $1.02 billion in fiscal 2013. The University projects spending of $1.05 billion from the Endowment in fiscal 2014, representing approximately 35 percent of revenues.

Spending Growth Surpasses Inflation 1950–2013 $1,400 $1,200 $1,000 Millions $800 $600 $400 $200 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Fiscal Year 1950 Spending Inflated Spending from Post-1950 Endowment Gifts Inflated Actual Spending Institutions versus Individuals The most important distinction in the opposite end of the spectrum from the sensibly pursue market-beating strategies investment world does not separate indi- appropriate approaches for investors with- in traditional asset classes and portfolio viduals and institutions; the most impor- out active management abilities. Aside allocations to nontraditional asset classes. tant distinction divides those investors from the obvious fact that skilled active No middle ground exists. Low-cost pas-with the ability to make high-quality managers face the opportunity to generate sive strategies suit the overwhelming num-active management decisions from those market-beating returns in the traditional ber of individual and institutional investors investors without active management asset classes of domestic and foreign equity, without the time, resources, and ability to expertise. Few institutions and even fewer skilled active managers enjoy the more make high-quality active management individuals exhibit the ability and commit important opportunity to create lower-risk, decisions. The framework of the Yale the resources to produce risk-adjusted higher-returning portfolios with the alter- model applies to only a small number of excess returns. native asset classes of absolute return, real investors with the resources and tempera-The correct strategies for investors with assets, and private equity. Only those ment to pursue the grail of risk-adjusted active management expertise fall on the investors with active management ability excess returns.

Investment Performance Yale has produced excellent long-term investment returns. Over the ten-year period ending June 30, 2013, the Endowment earned an annualized 11.0 percent return, net of fees, surpassing annual results for domestic stocks of 8.1 percent and domestic bonds of 4.5 percent, and placing it among the top one percent of large institutional investors. Endowment outperformance stems from sound asset allocation policy and superior active management.

Yale’s long-term superior performance relative to its peers and benchmarks has created substantial wealth for the University. Over the ten years ending June 30, 2013, Yale added $7.19 billion relative to its composite benchmark and $7.01 billion relative to the average return of a broad universe of college and university endowments.

Yale’s Performance Exceeds Peer Results June 30, 2003 to June 30, 2013, 2003=$100 $300 $200 Growth of $100 $100 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Fiscal Year Endowment Mean of Broad Universe of Colleges and Universities Inflation 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 9.7 percent return, exceeding the passive Barclays 9-12 Month Treasury Index by 7.6 percent per year and besting its active benchmark of hedge fund manager returns by 4.2 percent per year. For the ten-year period, absolute return results exhibited little correlation to traditional marketable securities.

The domestic equity portfolio returned an annualized 10.8 percent for the ten years ending June 30, 2013, outperforming the Wilshire 5000 by 2.7 percent per year and the Russell Median Manager return, net of estimated fees, by 3.3 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 3.4 percent over the past decade, keeping pace with the Barclays 1-5 Year Treasury Index and exceeding the Russell Median Manager return by 0.2 percent per year. Because the fixed income portfolio serves as the University’s primary source of liquidity, the Endowment forgoes opportunities to generate excess returns.

The foreign equity portfolio generated an annual return of 19.3 percent over the ten-year period, outperforming its composite benchmark by 8.4 percent per year and the Russell Median Manager return by 8.2 percent per year. The portfolio’s excess return is due to astute country allocation and e≠ective security selection by active managers.

Yale’s natural resources portfolio produced an annualized return of 15.6 percent over the past decade, surpassing its composite passive benchmark by 2.4 percent per year and the Cambridge Associates natural resources manager pool by 0.3 percent per year. Yale’s strong performance results from partnership with superior operators.

Private equity earned 14.4 percent annually over the last ten years, outperforming the composite passive benchmark by 4.4 percent per year and outperforming the return of a pool of private equity managers com-piled by Cambridge Associates by 1.0 percent per year. Real estate generated a 7.2 percent annualized return over the ten-year period, underperforming the MSCI REIT Index by 2.4 percent per year, but outperforming a pool of Cambridge Associates real estate managers by 3.2 percent per year. Yale’s active outperformance is due to successful exploitation of market ine∞ciencies and timely pursuit of contrarian investment strategies.

Yale Asset Class Results Beat Most Benchmarks June 30, 2003 to June 30, 2013 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% Absolute Domestic Fixed Foreign Natural Private Real Return Equity Income Equity Resources* Equity* Estate* Yale Return Active Benchmark Passive Benchmark * Yale Returns and Active Benchmarks are dollar-weighted.

Active Benchmarks Passive Benchmarks Absolute Return: Dow Jones Credit Suisse Composite Absolute Return: Barclays 9-12 Mo Treasury Domestic Equity: Frank Russell Median Manager, U.S. Equity Domestic Equity: Wilshire 5000 Fixed Income: Frank Russell Median Manager, Fixed Income Fixed Income: Barclays 1-5 Yr Treasury Foreign Equity: Frank Russell Median Manager Composite, Foreign Equity: Blend of msci eafe Investable Market Foreign Equity Index, msci Emerging Markets Investable Market Index, Natural Resources: Cambridge Associates Natural Resources msci China A-Shares, Custom Opportunistic Blended Index Private Equity: Cambridge Associates Private Equity Composite Natural Resources: Blend of Custom Timber reit Basket, Real Estate: Cambridge Associates Real Estate s&p o&g Exploration & Production Index, hsbc Global Mining Index Private Equity: Blend of Russell 2000, Russell 2000 Technology, msci acwi ex-US Small-Cap Index Real Estate: msci reit Index Management and Since 1975, the Yale Corporation Investment Committee has been respon-Oversight sible for oversight of the Endowment, incorporating senior-level invest-ment experience into portfolio policy formulation. The Investment Com- mittee consists of at least three Fellows of the Corporation and other per-sons who have particular investment expertise. The Committee meets quarterly, at which time members review asset allocation policies, Endow-ment 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 Stefan Kaluzny ’88 Chairman Managing Director Former Chairman Sycamore Partners J.P. Morgan Chase & Co.

Kevin Ryan ’85 G. Leonard Baker ’64 Founder and ceo Managing Director Gilt Groupe Sutter Hill Ventures Peter Salovey ’86 ph.d.

Francis Biondi ’87 President Managing Member Yale University King Street Capital Management Carter Simonds ’99 Ben Inker ’92 Managing Director Partner Blue Ridge Capital gmo Dinakar Singh ’90 Paul Joskow ’72 ph.d. ceo and Founding Partner President tpg-Axon Capital Alfred P. Sloan Foundation Peabody Museum tower, springtime view.

Nobel Prize Winners at Yale Two Yale University professors were recognized with Nobel Prizes in 2013, joining six other distinguished members of the Yale community who received the prestigious Lars Onsager George E. Palade award in prior years. Yale is delighted The Nobel Prize in Chemistry, 1968. The Nobel Prize in Physiology to count among the members of the Onsager’s discoveries of reciprocal or Medicine, 1974.

University community the 2013 winners relations in chemical thermodynamics Palade redefined the field of cell James E. Rothman and Robert J. Shiller. were recognized for their importance in the physiology. He, Albert Claude, and thermodynamics of irreversible processes. Christian de Duve were acknowledged for their influential findings on structural and functional cell organization.

Tjalling C. Koopmans James Tobin Sidney Altman The Nobel Prize in Economic Sciences, 1975. The Nobel Prize in Economic Sciences, 1981. The Nobel Prize in Chemistry, 1989. Koopmans and Russian economist Leonid Tobin was honored for his theory of Altman and Thomas R. Cech shared Vitaliyevich Kantorovich shared the prize financial markets and their relation to the Nobel Prize for their discovery of the for their independent analyses of the opti- consumption, investment, expenditures, catalytic properties of ribonucleic acid. mal allocation of scarce resources. employment, production, and prices.

Thomas A. Steitz James E. Rothman Robert J. Shiller The Nobel Prize in Chemistry, 2009. The Nobel Prize in Physiology The Nobel Prize in Economic Sciences, 2013. Steitz, with Venkatraman Ramakrishnan or Medicine, 2013. Shiller, a behavioral economist, was and Ada E. Yonath, was lauded for his Rothman, Randy W. Schekman, and recognized with Eugene F. Fama and Lars scholarship of the structure and function Thomas C. Südhof were honored for Peter Hansen for their empirical analysis of the ribosome. their contributions to cell physiology of asset prices. through their discovery of machinery regulating vesicle tra∞c, a major cellular transport system.

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 twenty-six professionals.

Investments O∞ce David F. Swensen ’80 ph.d. Matthew S. T. Mendelsohn ’07 Chief Investment O∞cer Associate Director Dean J. Takahashi ’80, ’83 mppm Celeste P. Benson Senior Director Senior Portfolio Manager Alexander C. Banker John V. Ricotta ’08 Director Senior Associate Alan S. Forman Patrick K. Sherwood ’13 m.b.a.

Director Senior Associate Lisa M. Howie ’00, ’08 m.b.a. Cain P. Solto≠ ’08 Director Senior Associate Timothy R. Sullivan ’86 Xinchen Wang ’09 Director Senior Associate Kenneth R. Miller ’71 David S. Katzman ’10 Senior Associate General Counsel Senior Financial Analyst Stephanie S. Chan ’97 Sebastian K. Serra ’11 Associate General Counsel Senior Financial Analyst Deborah S. Chung Philip J. Bronstein ’12 Associate General Counsel Financial Analyst J. Colin Sullivan Timothy H. Hillas ’13 Associate General Counsel Financial Analyst Carrie A. Abildgaard Daniel J. Otto ’12 Associate Director Financial Analyst Michael E. Finnerty E. Benjamin VanGelder ’13 Associate Director Financial Analyst R. Alexander Hetherington ’06 David Y. Zhang ’12 Associate Director Financial Analyst Back cover: Edward P. Evans Hall, named for the late Edward P. Evans ’64, the recently completed home of the School of Management.

Yale Rallies Behind Its Financial Steward In recognition of Chief Investment O∞cer freshman parents, congratulate the seniors, the core values of the University, the core David F. Swensen’s contributions to Yale and host countless events to enhance values that David embodies.” University over the past twenty-eight Berkeley spirit.” University President Peter Salovey said, years, a group of ninety colleagues, friends, “The outpouring of support for Yale’s “Donors have directed their contributions and family donated more than $36 million academic and athletic programs both over- to some of Yale’s most important priorities in Swensen’s honor. The gifts raised whelms and humbles me,” Swensen said. – support for great teaching and great through the Swensen Initiative will be “And to have the master’s house at Berkeley coaching as well as unrestricted funds that invested in Yale’s Endowment. College named for me is far more than I can be directed wherever they are needed A portion of the funds will establish a ever dreamed possible.” most. I am so thankful that our alumni and chair in the Economics Department, where Yale Investments O∞ce Senior Director friends have come together to recognize a Swensen was a student and then taught Dean Takahashi highlighted Swensen’s Yale leader in a way that will do so much for more than thirty years. “Nothing “vision of integrity and excellence that good for the University.” could be a more appropriate recognition inspires us to aim higher.” “On the person- “Over the last two decades, Yale moved of [Swensen’s] devotion to Yale and its al front,” Takahashi added, “he leads by from being a national leader to an institu-academic mission than a professorship example…. He chooses to serve the greater tion of global scope and eminence,” former in his name,” said William C. Brainard, good over his personal gain…. Dave not President Richard C. Levin said. “This Arthur M. Okun Professor Emeritus of only makes the world better, he makes us, work required substantial investment in Economics. his friends, better.” faculty, students, and infrastructure.

A second fund will endow the Yale Provost Benjamin Polak wrote David’s extraordinary investment returns Swensen-McMahon Head Coach of that Swensen is “the de facto professor of gave us the resources we needed to expand Women’s Tennis, named in honor of finance to a generation…. And what he has the University’s reach and influence. I am Swensen and Meghan R. McMahon ’87, taught us – what he has taught me – is not deeply grateful for his achievements, his a former standout Yale athlete and tennis just finance. It is ethics. It is humanity. It is unfailing integrity, and his friendship.” coach. In assuming her title as the Swensen-McMahon Head Coach of Women’s Tennis, Danielle L. McNamara expressed honor and gratitude, noting that it would be di∞cult to find “two people who love Yale and Yale Tennis more.”

Director of Athletics Thomas A. Beckett praised Swensen’s work as “transformative for Yale.”

The Initiative creates a fund for innovative teaching in Yale College and builds on the existing David Swensen Scholarship Fund, while the remainder provides endowment funding for teaching and research across the University.

Finally, Swensen has been recognized in Berkeley College – where he is a longtime Fellow – with the master’s residence now called Swensen House. Berkeley College Master Marvin M. Chun was honored to acknowledge Swensen in “the college’s David F. Swensen, Chief Investment O∞cer, and Dean J. Takahashi, Senior Director of the Yale Investments most beautiful space in which we welcome O∞ce, acknowledge applause at the announcement of the Swensen Initiative.

Sources Pages 8-13 Photo Credits Educational institution asset allocations and returns Financial and Investment Information Front cover. Steve Dunwell Photography, Inc., Boston. from Cambridge Associates.

Educational institution asset allocations and returns Page 19: Manuscripts and Archives, Pages 10-11 from Cambridge Associates. Sterling Memorial Library (Koopmans, Onsager); The Death of Alpha: Swensen, Pioneering Portfolio University of California-San Diego (Palade).

Much of the material in this publication is drawn from Management, pp. 238-240. memoranda produced by the Investments O∞ce for Back cover: Nigel Young (top photos), the Yale Corporation Investment Committee. Other Chuck Choi (center), Tom Strong (bottom left), Lessons from the Crisis: Swensen, Pioneering Portfolio material comes from Yale’s financial records, Reports Tony Rinaldo (bottom right).

Management, pp. 2-8 and 315-317. of the Treasurer, and Reports of the President.

Additional photographs: Michael Marsland, Page 3 Yale O∞ce of Public A≠airs and Communications.

Individuals versus Institutions: Excerpted from The Yale Model: David F. Swensen, Pioneering Design Swensen, Pioneering Portfolio Management, pp. 2-3.

Portfolio Management: An Unconventional Approach to Strong Cohen/L. Feher Institutional Investment (Simon and Schuster, 2009), Page 19 pp. 163, 170. Nobel Prize Winners at Yale: The O∞cial Web Site of the Nobel Prize.

Liquidity: Swensen, Pioneering Portfolio Management, 55.