By Yale University’s endowment achieved a 1.8% return in the fiscal year ending in June. Although this result fell short of the S&P 500 index, it surpassed the investment outcomes of both the Massachusetts Institute of Technology (MIT) and Duke University.
Yale’s recent performance follows a modest 0.8% increase in the 2022 fiscal year and an impressive 40.2% gain in the 12 months leading up to June 2021. With an endowment valued at $40.7 billion, Yale currently holds the third-largest university endowment globally, trailing only the University of Texas and Harvard University. The institution’s long-standing leader, David Swensen, played a significant role in shaping Yale’s success until his unfortunate passing in 2021.
Swensen’s renowned “Yale model” prioritized alternative assets such as venture capital, private equity, and hedge funds while avoiding heavy reliance on US stocks. In fact, US equities represent less than 3% of Yale’s endowment. Swensen firmly believed that alternative investments could deliver superior risk-adjusted returns when managed by external professionals.
Yale’s smaller allocation to US stocks and listed equities likely contributed to its comparatively lower return during the 12-month period leading up to June. This period saw the S&P 500 generate a robust 19.5% return and a mix of US stocks and bonds (70/30 ratio), represented by the S&P 500 and iShares Core US Aggregate Bond Exchange-Traded Fund (AGG), deliver a 13.4% gain.
In contrast to Yale’s performance, MIT reported a loss of 2.9% in their endowment during the 2023 fiscal year, while Duke University experienced a decline of 1%.
Overall, Yale’s endowment continues to demonstrate its place as a prominent force in the university investment landscape, even with its variance in returns compared to other institutions.
Yale Endowment’s Strong Performance in Fiscal 2021
Yale’s endowment fund has had a remarkable year, achieving a gain of over 40% in fiscal 2021. The fund’s primary focus on alternative investments, including venture capital, played a significant role in this impressive performance.
Over the past decade, Yale’s annual return has averaged 10.9%, surpassing the average return of college and university endowments by an estimated three percentage points each year. However, it is worth noting that the fund has slightly trailed behind the S&P 500 during this period, as the index delivered an annual return of 12.8%. Nevertheless, Yale has outperformed a 70/30 mix of U.S. stocks and bonds, which only generated a 9.5% annual return over the past ten years.
These findings highlight the growing challenge of achieving superior returns compared to market indexes, even for institutions like Yale with access to top alternative investment managers. The dominant role played by the technology giants like Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOGL) in driving the S&P 500 has contributed to this challenge. Moreover, the alternative investment market has become increasingly crowded, making it more difficult to generate substantial returns after accounting for fees.
In addition to its impressive performance over the last decade, Yale’s endowment has also delivered an annual return of 10.9% over the past 20 years. However, in the most recent fiscal year, the endowment experienced a decline in value by $700 million, resulting in a total value of $40.7 billion. This drop can be attributed to spending distributions of $1.8 billion that exceeded the portfolio’s return and gifts received. It is important to note that the endowment’s spending, which is typically between 4% and 5% of its value, plays a crucial role in funding a significant portion of Yale’s budget. Therefore, maintaining a solid return and preserving the endowment’s value after adjusting for inflation remains a key priority.
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