The role of the Endowment is to support both current and future academic programs of the University, including direct support to maintain the facilities housing these programs. To balance current and future needs, Yale has adopted investment and spending policies designed to preserve Endowment asset values while providing a substantial and growing flow of income to the operating budget. On June 30, 1997, the Endowment was at a record high market value of $5.79 billion, after providing $190.5 million for current use spending.

For the year ending June 30, 1997, the Endowment achieved a 21.8% investment return, representing an increase to the Endowment of more than $1 billion. During the past decade, the Endowment earned an annualized 13.5% return, net of fees, leading its peer group and exceeding institutional fund indices. Yale’s disciplined and diversified asset allocation policies, combined with strong active management, added substantial value to the Endowment.

Over the ten years ending June 30, 1997, Yale’s superior investment returns added $1,430 million relative to its composite benchmark, and an estimated $1,140 million relative to a broad universe of colleges and universities, as measured by the National Association of College and University Business Officers.

Endowment Spending

The Endowment spending policy, the means by which Endowment earnings are allocated to operations, creates a fulcrum for balancing the competing objectives of providing a stable flow of income for current use and protecting the real value of the Endowment over time. The University's long-term target spending rate was increased from 4.75% to 5.0% in 1995-96. This increase was justified by portfolio changes that enhanced the Endowment’s ability to generate superior investment returns at acceptable risk levels.

Through the spending policy, the Endowment provided $190.5 million for current spending in 1996-97, representing 19.2% of the University’s operating revenue for the year. Ten years ago, Endowment distributions contributed approximately $83.3 million, or 14.8% of the operating revenue. Over the past decade, Endowment distributions have grown at an annualized rate of 8.6%.

Asset allocation is the key to successful Endowment performance. Yale’s asset allocation policy combines tested theory and informed market judgment to balance investment risks with the need for high returns.

The need to provide resources for current operations as well as preserve the purchasing power of assets dictates investing for high returns, causing the Endowment to be biased toward equity. In addition, the Endowment’s vulnerability to inflation directs the University away from fixed income and toward equity instruments. Hence, nearly 90% of the Endowment is invested in some form of equity, through domestic and international securities, real estate and private equity.

Over the past decade, Yale has significantly reduced the Endowment's exposure to traditional domestic marketable securities, reallocating assets to nontraditional asset classes. In 1987, more than 85% of the Endowment was committed to U.S. stocks, bonds and cash. Today, this percentage is approximately 30%. Foreign equity, private equity, absolute return strategies and real estate now represent close to 70% of the Endowment.

On June 30, 1997, the University’s target asset allocation was adjusted to reduce the Endowment’s allocation to domestic equities and fixed income by 2.5% each, and increase the allocation to absolute return by 5%. The greater than usual difference between the actual and target allocations on June 30, 1997 for these asset classes reflects the transition to the new policy targets.

The heavy allocation to nontraditional asset classes stems from the diversifying power they provide relative to the portfolio as a whole. Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management. Today’s actual and target portfolios have significantly higher expected returns and lower volatility than the portfolio a decade ago.