Yale University Investment office Case Study
The case tells the story about Yale University Endowment Fund. Firstly case tells about the history of fund from foundation of fund in 1818. Then it talks about current situation of Investment office which manages assets of the endowment. Currently (in 2006) the head of the endowment is Mr. Swensen, who manages endowment from 1985.Investment Office reports to the president and to Investment Committee. Investment Committee is active board that meets quarterly. Then case talks about investment philosophy of the endowment. Office takes “the risk of being different”, that is why it has returns higher than market. That is why company do not invest in bonds, holds a diversified portfolio, seek opportunities to invest in “less efficient markets”, uses outside managers (especially for routine or indexed investments) and focus on incentives to these managers. As it was described in case, comparing with other universities’ endowment funds, Yale invests more heavily in illiquid asset classes like private equity (venture capital, buyouts), absolute-return (hedge funds, high yield bonds, distressed securities and event arbitrage) and real assets (real estate and gas-oil) and less in bonds. Then it talks more its management philosophy for each asset class. Case ends with situation in August 2006, where Swensen and Takahashi think about future prospects and need to make decision about changing asset allocation of fund.
As it is stated before company invests in alternative assets like absolute returns, real assets and private equity. The reasoning is that company could get more value and earn returns higher than market by investing in “less efficient markets” and by taking “risk of being different”. Firstly, Swensen believed rather in equities than in bonds, because it is claim on real stream of income, to fight with inflation because most of universities cash outflows are from salaries. Secondly, Invesment Office invests in diversified portfolio, which decreases aggregate exposure to risks of investing in alternative investments. Thirdly, Office seeks opportunites in less efficient markets, because there company can get higher returns. Fourthly, Swensen used outside investors to invest in most routine and indexed of investments. And finally, Yale critically analyzes incentives, that is why it believes that it could earn more than others by using managers whose incentive structure align better their interests with Yale’s. Importance of endowment for university is very high. As it is written in the case Yale adjusted its spending rate upward from 4.5% to 4.75% of endowment assets in 1992, to 5% in 1995 and 5.25% in 2004. It spends endowment funds to pay for salaries and adjust it to inflation rate. Furthermore in my honest opinion, it is like “airbag” for worst-case scenario. Also it helped strengthened university in two ways by having large endowment and increasing target spending rate. Also by having endowment, university got highest rating to finance its capital projects, which helped them to borrow money at favorable rates.