Yale (IMO not Completely ) Reports Its Damage from The Black Swan

I knew this was coming....

I noted on December 3 the large losses experienced by the Harvard Endowment. At the time I noted that Harvard and. to an even greater extent, Yale are considered the gold standard in investment management among not for profits. They were pioneers in the extensive use of "alternative assets" such as hedge funds, private equity and venture capital while significantly reducing the exposure to conventional bonds to generate what was praised as higher return and less risk. Needless to say those asset classes have taken big hits as of late and in fact have in many cases turned illiquid and even in some cases a market value cannot be determined for them.

I also noted that Yale's manager David Swensen is interviewed in the current issue of Worth magazine stating that he didn't know the returns for the portfolio at present and that he wouldn't know till fiscal year end on June 30. I voiced skepticism at the time noting. I thought that was unlikely and was proven correct. From today's WSJ

* DECEMBER 17, 2008

Yale to Trim Budget as Its Endowment Falls 25%


By JOHN HECHINGER

Yale University, a much-emulated college investor, estimated its endowment has fallen 25% since June 30, prompting the school to trim its budget.

The Ivy League school, higher education's second-richest, said its endowment now stands at roughly $17 billion, down from $22.9 billion on June 30. The $5.9 billion decline is more than the total investment funds of most other U.S. colleges.

A number of wealthy schools have reported investment declines in similar ranges, including Harvard University, which has the largest fund. In a recent report, Moody's Investors Service said Massachusetts Institute of Technology had told the rating agency that the school's endowment, valued at $10.1 billion as of June 30, had declined 20% to 25% by Oct. 31. The school declined to comment. Across the country, losses are leading to budget cuts and hiring freezes.

In a letter to the faculty and staff Tuesday, Yale President Richard C. Levin said the school's endowment had declined "significantly less than market indexes." From June 30 through Oct. 31,

Dr. Levin said the value of marketable securities had fallen 13%. That compares with a 24% decline for the Standard & Poor's 500 stock-index in those four months.

I find Dr. Levin's math a bit fuzzy a "20 -25% loss" (which, see below is likely to revised downwards) is not "signficantly less than market indices" when the S+P 500 declined 24% over the same period. A reasonable benchmark for an endowment would be a blended number including at a minimum 25% bonds. Given that a broad bond index would have declined far less than 24%, I think Dr. Levin's assertion can be fairly regarded with skepticism)



note that in a similar letter Harvard's President wrote the following (my bold):

Harvard Management Company, using standard industry practices for valuing assets, has calculated investment losses of approximately 22 percent from July 1 through October 31. Yet even that sobering figure is unlikely to capture the full extent of actual losses for this period, because it does not reflect fully updated valuations in certain externally managed asset classes, most notably private equity and real estate. HMC expects that as we receive more comprehensive valuations in these asset classes from our external managers, the endowment will realize further declines in value.

The Harvard returns number is close to that of Yale's and we know that Yale had similar exposure to the above noted asset classes. For that reason I think it is reasonable to assume that Yale faces the same valuation issues and that, as in the case of Harvard, the reported loss number will be ultimately be larger than this initial number.

More on this issue later but in preparation for my class on investment management for not for profits class we will be raising the issue on whether we are entering a new era for endowment management and discussing whether the old stodgy strategy of large doses of marketable bonds combined with some listed equities will become the new state of the art. Let's just say the discussions of the case studies on Harvard, Yale and other endowments in which we questioned whether extensive use of "alternative asset classes" was appropriate for smaller endowments will be likely be a bit more one sided this year.....

and we will have a good case study on the importance of controls by discussing the Madoff affair (more on that one later as well).