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Yale Endowment Posts 25% Loss - WSJ.com
Old 09-23-2009, 06:04 AM   #1
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Yale Endowment Posts 25% Loss - WSJ.com

Swensen was the darling of endowment management - had a very non-traditional portfolio heavy in private equity, RE, and natural resources. He's still probably outperforming all the others - but taking some his himself for a change...

Yale Endowment Posts a 25% Loss - WSJ.com

Yale University, blaming its big bets on real estate and commodities, said its endowment had an investment loss of 24.6% in the year ended June 30.

The Ivy League school said its endowment fell to $16.3 billion -- a total that included investment losses of $5.6 billion, spending for the university's budget of $1.2 billion, and gifts and other adjustments of $200 million. The endowment was valued at $22.9 billion on June 30, 2008. Yale had previously reported the approximate decline in the size of its endowment -- but not its annual investment return.
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Old 09-23-2009, 08:07 AM   #2
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A loss is to be expected during that period of time, but the size of the loss is amazing! Yale's 25% loss only includes their investment losses and their spending was in addition to that.

Thanks for posting this. It makes me feel like an investment guru since I only lost 10% during approximately the same period of time.
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Old 09-23-2009, 08:24 AM   #3
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It seems to me that if endowments, pension funds and the like didn't use overly aggressive growth assumptions, they might not be in this mess.
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Old 09-23-2009, 08:33 AM   #4
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It seems to me that if endowments, pension funds and the like didn't use overly aggressive growth assumptions, they might not be in this mess.
Grrr. Don't get me started.
I still can't believe that during the tech. bubble, mega-corps could (and did) legally sell stocks from their retirement plan portfolios, taking the retirement funding back down to minimum government levels. They could (and did) legally use those profits to juice up their P&Ls, essentially stealing from the pension fund. Later, when the market crashed, those funds were (and remain) woefully underfunded.
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Old 09-23-2009, 09:09 AM   #5
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A loss is to be expected during that period of time, but the size of the loss is amazing! Yale's 25% loss only includes their investment losses and their spending was in addition to that.

Thanks for posting this. It makes me feel like an investment guru since I only lost 10% during approximately the same period of time.
I think it is clear in hindsight that David Swenson was able to get outsized returns for so many years by taking on a lot of risk.

His 25% loss is right on par with what the Total US Stock Market index did over the same period of time. So he still didn't do too bad. It just goes to show that Mr. Swenson isn't some magical mythical creature that can beat Mr. Market year in and year out.
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Old 09-23-2009, 09:10 AM   #6
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It seems to me that if endowments, pension funds and the like didn't use overly aggressive growth assumptions, they might not be in this mess.
Not only that - but there seems to be this helpless attraction to the exotic when it comes to professional investing. I can't believe how many large investment funds/pension plans/endowments started throwing their money at hedge funds and private equity firms over the last few years. I guess they decided was that conventional investments just were not performing "good enough".

Call it schadenfreude, but I just love it when the "brilliant people" greedliy chasing after exotic "can't miss" investments fall on their butts! [Um - that is, unless they bring the whole financial system down with them - then I get really steamed!]

There is a good reason to keep things simple in investing. Complexity costs. There is also something called prudence.

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Old 09-23-2009, 09:24 AM   #7
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there seems to be this helpless attraction to the exotic when it comes to professional investing. I can't believe how many large investment funds/pension plans/endowments started throwing their money at hedge funds and private equity firms over the last few years. I guess they decided was that conventional investments just were not performing "good enough".
I believe there is a management aphorism that goes like this: "Bad ideas drive out the good."
What that means is that companies (or mutual funds) that take on excessive risk and are successful for a while force otherwise prudent organizations into taking on too much risk to keep up.

I saw this happen first hand during the tech. boom. My high-tech mega-corp employer admitted candidly in management meetings that their conservative business plan wasn't performing up to the likes of WorldCom or Adelphia. Growth and return on investment was embarrassing by the standard set by the brash new tech-wonders, so they sold off the stodgy but reliable divisions and concentrated on a few high risk ventures. After those blew up, mega-corp wasn't nearly as mega anymore. Of course, those fabulous returns posted by WorldComs of the time proved to be chimeral, but it was too late for the companies that had discarded their business plans for a roll of the dice.

It wasn't all bad. Early-retirement incentives ensued.
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Old 09-23-2009, 11:29 AM   #8
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I know a person working for the Harvard Endowment. He is highly touted for his investment smarts. Well, Harvard endowment's loss is in the same magnitude as Yale's. Smarts do not necessarily help. There are often people smarter, and market forces are hard to control or escape from.
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Old 09-23-2009, 11:53 AM   #9
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I think it is clear in hindsight that Larry Swedroe was able to get outsized returns for so many years by taking on a lot of risk.
Aren't we talking about a guy named David Swenson?

And whoever he is, I think he is still way ahead of the markets, even after that tough year. Maybe it does help to be smart? Oh, I almost forgot, anything other than an index is a loser's proposition.

"In the statement, Yale made no mention of changing strategy. Instead, the university noted its endowment, even after the recent decline, had posted an annualized return of 12% in the 10 years ended June 30. The school said performance over the same period surpassed the annual loss of 1.2% for U.S. stocks and the 6%-a-year gain for U.S. bonds."


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Old 09-23-2009, 12:08 PM   #10
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Of course, those fabulous returns posted by WorldComs of the time proved to be chimeral, but it was too late for the companies that had discarded their business plans for a roll of the dice.
A lot of those results turned out to be outright fraud. So, yes all those companies who abandoned their tried and true business plans to chase similar returns were chasing a fantasy. It's really sick how much pain and destruction this caused. But I guess every generation learns this lesson over again.

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Old 09-23-2009, 12:19 PM   #11
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Aren't we talking about a guy named David Swenson?

And whoever he is, I think he is still way ahead of the markets, even after that tough year.

"In the statement, Yale made no mention of changing strategy. Instead, the university noted its endowment, even after the recent decline, had posted an annualized return of 12% in the 10 years ended June 30. The school said performance over the same period surpassed the annual loss of 1.2% for U.S. stocks and the 6%-a-year gain for U.S. bonds."


Ha
However, if they increase spending along with the outsized gains to 7% withdrawl rate as YALE is doing of the endowment fund another bad year will have severe consequences for them.

In addition many of these funds are tied into illiquid and restricted investments which if a second leg were to hit down would cause some pain at the elite of Ivy-League schools. See the following article about Harvard's endowment fund.

Harvard endowment falls from $36.9 billion to $26 billion | Harvard Magazine
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Old 09-23-2009, 12:37 PM   #12
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However, if they increase spending along with the outsized gains to 7% withdrawl rate as YALE is doing of the endowment fund another bad year will have severe consequences for them.

In addition many of these funds are tied into illiquid and restricted investments which if a second leg were to hit down would cause some pain at the elite of Ivy-League schools. See the following article about Harvard's endowment fund.

Harvard endowment falls from $36.9 billion to $26 billion | Harvard Magazine
No doubt you are correct. But returns are what Swenson is responsible for, and returns is what he deliverd. Very well IMO.

If the admisnistration tried to get to much milk from the cow, that isn't under Swenson's cotrol.

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Old 09-23-2009, 12:44 PM   #13
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However, if they increase spending along with the outsized gains to 7% withdrawl rate as YALE is doing of the endowment fund another bad year will have severe consequences for them.
You're right, but we don't know what the fund manager's mandate was from their client (in this case, Yale). Maybe they had a long-term expectation of performance that required this kind of risk taking. And for the most part he's delivered it. If Yale understands and accepts the risks inherent in expecting such a high long-term rate of return, so be it when the market tanks.
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Old 09-23-2009, 12:59 PM   #14
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I wonder how long ago Yale's endowment fund, on the way up, hit the point it's at now. Still at $16 billion at the end of the second quarter and will likely be higher at the end of this quarter.

Also Harvard. Are these the level their funds were at in 2004? If so, they're still in pretty good shape.
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Old 09-23-2009, 03:28 PM   #15
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If your average is greater than 12% (Yale) or 8.6% (Harvard) for the last 10 years, consider yourself a great investor.

I'm not there in case you were wondering.

What's your 10 year average? I am not feeling up to making that poll.

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Old 09-23-2009, 06:15 PM   #16
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No doubt you are correct. But returns are what Swenson is responsible for, and returns is what he deliverd. Very well IMO.

If the admisnistration tried to get to much milk from the cow, that isn't under Swenson's cotrol.

Ha
I agree that his returns were very good, so good the endowment world copied so much and unwittingly set up the fall for the strategy. It is forced liquidations that will cause a very good strategy to unwind. I am sure right now they are breathing much easier than they were in March.

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I wonder how long ago Yale's endowment fund, on the way up, hit the point it's at now. Still at $16 billion at the end of the second quarter and will likely be higher at the end of this quarter.

Also Harvard. Are these the level their funds were at in 2004? If so, they're still in pretty good shape.
While they may be in good shape the commitments they made from the fund seem to be based on a much higher endowment level as present distributions are 6.1 percent for Harvard. I had to laugh at their self-confidence to have the fund in past years declared a requirement to run at a -5% cash level. Compare this strategy to Berkshire where Warren always kept a billions in cash for the possibilities of what occured in 2008.

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You're right, but we don't know what the fund manager's mandate was from their client (in this case, Yale). Maybe they had a long-term expectation of performance that required this kind of risk taking. And for the most part he's delivered it. If Yale understands and accepts the risks inherent in expecting such a high long-term rate of return, so be it when the market tanks.
This would be all fine and well if the graduates of these schools weren't also at the seat of government power and able to bail out the schools at taxpayer expense if the endowments reached the point of where massive cuts at these schools would be required.

All of this is going to be great fodder for future Noble prizes at Ivy League business schools in the study of finance in coming decades, if there is another leg down in the declines. If all continues on at 13 percent a year this will have just been a abnormal fluctuation in a long term superior strategy.
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Old 09-23-2009, 07:57 PM   #17
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This would be all fine and well if the graduates of these schools weren't also at the seat of government power and able to bail out the schools at taxpayer expense if the endowments reached the point of where massive cuts at these schools would be required.
This seems quite a stretch. Can you give any examples of where and when this has happened?

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Old 09-23-2009, 11:28 PM   #18
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This seems quite a stretch. Can you give any examples of where and when this has happened?

Ha
Here is the Harvard site on how to troll for stimulus dollars:
HARVARD UNIVERSITY AND FEDERAL STIMULUS FUNDING | The Office of the Vice Provost for Research

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Harvard chief lobbyist Kevin Casey said both the Senate and the House had done “an exemplary job” of writing legislation that creates jobs and transforms the economy by emphasizing innovation and education. He noted that the NIH funding would provide short-term boosts to the economy since the stimulus is designed for a two-year period.
Endowment Losses From Harvard to Yale Force Cuts (Update1) - Bloomberg.com

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Endowment earnings support 44 percent of the school’s spending. It will take more than 10 years for the fund, managed by David Swensen, to climb back to its value of $22.9 billion on June 30, 2008, according to Levin. Yale estimates the fund was $16 billion at the end of this June. ........Schools will be discussing what they can sustain and where monies can be reallocated to new priorities,” .... “They will not want to cut research activities or financial aid but are going to have to make tough choices in a difficult economic environment where revenues will remain under pressure due to market

The Harvard Crimson :: News :: Senate Stimulus Would Up NIH Funding
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Old 09-24-2009, 01:46 PM   #19
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From President Levin's Budget Letter last December:

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It is important to recognize that $17 billion is still a very large endowment. This was where the endowment stood as recently as January 2006. Still, the 25% decline we have experienced has a very significant impact on our operations because income from the endowment supports 44% of the University’s annual expense base of $2.7 billion.
If I'm reading this right, the endowment needs to throw off 44% of 2.7B, or 1.188B per year. That's a withdrawal rate of 6.9%, which does not seem to safe or sustainable to me. Even before the big loss the withdrawal rate was over 5%. How does the endowment keep up? Has the WR always been this high?
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Old 09-24-2009, 01:55 PM   #20
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From President Levin's Budget Letter last December:



If I'm reading this right, the endowment needs to throw off 44% of 2.7B, or 1.188B per year. That's a withdrawal rate of 6.9%, which does not seem to safe or sustainable to me. Even before the big loss the withdrawal rate was over 5%. How does the endowment keep up? Has the WR always been this high?
If you read their other information they base spending on past 3 years performance of the endowment fund and consider how much will come in donations. However they clearly either did not understand the impact a bad year would have on their budgets or didn't think it was possible. Presently there are many housing projects they had pledged to complete that they are not able to at the present time
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