Yale Case

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OCTOBER 18, 2011

JOSH LERNER ANN LEAMON

Yale University Investments Office: February 2011
“…anointing winners and losers on the basis of 12 months’ worth of performance is silly in the context of portfolios that are being managed with incredibly long time horizons.” — David F. Swensen, Chief Investment Officer, Yale University1

On a February afternoon in 2011, David Swensen, Chief Investment Officer of Yale University, stared out his window at the snow blanketing the city of New Haven. He was considering the roster for the Investments Office’s 2011 softball team, which would be defending its first-ever Yale University championship. It was nice to imagine the warmth of summer. Swensen and the Investments Office had endured a number of storms recently, not least the ongoing turmoil in the financial markets. Since his arrival in 1985, Swensen had steered Yale’s endowment—the second largest university endowment in the world—from $1 billion to a peak of $22.9 billion in 2008. Yale’s student body had grown modestly during this period, its faculty more significantly, and the building space most of all. The past two years, though, had not been kind. During the fiscal year ending June 30, 2009, the endowment’s value plummeted by 24.6%, to $16.3 billion. Although the endowment gained 8.9% in 2010 and finished the year at $16.7 billion, Yale’s performance had lagged its peer group of universities. Yale had pioneered an unconventional approach to managing its endowment. Rather than keeping a substantial share of its assets in domestic equities and cash, Yale made significant investments in less efficient equity markets such as private equity (venture capital and buyouts), real assets (real estate, timber, oil and gas), and “absolute-return” investments (hedge funds). Until the financial crisis, this had generated enviable returns and led a number of other organizations to attempt to emulate the model. Swensen and his staff, while proud of their record, had long cautioned that it should not be blindly adopted. Swensen himself was philosophical. “Over the past 10 years,” he observed, “we’ve still generated the best record among all endowments. I’d rather have the best 10-year record than the best two-year record. This is a long term game.” Moreover, the model espoused periodic adjustment and revision, reweighting allocations and rebalancing the portfolio. In the aftermath of the crisis, the Investments Office team was revisiting its assumptions and determining where and how to rebalance. Did the recent experience suggest that Yale should reduce its exposure to illiquid assets, even at the cost of lower returns and growth? In addition, the team was considering whether to revisit its asset class definitions and break out real estate from natural resources—but would that introduce more ________________________________________________________________________________________________________________ Professor Josh Lerner and Teaching Fellow Ann Leamon prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

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Yale University Investments Office: February 2011

problems than it solved? Finally, how should Yale respond to the turbulence facing private equity funds, which had historically played an integral role in its portfolio?

Background2
Ten Connecticut clergymen established Yale in 1701....
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