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Yale Fund Rises 8.9%, Smallest Return in Ivy League

Yale University, whose endowment strategy is a model for U.S. schools, said its investments rose 8.9 percent, trailing Harvard University and the three other Ivy League funds that have reported returns for the past year.

The endowment’s value increased 2.5 percent to $16.7 billion as of June 30, including $136 million in donations and $1.1 billion in distributions to the New Haven, Connecticut, university, according to a letter posted today on its website. The fund peaked at $22.9 billion in June 2008 before plunging 25 percent in the next 12 months.

Yale, the second-richest school after Harvard of Cambridge, Massachusetts, was hampered by a second straight year of losses on real estate, timber and oil and gas holdings. Its return lagged behind Harvard’s, whose $27.4 billion endowment rose 11 percent, as well as those reported this month by Columbia University in New York, the University of Pennsylvania in Philadelphia and Dartmouth College in Hanover, New Hampshire.

“Private equity, venture, real estate, real assets are going to be a drag on some of the endowments that have substantial portions invested there,” said Stewart Massey, chief investment officer at Massey, Quick & Co. in Morristown, New Jersey, which manages $1.7 billion on behalf of endowments, foundations and wealthy families. “They may continue to be a drag for a year or two.”

David Swensen, Yale’s chief investment officer, pioneered an investing style that helped endowments beat market indexes by relying on such hard-to-sell assets.

Yale Model

Swensen’s guiding principle, outlined in his 2000 book “Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment,” is that the best stock and bond pickers don’t outperform bottom-rated managers by much -- and the biggest performance gap comes in “less efficient” markets such as real assets and private equity. Those assets don’t move lock-step with stock and bond markets and therefore protect against losses when public markets decline, he wrote.

Swensen, 56, declined to comment.

Yale reported an average annual return of 8.9 percent in the decade through June. That beat Harvard’s 7 percent increase and the 3.4 percent median gain of public and corporate pensions, endowments and foundations tracked by Wilshire Associates, a consulting firm in Santa Monica, California.

Yale isn’t changing its investment strategy, said President Richard Levin.

Long-Term Confidence

“If you look back 10 years or 20 years, we still seem to have the strongest performance out of all our peers,” Levin, 63, said in an interview today. “For the long term, we’re sticking with our strategy of a diversified portfolio that’s relatively heavy in illiquid assets, where we think we can earn larger-than-normal returns over a long period of time. We’re confident that will be true in the long run.”

Yale’s investments in real assets -- real estate, energy and timber -- lost 4.5 percent in the past year. The category, which makes up 28 percent of the fund, declined 34 percent in the previous year.

Private-equity holdings, Yale’s biggest asset class at 33 percent of the fund, returned 18 percent. Absolute-return stakes including hedge funds, the endowment’s third-biggest group of holdings at 19 percent, rose 12 percent. The university’s U.S. and foreign stocks gained 21 percent and 15 percent.

“While real assets provide protection against inflation, which may prove beneficial in today’s highly uncertain global economy, in weak economic environments real assets tend to produce poor returns,” the university said in the statement.

Columbia, Penn

The Ivy League consists of eight selective private schools in the northeastern U.S. Columbia’s $6.5 billion endowment jumped 17 percent in the past year, while Penn said today its $5.7 billion fund gained 13 percent. Dartmouth today reported a 10 percent return for its $3 billion fund. The Standard & Poor’s 500 Index of stocks rose 12 percent in the year ended June 30.

Cornell University in Ithaca, New York, Princeton University in New Jersey and Brown University in Providence, Rhode Island, have yet to report their endowment results.

None of the Ivy League schools have recouped the record losses incurred in the year ended June 30, 2009. The bankruptcy of Lehman Brothers Holdings Inc. in September 2008 crippled financial markets. As investments tumbled, universities cut jobs, froze salaries and postponed building projects.

At least 15 private nonprofit colleges and universities sold bonds to raise cash after the credit collapse, including six of eight Ivy League schools, according to reports from Moody’s Investors Service. They borrowed $7.2 billion, costing them about $360 million a year in interest, according to data compiled by Bloomberg.

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