If you think winning a seat in Yale University’s freshman class is hard, try becoming a money manager for the school’s $27 billion endowment.
Yale’s investment office, run by David Swensen for more than three decades, said in its annual report that it scours all kinds of sources — even social media — to find outside managers who are key to its long-term success. All are welcome to apply. Few make the cut.
“We fully encourage investors of all types — large or small, traditional or nontraditional — to contact the investments office and recognize that talented prospects may manage subscale pools of capital or operate as one-person shops,” according to the report. “Several unconventional managers rank among Yale’s longest-lasting and most fruitful partnerships.”
Dead Ends
Here’s the bad part: The process “inevitably produces many dead ends,” according to the report, without offering specific data on the success rate.
There’s good news for those with connections: Nearly half of new managers in the past decade were discovered through existing managers, alumni and industry professionals. Once they’re in, turnover is low, averaging 7.7 percent in the past decade, or a 13-year holding period, according to the report.
The report each year provides insight into one of the most successful university endowments. This year’s version — which covers fiscal 2017 through June 30 — defends the merits of active management in a period when publicly traded equities outperformed.
In fiscal 2017, Yale’s fund had 3.9 percent of assets in domestic equity, 15.2 percent in foreign stocks, and more than half in private equity and absolute return, which includes hedge funds. The endowment returned 11.3 percent, lower than the 12.7 percent on average for endowments.
Grinnell College, one of the top performers among university funds in fiscal 2017, gained almost 19 percent thanks to investments in public equities. The Iowa school’s endowment for decades was guided by longtime trustee and investment committee member Warren Buffett.
Buffett Criticized
For the second year, Yale’s report takes Buffett to task for advocating passive investing. Buffett offers “sound investment advice” for the majority of individuals and institutions. But it’s “not appropriate” for endowments that can pursue “successful active management programs.”
“His conclusion goes too far,” according to the report, adding that Yale’s “superior results” are the result of active management.
The endowment’s 12.1 percent annualized gain in the past 20 years beat the performance of peers listed by Yale — including Princeton, Duke, MIT and Stanford. Harvard, the largest endowment with the second-lowest 10-year returns in the Ivy League, wasn’t on the list.
Yale and about 30 other schools — many it says are peers — have been hit with a 1.4 percent excise tax on net investment earnings as part of the tax overhaul passed in December. About 50 schools sent congressional leaders a letter in March, asking them to revisit the “misguided policy.”
Several pages of Yale’s report are dedicated to how the endowment supports programs such as financial aid and its residential college system. For low-income students, Yale helps with expenses such as computers, winter coats and funding to return home during breaks.
The report also highlights how the endowment’s growth over 30 years helped the school decide to increase enrollment. Spending from the endowment next year will total $1.3 billion, about one-third of the budget.
Tapping Connections
Yale said it taps alumni, former investment office employees and interns to “extend Yale’s reach across the investment management industry, providing important introductions.”
The endowment tracks hundreds of inquiries each year to reach the high bar it sets for managers with “intellectual honesty, analytical rigor, high integrity and a passion for markets.”
The approach isn’t unlike Yale’s admissions process, which this year attracted 35,306 applications and offered seats to 2,229 students, or 6.3 percent.
The endowment established early partnerships with groups that are now considered “premier managers” in marketable securities, leveraged buyouts, venture capital, real estate, absolute return, and natural resources.
Patience is key. “Office staff maintain conversations, sometimes for years, before a window to invest with a manager opens,” according to the report. “In addition, Yale’s investment process requires staff members to spend time on the road overseeing managers and understanding the global opportunity set.”
Still interested in applying? The report helpfully adds: “Please email prospective.managers@invest.yale.edu to begin a conversation. All inquiries are welcome!”
This article was provided by Bloomberg News.
