The Yale Endowment 2015 Endowment Highlights Fiscal Year 2015 2014 2013 2012 2011 Market Value (in millions) $25,572.1 $23,894.8 $20,780.0 $19,344.6 $19,374.4 Return 11.5% 20.2% 12.5% 4.7% 21.9% Spending (in millions) $1,082.5 $ 1,041.5 $1,024.0 $994.2 $986.8 Operating Budget Revenues $3,297.7 $3,116.1 $2,968.6 $2,847.8 $2,681.3 (in millions) Endowment Percentage 32.8% 33.4% 34.5% 34.9% 36.1% Asset Allocation (as of June 30) Absolute Return 20.5% 17.4% 17.8 % 14.5% 17.5 % Domestic Equity 3.9 3.9 5.9 5.8 6.7 Fixed Income 4.9 4.9 4.9 3.9 3.9 Foreign Equity 14.7 11.5 9.8 7.8 9.0 Leveraged Buyouts 16.2 19.3 21.9 24.3 24.8 Natural Resources 6.7 8.2 7.9 8.3 8.7 Real Estate 14.0 17.6 20.2 21.7 20.2 Venture Capital 16.3 13.7 10.0 11.0 10.3 Cash 2.8 3.5 1.6 2.7 -1.1 Endowment Market Value 1950 –2015 $30 $25 $20 s n $15 o i l l i B $10 $5 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Fiscal Year Contents 1. Introduction 2 2. The Yale Endowment 4 3. Investment Policy 6 4. Spending Policy 22 5. Investment Performance 27 6. Management and Oversight 34 Front cover: Stairway in the Yale University Art Gallery’s older wing, designed by Egerton Swartwout ( b.a. 1891) and dating to 1926 in a style reminiscent of the Renaissance-era Bargello and the Davanzati Palace in Florence. Right: The Schwarzman Center Rotunda, between University Commons and Woolsey Hall, designed for the Yale bicentennial celebration in 1901 by the firm Carrère and Hastings, the architects responsible for the New York Public Library. Introduction Yale’s Endowment generated an 11.5% return in fiscal 2015, producing an investment gain of $2.6 billion. Over the past ten years, the Endowment grew from $15.2 billion to $25.6 billion. With annual net ten-year invest - ment returns of 10.0%, the Endowment’s performance exceeded its bench - 1 mark and outpaced institutional fund indices. For nine of the past ten years, Yale’s ten-year record ranked first in the Cambridge Associates universe. Spending from the Endowment grew during the last decade from $567 million to $1.1 billion, an annual growth rate of 6.7%. Next year, spending will amount to $1.2 billion, or 34% of projected revenues. Yale’s spending and investment policies provide substantial levels of cash flow to the operating budget for current scholars while preserving Endowment purchasing power for future generations. Endowment Growth Outpaces Inflation 1950–2015 $28 $26 $24 $22 $20 $18 s $16 n o i l $14 l i B $12 $10 $8 $6 $4 $2 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Fiscal Year 1950 Endowment Inflated Post-1950 Endowment Gifts Inflated Endowment Market Value 2 Thirty-Year Performance In the mid 1980s Yale began moving comparison, during the period, domestic Yale produced an investment gain of away from a conventional portfolio equities generated 10.7%, foreign equi - $35.2 billion over the past three decades, model dominated by domestic equities ties 8.7%, and domestic bonds 7.1% per while aggregate Endowment gifts and bonds to a diversified, equity- annum. The University outperformed reached $3.1 billion. Over the thirty-year oriented asset allocation that promised the equal-weighted mean return of period, the aggregate spending distribu - higher returns and lower risk. In the colleges and universities measured by tion to the University’s operating budget past three decades the University’s the National Association of College and totaled $13.9 billion. Endowment more than met expecta - University Business O∞cers by 5.0% per By responding to the first principles tions, returning 13.9% per annum and annum and bested its passive benchmark of endowment investing—diversification exceeding results for traditional mar - by 4.0% per annum over the thirty-year and equity orientation—Yale produced ketable asset classes by wide margins. In period. an extraordinary three-decade record. David F. Swensen, Chief Investment Officer, and announcement of the Swensen Initiative in 2013, Dean J. Takahashi, Senior Director of the Yale which raised more than $35 million for the Yale Investments Office, acknowledge applause at the Endowment. David Swensen’s Pioneering Portfolio Management , now in its second edition, discusses the essentials of endowment investing—diversification and equity orientation—which have helped Yale achieve its extraordinary three-decade results. 3 The Yale Endowment Totaling $25.6 billion on June 30, 2015, the Yale Endowment contains thousands of funds with various purposes and restrictions. Approximately 84% of funds constitute true endowment, gifts restricted by donors to provide long-term funding for designated purposes. The remaining funds 2 represent quasi-endowment, monies that the Yale Corporation chooses to invest and treat as endowment. Donors frequently specify a particular purpose for gifts, creating endowments to fund professorships, teaching, and lectureships (24%); scholarships, fellowships, and prizes (17%); maintenance (4%); books (3%); and miscellaneous specific purposes (27%). Twenty-five percent of funds are unrestricted. Twenty-five percent of the Endowment benefits the overall University, with remaining funds focused on specific units, including the Faculty of Arts and Sciences (29%), the professional schools (24%), the library (7%), and other entities (14%). Although distinct in purpose or restriction, Endowment funds are commingled in an investment pool and tracked with unit accounting much like a large mutual fund. Endowment gifts of cash, securities, or property are valued and exchanged for units that represent a claim on a portion of the total inv estm ent po rtfolio. In fiscal 2015 the Endowment provided $1.1 billion, or 33%, of the Un iversity ’s $3.3 billion operating income. Other major sources of revenu es were medical services of $787 million (24%); grants and contracts of $674 million (20%); net tuition, room, and board of $318 million (10%); gifts of $156 million (5%); and other income and transfers of $281 million (9%). Endowment Fund Allocation O perating Budget R evenue Fiscal Year 2015 Fis cal Ye ar 2015 Other Income and Transfers Maintenance Books Unrestricted Gifts Endowment Scholarships Tuition, Room, and Board Professorships Miscellaneous Medical Services Specific Purposes Grants and Contracts 4 Entrepreneurship, Technology, and Yale The Yale community has long been at the forefront of innovation, technology, and entrepreneurship. University alumni are active members of the global venture capital ecosystem, while faculty, student, and alumni entrepreneurs have devel - oped unique technologies and services, founding some of the world’s most suc - cessful and innovative companies. In recent years, Yale’s commitment to inno - vation has grown as the University has expanded its technology curriculum and entrepreneurship programming. This report highlights only a small sample of Yale’s successful entrepreneurs, technologists, and investors, who strive to transform markets, develop new products and processes, and change the world. In addition, the report features several of the many initiatives under- taken by the University to foster innova - tion and develop the next generation of technology leaders. Lee DeForest ( b.s. 1896, ph.d. 1899) was a prolific inventor, with more than 300 patents to his name. Most prominently, he is remembered for inventing the audion, a vacuum tube that amplified weak electrical signals and allowed at&t to have nation - wide phone service, and that provided sound trans - mission for radios, tv s, and even early computers. DeForest is known as “the father of radio.” Yale’s Venture Capital Yale’s venture capital managers helped million of gains after the company went to start some of the world’s leading com - public in 2011. Portfolio panies. In the 1970s and 1980s, Yale par - Since inception in 1976, Yale’s venture ticipated in a number of start-ups that capital portfolio generated a 33.8% annu - Venture capital partnerships provide defined the technology industry, includ - al return. Over the past ten years it has financing and company-building skills ing Compaq Computer, Oracle, produced a return of 18.0% per annum, to start-up companies with the goal Genentech, Dell Computer, and Amgen. outpacing the S&P 500 by 10.1% per of developing them into substantial, The high-flying 1990s included lucrative annum. The hallmark of Yale’s successful profitable enterprises. Venture capitalists investments in Amazon.com, Google, venture capital program has been long- identify and support promising entrepre - Yahoo!, Cisco Systems, Red Hat, and term relationships with the very best neurs and start-ups, and successful VC s Juniper Networks. Yale’s more recent managers. By aligning itself with pre - generate breathtaking returns by backing investments in Facebook, LinkedIn, mier firms, the University hopes to con - innovative and disruptive companies Twitter, Uber, Pinterest, Snapchat, tinue to generate attractive returns to from an early stage. AirBnB, JD.com, and Snapdeal illustrate support Yale’s educational mission. Yale was among the first institutional the home-run potential of venture investors to participate in venture capital, capital investing; for example, the making its first commitment in 1976. University’s original $2.7 million invest - The University participates through ment in LinkedIn generated $84.4 partnerships managed by the nation’s leading venture capital firms, including Andreessen Horowitz, Benchmark, and One of Yale’s most profitable venture Greylock Partners, as well as premier capital investments in recent years was firms in China and India.