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YALE DAILY NEWS · FRIDAY, NOVEMBER 21, 2014 · yaledailynews.com
FROM THE FRONT
“Wealth is the ability to fully experience life.” HENRY DAVID THOREAU AMERICAN AUTHOR
Yale-Harvard rivalry extends to the markets
YALE Private Equity
Bonds and Cash
Domestic Equity
Domestic Equity Natural Resources
Private Equity Hedge Funds
Natural Resources
Hedge Funds
Foreign Equity
Bonds and Cash
Foreign Equity
Real Estate
Real Estate
HARVARD ENDOWMENTS FROM PAGE 1 nature, so you will always get a rivalry among asset managers regardless,” MIT finance professor Andrew Lo ’80 said. “But the Harvard and Yale rivalry goes beyond that, so I wouldn’t be surprised if there was a certain degree of rivalry with the endowments as well.”
THE SCOREBOARD
Although Yale has not won The Game since 2006, the Yale Investments Office has consistently beat its Cantab rival — the Harvard Management Company — over the past two decades. Since 1994, Yale has seen an average annual return of 13.9 percent, well above HMC’s 12.3 percent. Both Harvard and Yale outperformed the estimated 9.2 percent average return of university endowments over the same period. Over the past 10 years, that divide has only grown, with Yale’s average investment returns per year standing at 11 percent compared to Harvard’s 8.9 percent. “These differences are significant,” said Richard Hesel, a principal at Art and Science Group, LLC, a firm that advises colleges and nonprofits. “When you have endowments at this magnitude, a one-percent swing is $400 million of revenue — not a small amount of money and that has large consequences.” Still, NYU Stern School of Business finance professor David
Yermack said the data for investment returns often fluctuate, so there would need to be huge differences — not just a few percentage points — for it to be statistically significant. Wick Sloane SOM ’84, a columnist for the website Inside Higher Ed, said irrelevant of actual nominal differences, it is the perception that matters most. “In this game, with such staggering amounts of money, these returns just aren’t that far apart,” Sloane said. “[But] in the endowment world, they may be life and death.” Still, the price tag on a endowment provides only a glimpse into the investment offices of these schools. The true story of the Yale and Harvard endowments lies behind the reported numbers.
THE HALL OF FAME
In 1985, David Swensen, a young Wall Street executive at Lehman Brothers came to the Elm City, tasked with turning around Yale’s $1.3 billion endowment. Swensen is credited with pioneering the “Yale Model,” which aims to allocate investments towards alternative or illiquid investments — including private equity, real estate and natural resources — while also diversifying the portfolio to decrease risk. Provost Benjamin Polak described Swensen as a “moral force,” someone who is an
uncanny judge of both character and investment opportunity. “The reason Yale has done so well boils down to two words: David Swensen,” he said. Swensen declined to be interviewed for this article. But like all protagonists, Swensen has a rival. Jack Meyer started running the Harvard Management Company in 1990. Before stepping down in 2005, he grew the endowment from $4.7 billion to $25.9 billion. Hesel said that prior to these two leaders, the operative word in endowment investing was “conservatism.” However, Yale and Harvard began to shift the previously accepted norms and as a result, transformed the industry. “They both were concurrently radicalizing the way that institutions investments have been handled prior to their taking over their respective organizations,” said Daniel Wallick, an institutional investment strategist at Vanguard. Throughout their tenures, Swensen and Meyer produced very similar endowment returns. According to the released annual reports between 1990 and 1998, Yale’s returns were higher than Harvard’s for five out of the nine years. In 2005, Meyer stepped down from his role as chief executive officer of HMC to start his own hedge fund, Convexity Capital Management. But this was only the start of trouble for Harvard’s endowment over the next few
years — and to a certain extent, Yale’s endowment as well.
THE SACK
“The fiscal year that ended June 30, 2009 marked the close of what was very likely the most challenging period in modern times for the financial markets, as well as for the Harvard portfolio,” current HMC CEO Jane Mendillo ’80 SOM ’84 wrote in the Harvard annual report that year. In the 2009 fiscal year, Harvard saw a 27.3 percent drop in its endowment, the largest drop in over 40 years. Yale’s endowment suffered critically as well. According to its 2009 Endowment Report, Yale’s assets lost nearly a quarter of their value, leading to a decline of $5.6 billion. As a result, Harvard had to borrow cash. In 2008, the university sold $1.5 billion in taxable bonds and $1 billion in taxexempt bonds, which freed an additional $2.5 billion in cash. “They had that disastrous cash exposure during the recession,” Hesel said. “Having Harvard borrowing to fund operations [was] astounding.” Although Yale was not as cashstrapped as its rival, the fall in the endowment led to widespread criticism of Swensen’s investment strategy. Some financial experts claimed that the “Yale Model” was broken and should be retired. “The endowments, Yale, Har-
vard and all didn’t lose so much because of the markets, they lost that much because they were invested is risks that were way, way too high,” Sloane said. “If they’d had the endowments in treasuries, they would have had the same amount of money before and after the crash.” Yermack said there are still lessons to learn from the financial downturn and its impact on the Yale and Harvard endowments. He echoed Sloane’s sentiments that both schools paid a hefty price for heavily investing in risky asset classes like private equity. Yermack added Yale is still feeling the impact of the severe budget cuts across the University. “The impact of the events of 2008-2009 will not be reversed overnight,” Mendillo wrote in her 2009 letter. “Regaining the market value lost as a result of the recent global economic crisis will take time.”
THE PLAYBOOK
Fast-forward six years, and the financial crisis appears as a faded scar on Harvard and Yale’s record, a significant dip in a graph of otherwise rising lines. Still, some contend that the asset allocations of both institutions may still bear the marks from the recession. In fact, it may be the explanation for why HMC has not returned to its former glory under Meyer. Harvard may be working to avoid a situation where the
school has low cash reserves, Wallick said. Therefore, he said Harvard’s managers might have constructed the current portfolio in a way to make funds more accessible, hedging against a similar drop in the value of illiquid assets that occurred in 2008. “You can think of it as an insurance policy,” Wallick said. “They decided to take more insurance, in this case buying more liquid assets.” Compared to Yale, Harvard has placed more funds in domestic equity and lower risk bonds and cash. Yale has relatively higher investments in private equity and hedge funds. Lo said that historical data indicates that taking on more illiquid investment tends to carry a long-term reward, which may be why Yale’s allocation has been performing relatively more strongly. “Therefore, it becomes a question of asset allocation that drives the results, so if Yale bets big on private equity and that does well, then returns will be higher,” Yermack said. But uncertainty remains. Despite Yale’s outperformance over the past two decades, many argue the ball can still be turned over. “It is absolutely possible for Harvard to beat Yale again, there is nothing structural that prevents that from becoming a reality,” Wallick said. Contact LARRY MILSTEIN at larry.milstein@yale.edu .
Livable City Initiative director departs LIVABLE CITY FROM PAGE 1 deputy development director for the city of Hartford. After Harp increased his salary from about $98,000 to $120,000 and promised to overhaul the LCI by refocusing it on neighborhood development, Johnson agreed to stay. But after he was offered a job in California, he told Harp he was leaving. “I got an unexpected and really great opportunity to work with a really talented group of people,” Johnson said. “I hope my story, if I have a story, shows other people form New Haven and black men in particular that you can come home and you can leave home to do other things. If the opportunity presents itself to come back again, I would, hopefully as a better leader and professional to serve this community.” New Haven City Hall spokesman Laurence Grotheer said Harp had accepted his resignation this October “with regret.” As he settles into his new job across the country, the city is still in the process of determining the future of the LCI. Nemerson said he does not foresee major changes to the role of executive director or to the day-to-day work of the department, even though he and Harp told Johnson over the summer they would rename it the Office
of Housing and Neighborhood Development. The LCI was formed by former Mayor John DeStefano Jr. in the mid-1990s, taking on the code-enforcement and development duties of the existing Office of Housing and Neighborhood Development, but also acquiring a new mission: combating blight in the city. By the end of the 20th century, New Haven was suffering from depopulation and vacant homes, said Jim Paley, executive director of the non-profit organization Neighborhood Housing Services of New Haven. Believing an empty lot to be healthier for a neighborhood than a deteriorating, empty home, the LCI has torn down hundreds of previously vacant buildings. When Johnson claimed the position of executive director in 2010, however, New Haven was on the upswing: After decades of migration to New Haven’s surrounding suburbs, the city’s population stabilized in the mid-2000s and, according to the U.S. Census Bureau, increased by about 6 percent between 2000 and 2010. Because blight has been less of a problem in New Haven, Johnson prioritized helping to create a cohesive New Haven identity and inspire neighborhood pride. “This is a much better place than we give it credit for,” John-
son said. Nemerson said the city is looking for a candidate who can manage a team well and allocate resources efficiently. Grotheer said Harp has received applications from both city and noncity employees. Once Harp chooses Johnson’s successor, the three will work together to plan any major changes to the LCI. Grotheer said the mayor hopes to choose a successor “sooner rather than later.”
I won’t shed any tears if the LCI ceases to exist as long as it’s replaced by [a strong] organization. JIM PALEY Executive director, Neighborhood Housing Services of New Haven Alder Anna Festa, who represents Ward 10, which includes the affluent East Rock neighborhood, said she thinks LCI needs to take a more neighborhoodspecific approach to blight. East Rock lacks the abandoned homes that dot some of the city’s neighborhoods, but residents are not always satisfied with the appearance of properties, and feel they don’t have many options to get
help from the city. Festa said she had never felt certain that the Office of Housing and Neighborhood Development needed to be reorganized into the LCI back in the 1990s. “They switched it for a reason,” Festa said. “I’m still trying to figure out what that reason is. Ward 4 Alder Andrea JacksonBrooks, whose district includes the Hill, said her constituents have found the LCI to be attentive and effective at resolving housing issues in the neighborhood. To Jackson-Brooks, the creation of the LCI signaled a new focus on neighborhood issues. She thinks the next executive director should continue the department’s current work. In 2012, the LCI renovated several homes in the Hill and sold them to working-class families. The neighborhood also played host to the “Hill-to-Downtown project,” a multi-faceted effort to connect the Hill neighborhood to the Yale School of Medicine and Union Station. The Hill was separated from downtown in the 1950s by the construction of Highway Route 34. Nemerson said the breadth of the LCI’s tasks gives its executive director a degree of flexibility in choosing priorities and projects. “Everybody in one of these director positions brings his or her own skills,” Nemerson said. “Erik had a passion for planning.
Planning isn’t really part of LCI, but it doesn’t make sense not to let Erik try his hand at doing some planning things.” Projects Johnson listed as highlights of his tenure include updating the department’s technology, rehabilitating several homes in the Hill and, earlier this year, launching a program called Re: New Haven that incentivizes people who do not currently live in the city to buy homes in the Elm City. First-time homebuyers with incomes below 120 percent of the median family income in New Haven can receive a $10,000 loan that will be completely forgiven if they live in the home for five years. Including funding for energy-saving renovations and in-state college tuition paid by New Haven Promise, Re: New Haven pledges up to $80,000 in benefits to participants. Paley said he had found Johnson to be a strong leader with an understanding of the city’s diverse neighborhoods and their challenges. Going forward, Paley hopes the LCI will have a stronger focus on aggressively attacking blight. Neighborhood Housing Services sometimes acquires foreclosed-on homes from the city; it then renovates them and sells them at affordable prices. That task, Paley said, is more difficult when a home is surrounded by blighted properties owned by absentee landlords.
He would like to see the city take such owners to court more often. “The city doesn’t really want to do this. It’s confrontational; it probably takes them time and paying attorneys, all that stuff,” Paley said. “But it’s really important because those buildings have a serious negative impact on the work that we’re doing.” He considers the city to be at a crossroads — dramatic racial and socioeconomic divisions between neighborhoods persist, but change looks possible. Paley said he thinks the LCI is largely serving its purpose and need not change dramatically from the course Johnson set over the last four years. One organizational change Paley would not mind seeing is a new name. He remembers when the department was renamed from the Office of Housing and Neighborhood Development, triggering confusion about its purpose. “Who names a housing department an initiative? An initiative is different from a department,” Paley said. “I won’t shed any tears if the LCI ceases to exist as long as it’s replaced by an organization that takes all the strengths that the current LCI has and then says, ‘How can we make this better?’” Contact ISABELLE TAFT at isabelle.taft@yale.edu .