How to Manage a $17 Billion Endowment

Yale's David Swensen discusses how the ups and downs of endowment investing affect campus life.

By + More

While some universities are announcing construction halts, salary freezes, tuition hikes, and layoffs to make up for declines in endowments and budgets, one of the wealthiest colleges in America is hoping to ride out the current economic storm without changing its spending and investing strategy. The nation's most successful college endowment manager—Yale University's David Swensen—says Yale won't take any sudden or dramatic action in response to a $5.6 billion, six-month drop in the Ivy League school's endowment.

Swensen, who steered Yale's endowment fund from just over $1 billion in 1985 to about $17 billion today, says Yale can afford to wait out what he describes as a "transitory" collapse in the investment value of nearly everything but U.S. Treasury bonds. Many less wealthy investors and schools, of course, don't have the luxury of such a big nest egg and such a long investing horizon. Many need to sell at today's lows to fund immediate expenses. But Swensen says Yale will stick with plans to spend anywhere from 4.5 to 6 percent of its endowment every year. That means it can wait for the bulk of the endowment—most of which is in alternative investments such as real estate and private businesses—to rebound.

Like many other universities, Yale has faced growing criticism from Congress, students, and parents for spending very little of its booming endowment. Even in recent years in which it was earning double-digit profits, it sometimes withdrew less than 4 percent for financial aid, salaries, and the like. In January of 2008, Yale President Richard Levin announced that the school would increase its draw to more than $1 billion this year, accounting for more than 40 percent of the school's $2.7 billion annual budget. The new formula and rapid declines in the value of the endowment may mean that Yale could take out 6 or even 6.5 percent of the current value of its endowment, Swensen says, adding, "I am completely fine with that." The school currently plans to freeze its draw from the endowment "to provide a stable flow of resources," he says.

In a Dec. 16, 2008, letter to the faculty, President Levin warned, however, that the dramatic drop in the value of the endowment could leave a $100 million gap in next year's budget. Other schools, facing similarly dramatic declines in endowments and budgets, have already announced suspensions of construction projects, hiring and salary freezes, tuition increases, and the like. Swensen, who has a Ph.D. in economics from Yale, says he and the university plan to stick with their notoriously deliberate pace, even if that means passing up bargains that might be available in today's beaten-down market. American stocks are "more attractively priced than they were 18 months ago," he says. "I wouldn't be surprised if sometime in the next months or years if we considered seriously increasing our allocation to domestic equities," but a decision like that takes months, he says.

Swensen says he was taught the value of sticking with a long-term plan when he rushed to get out of U.S. stocks during the market decline that preceded the first Gulf War. "Of course, the markets did exactly what you would expect in that circumstance they would do—they rallied," he recalls. "If you have got a well-considered, long-term plan, I think you stick with it, independent of what the current market does."