2011The Yale Endowment

Endowment HighlightsFiscal Year

2011 2010 2009 2008 2007

Market Value (in millions) $19,374.4 $16,652.1 $16,326.6 $22,869.7 $22,530.2Return 21.9% 8.9% -24.6% 4.5% 28.0%

Spending (in millions) $ 986.8 $ 1,108.4 $ 1,175.2 $ 849.9 $ 684.0 Operating Budget Revenues $ 2,734.2 2,681.3 2,559.8 2,280.2 2,075.0(in millions)Endowment Percentage 36.1% 41.3% 45.9% 37.3% 33.0%

Asset Allocation (as of June 30)Absolute Return 17.5% 21.0% 24.3% 25.1% 23.3%Domestic Equity 6.7 7.0 7.5 10.1 11.0Fixed Income 3.9 4.0 4.0 4.0 4.0Foreign Equity 9.0 9.9 9.8 15.2 14.1Private Equity 35.1 30.3 24.3 20.2 18.7Real Assets 28.9 27.5 32.0 29.3 27.1Cash -1.1 0.4 -1.9 -3.9 1.9

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Contents

1. Introduction 22. The Yale Endowment 43. Investment Policy 54. Spending Policy 185. Investment Performance 226. Management and Oversight 24

Front cover:Window of Sterling Memorial Library, east façade.

Right: Aerial view of Timothy Dwight College.

Yale’s Endowment performed strongly in fiscal year 2011, as returns of21.9 percent produced an investment gain of $3.6 billion.

Over the past ten years, the Endowment grew from $10.7 billionto $19.4 billion. With annual net investment returns of 10.1 percent, theEndowment’s performance exceeded its benchmark and outpaced institu-tional fund indices. The Yale Endowment’s twenty-year record of 14.2percent per annum produced a 2011 Endowment value of more thanseven times that of 1991. Yale’s long-term record results from disciplinedand diversified asset allocation policies and superior active managementresults.

Spending from the Endowment grew during the last decade from$338 million to $987 million, an annual growth rate of approximately 11percent. On a relative basis, Endowment contributions expanded from 25percent of total revenues in fiscal 2001 to 36 percent in fiscal 2011. Nextyear, spending will amount to $992 million, or 37 percent of projectedrevenues. Yale’s spending and investment policies have provided substan-tial levels of cash flow to the operating budget for current scholars whilepreserving Endowment purchasing power for future generations.

Introduction1

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Endowment Growth Outpaces Inflation 1950–2011

In June 2011, Yale separated its real assetsportfolio into the component parts of natu-ral resources and real estate, establishingeach as a separate asset class. The changeacknowledges some fundamental di!er-ences between the asset classes’ underlyingcharacteristics and highlights naturalresources’ growing importance in the portfolio.

For over a decade, the Endowment clas-sified real estate, timberland, and oil andgas as subsets of its real assets portfoliobecause all three share important underly-ing characteristics. In particular, each assettype consists mostly of investments in illiq-uid physical assets that provide claims onfuture income streams that tend to trackinflation.

Despite important similarities, the com-ponents of real assets are not homogen-eous. Indeed, the heterogeneity within realassets provided important diversification asthe asset class grew to more than 30 per-cent of the Endowment. The two new assetclasses resulting from the split of real assetsreflect important di!erences in inflationsensitivity and asset price drivers.

While both real estate and naturalresources provide inflation protection, themechanisms and e!ectiveness with whichthey accomplish this may di!er. In the caseof real estate, replacement cost—and there-fore ultimately market values—shouldincrease with inflation. A particular asset’sresponse to a rise in price levels, however,is a function of both its lease structure andthe relationship between property supplyand demand in the relevant local market.When a market’s supply and demand are in equilibrium, lease structures determinehow quickly assets respond to inflationarypressure. Properties with shorter-term leases exhibit greater sensitivity to infla-tion. In cases where supply and demandare in disequilibrium, prices do not neces-sarily follow the expected relationshipbetween changes in replacement cost andinflation. In a supply-constrained market,rents may rise faster than inflation, whilein an overbuilt market, rents may declinein spite of inflation.

In contrast, oil, gas, metals, and miner-als are more directly exposed to global sup-ply and demand dynamics. Oil demand, for example, is increasingly a function ofemerging markets’ growth as they consumean ever larger percentage of the world’senergy. Going forward, the rate of demandgrowth in emerging economies will be acrucial determinant of petroleum price levels. Timber and natural gas likewise

provide greater global exposure than doesreal estate, although they are somewhat lessglobally driven than oil. North Americannatural gas, for example, is essentially aregional commodity, with processing andregulatory hurdles limiting its exportpotential.

Natural resources investments provideinflation protection to Yale, but with trans-mission dynamics somewhat di!erent fromthose in real estate. Dollar-denominatednatural resources provide direct protectionagainst unanticipated inflation, as their

prices should rise when the U.S. dollardepreciates relative to other currencies.Moreover, because Yale consumes somecommodities directly—energy and con-struction materials, for example—Univer-sity inflation increases as energy and othercommodity prices rise. Endowment naturalresource investments mitigate the e!ects of that inflation. Furthermore, exposure to commodities provides some protectionagainst raw materials inflation that Yaleexperiences through the importation offinished goods.

Separation of Real Assets into Natural Resources and Real Estate

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Real estate, previously part of the Yale real assets portfolio along with timberland and oil and gas, becamea separate asset class for the University in 2011.

Yale has been investing in North American timber for over fifteen years.

Totaling $19.4 billion on June 30, 2011, the Yale Endowment containsthousands of funds with a variety of designated purposes and restrictions.Approximately three-quarters of funds constitute true endowment, giftsrestricted by donors to provide long-term funding for designated pur-poses. The remaining one-quarter represent quasi-endowment, moniesthat the Yale Corporation chooses to invest and treat as endowment.

Donors frequently specify a particular purpose for gifts, creatingendowments to fund professorships, teaching, and lectureships (24 per-cent), scholarships, fellowships, and prizes (17 percent), maintenance (4 percent), books (3 percent), and miscellaneous specific purposes (26percent). Twenty-six percent of funds are unrestricted. Twenty-three per-cent of the Endowment benefits the overall University, with remainingfunds focused on specific units, including the Faculty of Arts and Sciences(37 percent), the professional schools (26 percent), the library (7 per-cent), and other entities (7 percent).

Although distinct in purpose or restriction, Endowment funds are commingled in an investment pool and tracked with unit accountingmuch like a large mutual fund. Endowment gifts of cash, securities, orproperty are valued and exchanged for units that represent a claim on aportion of the whole investment portfolio.

In fiscal 2011 the Endowment provided $987 million, or 36 per-cent, of the University’s $2.734 million operating income. Other majorsources of revenues were grants and contracts of $684 million (25 per-cent), medical services of $493 million (18 percent), net tuition, room,and board of $243 million (9 percent), gifts of $110 million (4 percent),and other income and transfers of $217 million (8 percent).

The Yale Endowment

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BooksMaintenance

Scholarships

Professorships

Miscellaneous Specific Purposes

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Endowment

Grants and Contracts

Tuition, Room, and Board

Medical Services

Gifts

Other Income and Transfers

Endowment Fund AllocationFiscal Year 2011

Operating Budget Revenue Fiscal Year 2011

Yale’s portfolio is structured using a combination of academic theory andinformed market judgment. The theoretical framework relies on mean-variance analysis, an approach developed by Nobel laureates James Tobinand Harry Markowitz, both of whom conducted work on this importantportfolio management tool at Yale’s Cowles Foundation. Using statisticaltechniques to combine expected returns, variances, and covariances ofinvestment assets, Yale employs mean-variance analysis to estimateexpected risk and return profiles of various asset allocation alternativesand to test sensitivity of results to changes in input assumptions.

Because investment management involves as much art as science,qualitative considerations play an extremely important role in portfoliodecisions. The definition of an asset class is quite subjective, requiringprecise distinctions where none exist. Returns and correlations are di"-cult to forecast. Historical data provide a guide, but must be modified to recognize structural changes and compensate for anomalous periods.Quantitative measures have di"culty incorporating factors such as mar-ket liquidity or the influence of significant, low-probability events. Inspite of the operational challenges, the rigor required in conductingmean-variance analysis brings an important perspective to the asset allocation process.

The combination of quantitative analysis and market judgmentemployed by Yale and the creation of a new asset class produces the following portfolio:

June 2011 June 2011Asset Class Actual Target

Absolute Return 17.5% 17.0%Domestic Equity 6.7 7.0Fixed Income 3.9 4.0Foreign Equity 9.0 9.0Natural Resources* 8.7 9.0Private Equity 35.1 34.0Real Estate 20.2 20.0Cash -1.1 0.0*The natural resources asset class was created on June 30, 2011.

Investment Policy3

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The target mix of assets produces an expected real (after inflation) long-term growth rate of 6.2 percent with a risk (standard deviation ofreturns) of 15.2 percent. Because actual holdings di!er from target levels,the actual allocation produces a portfolio expected to grow at 6.3 percentwith a risk of 15.4 percent. The University’s measure of inflation is basedon a basket of goods and services specific to higher education that tendsto exceed the Consumer Price Index by approximately one percentagepoint.

At its June 2011 meeting, Yale’s Investment Committee adopted anumber of changes to the University’s policy portfolio allocations. TheCommittee approved a modest increase in the private equity target from33 percent to 34 percent. The Committee approved a similar increase ofthe total real assets target from 28 percent to 29 percent, and separatedreal assets into real estate (20 percent) and natural resources (9 percent).The increases in the illiquid asset classes were funded by a 2 percentagepoint decrease in the absolute return target allocation to 17 percent.

The need to provide resources for current operations as well aspreserve purchasing power of assets dictates investing for high returns,causing the Endowment to be biased toward equity. In addition, the Uni-versity’s vulnerability to inflation further directs the Endowment awayfrom fixed income and toward equity instruments. Hence, more than 95percent of the Endowment is targeted for investment in assets expected toproduce equity-like returns, through holdings of domestic and interna-tional securities, real estate, natural resources, and private equity.

Over the past two decades, Yale reduced dramatically the Endow-ment’s dependence on domestic marketable securities by reallocatingassets to nontraditional asset classes. In 1991, 53 percent of the Endow-ment was committed to U.S. stocks, bonds, and cash. Today, target allo-cations call for 11 percent in domestic marketable securities, while thediversifying assets of foreign equity, natural resources, private equity,absolute return strategies, and real estate dominate the Endowment, representing 89 percent of the target portfolio.

The heavy allocation to nontraditional asset classes stems fromtheir return potential and diversifying power. Today’s actual and targetportfolios have significantly higher expected returns and lower volatilitythan the 1991 portfolio. Alternative assets, by their very nature, tend to beless e"ciently priced than traditional marketable securities, providing anopportunity to exploit market ine"ciencies through active management.The Endowment’s long time horizon is well suited to exploit illiquid, lesse"cient markets such as venture capital, leveraged buyouts, oil and gas,timber, and real estate.

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Yale hires external managers with an eyetoward creating long-lasting partnershipswith outstanding individuals. In additionto managing the University’s assets, manyof Yale’s managers invest their time andmoney to make the world a better place.Below is a sample of six such managerswho have done a remarkable job of notonly creating value for Yale, but also lead-ing the way in the philanthropic world.

Josh Bekenstein—Bain CapitalDana-Farber Cancer Institute

“My partners and I are pleased that wecan actively support many great philan-thropic organizations that do so much toimprove our world.”

Dana-Farber Cancer Institute providesexpert, compassionate care to children andadults with cancer while advancing theunderstanding, diagnosis, treatment, cure,and prevention of cancer and related dis-eases. As an a"liate of Harvard MedicalSchool and a Comprehensive CancerCenter designated by the National CancerInstitute, Dana-Farber provides trainingfor new generations of physicians and sci-entists, designs programs that promotepublic health among high-risk and under-served populations, and disseminates innovative patient therapies and scientificdiscoveries.

Josh Bekenstein’s work helps advancethe battle against cancer. He is chairman of the Institute’s board of trustees, and heco-chaired Mission Possible, the Institute’srecent campaign that raised $1.18 billion,making the institute the first hospital inNew England to complete a $1 billion capi-tal campaign. In addition, Josh has com-pleted the Pan-Mass Challenge, a 200-mile

bikeathon to raise money for Dana-Farber,for nineteen consecutive years, and in sodoing he has helped to raise over $8 mil-lion for Dana-Farber.

In 2010, Josh was honored as theNational Association of Corporate Direc-tors (nacd) Nonprofit Director of theYear, in recognition of his commitment andservice to Dana-Farber as well as his con-tributions as a director of New Profit, CityYear, Horizons for Homeless Children, andNew Leaders for New Schools.

Josh has served Yale as a member of theUniversity’s Investment Committee since2000. He co-chaired the $3.5 billion YaleTomorrow Campaign and was a majordonor for renovations of Saybrook College,for construction of the School of Manage-ment campus, for Yale athletics, and forfinancial aid.

Bill Helman—Greylock PartnersGlobal Health

“It takes the active engagement of multi-ple organizations to make this globalhealth endeavor successful, and Daisy andI truly support the breaking down of tra-ditional barriers in cooperative pursuit ofa common goal, to bring quality healthcare to the world’s poorest places.”

Global health, a relatively new healthcare field, focuses on providing qualityhealth care in the world’s poorest places.The goal is to improve the health of thepoor and marginalized, build local capacity,and improve communities through thealleviation of poverty. Bill and his familyhave traveled extensively, witnessing first-hand the work of three organizationsthrough which they support global health:Partners In Health, the Harvard MedicalSchool Department of Global Health andSocial Justice, and the Brigham andWomen’s Hospital Division of GlobalHealth Equity.

Bill approaches his philanthropy in thesame way he approaches venture capital: he backs people he calls “founders,” indi-viduals who change our world, who addvalue, who lead, inspire, and influence, alldone with passion, determination, and per-sistence. Bill supports a number of early pioneers in the global health field, includ-ing Paul Farmer, Jim Yong Kim, andOphelia Dahl.

Bill’s other charitable activities include work on the boards of The Steppingstone Foundation, the Isabella Stewart GardnerMuseum, the Broad Institute, the DamonRunyon Cancer Research Foundation, theDartmouth-Hitchcock Medical Center, the Harvard Management Company, andHarvard Medical School. Bill serves as atrustee of Dartmouth College, where hechairs the investment committee.

Seth Klarman—Baupost Facing History and Ourselves

“The leverage of Facing History is phe-nomenal. By training approximately 3,000teachers each year, most of whom will stillbe in the classroom ten to twenty yearsfrom now, Facing History is able to reachan estimated 1.5 million adolescents eachyear with its vitally important curriculum.”

Facing History and Ourselves, an inter-national educational and professionaldevelopment organization, engages stu-dents of diverse backgrounds in an exami-nation of racism, prejudice, and anti-Semi-tism in order to promote the developmentof a more humane and informed citizenry. The organization helps young peopleunderstand the sources of hatred and takeresponsibility for change by looking back athistorical events. Facing History organizes

Philanthropists among Our Managers

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workshops and seminars for teachers tolearn the most current tools and resourcesavailable to teach students history.

Seth Klarman served as the chair of theboard of directors for Facing History andOurselves for the past sixteen years, step-ping down in November 2011. He currentlyserves as co-chair of the board of trustees.In these roles, Seth has worked on fundraising, the challenges and opportunitiesrelated to organizational growth, anddevelopment of new resource materials for educators.

Seth is chairman of the Klarman FamilyFoundation, on the board of directors ofthe Broad Institute, chairman of the boardof directors for The David Project (Centerfor Jewish Leadership), a vice chair of Beth Israel Hospital’s board of managers, a member of the board of directors of The Israel Project, and a member of theBoard of Dean’s Advisors at HarvardBusiness School.

Steve Mandel—Lone Pine CapitalTeach for America

“The future of our society and our globalcompetitiveness depends on a much betterk-12 public education system. The dispar-ity in educational opportunity betweenrich and poor in this country is shamefuland is the civil rights issue of the twenty-first century. It will take many years, butTeach for America is the human capitalengine that is recruiting, training, andinspiring thousands of this country’s mosttalented and relentless young leaders toeliminate this inequity, not just during

their two-year teaching commitment, butover the rest of their lives.”

Teach for America (tfa) strives to erad-icate educational inequity by recruiting adiverse selection of America’s brightest college graduates to teach for two years in urban or rural communities within the United States. Founded in 1990, tfarecruited, trained, and placed 500 teachersin its first year. Last year, the programreceived more than 48,000 applicants to fill5,200 spots in the corps, attracting interestfrom 12 percent of all Ivy League seniors.In 2010, Yale was recognized by tfa as atop contributor of tfa members, placingthird in the medium-school category. Overthe past three years, 129 Yale College sen-iors accepted full-time employment o!ersfrom tfa.

Yale, together with the CommunityFoundation for Greater New Haven,pledged financial support to tfa thatallowed the organization to start operationsin New Haven and in Connecticut. Sincetfa came to Connecticut, the Universityhas given the organization more than$700,000.

Steve Mandel has served on the nationalboard of directors of Teach for Americasince 2005. Steve is one of the organiza-tion’s most dedicated advocates, joining theWalton Family Foundation as one of twobenefactors contributing over $50 millionin support of the program’s educationalmission. Aside from his work on thenational board, Steve founded and serveson the Regional Advisory Board forConnecticut, helping to address educa-tional inequity in urban communities suchas Bridgeport, Hartford, New Haven, andStamford.

In addition to his work with tfa, Steveis the chair of the trustees of DartmouthCollege, and served previously as a trusteeof Phillips Exeter Academy and The Chil-dren’s School in Stamford, Connecticut. In 2001 he founded the Lone Pine Founda-tion, an organization that aims to use edu-cation to break the cycle of poverty by o!-ering grants to educational programs basedin Connecticut, New York City, London,and Hong Kong.

Tom Steyer—FarallonEnergy Sciences Institute at Yale

“For me, figuring out what you care aboutmost and pursuing it passionately is not achoice; it is life itself.”

Tom Steyer is a passionate advocate ofenvironmental protection and clean energy.

In September 2011, Yale announced that Tom and his wife Kat Taylor donated $25 million to launch the Energy Sciences Institute at the University’s West Campus.

The institute will bring together physi-cists, chemists, geologists, biologists, andengineers to develop solutions to theworld’s energy challenges. Previously, Tom and Kat created and funded the TomKat Center for Sustainable Energy at StanfordUniversity, which looks for ways to makerenewable energy technologies morea!ordable and accessible.

Tom recently partnered with formerReagan administration Secretary of StateGeorge Schultz to lead the opposition toProposition 23, a November 2011 ballotmeasure that would have suspended Cali-fornia’s landmark climate change law. Tompledged $5 million to the e!ort and joinedSchultz as co-chair of Californians forClean Energy and Jobs.

Tom and Kat are co-founders of OnePacificCoast Bank (formerly OneCaliforniaBank), which pursues the vision of creatinga sustainable, meaningful community development bank.

Tom and Kat’s support of Yale includesfunds for the Pierson College renovationand for the William C. Brainard Professor-ship in Economics. In 2010, Tom and hiswife joined Bill and Melinda Gates andWarren Bu!ett in the Giving Pledge, acommitment by some of the wealthiestAmerican families to donate more than halfof their wealth to charity during their life-times or after their deaths.

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Lei Zhang—Hillhouse CapitalYale University and Renmin University

“Peaches and plums do not have to talk, yet the world beats a path to them.”—The Records of the Grand Historian(by Sima Qian)

Lei Zhang contributed an auspicious$8,888,888 to the Yale School of Manage-ment in 2010. The gift, which was thelargest that som has received from a grad-uate of the school, will be used to supportconstruction of the school’s new campus aswell as to provide China-related scholar-ships. In addition, Lei’s generosity bene-fited the Yale China and World Fellowsprograms. Lei made the gift with hopes ofstrengthening ties between Yale and China,which he believes will benefit studentsfrom all backgrounds.

Also in 2010, Lei provided funds fortwenty students from his undergraduatealma mater, Renmin University of China,to study for a summer at Yale University. Renmin University acquired its current

name in 1950, making it the first universityestablished by the People’s Republic ofChina. Renmin holds a place as one of themost prominent research institutions in China, with a special emphasis on humani-ties and social sciences. Lei donated 10 million rmb to set up the Hillhouse(Gaoli) Academy at Renmin University.

Lei serves on the board of bn Voca-tional School, China’s first tuition-free,non-profit vocational school designed forunderprivileged children. The schooldesigns courses based on market demandand aims to equip students with both cul-tural and practical capabilities to be top-tier skilled workers. Lei and his wife alsodonate money for other educational pur-poses, including scholarships in highschools and elementary schools.

Lei was a founding member of theUnited World College of Southeast Asia(uwcsea) Foundation and helped to formthe investment committee of the first highschool endowment in Singapore.

Philanthropists (continued)

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The Yale Investments O"ce’s single mostimportant function is to develop invest-ment partnerships with extraordinaryinvestors. As a result, nothing mattersmore than finding and working with high-quality partners. The Investments O"cesta! meets with countless prospectiveinvestment managers each year. It thennarrows in on particularly compelling can-didates, meeting with those managers sev-eral times and conducting numerous layersof due diligence as it evaluates each man-ager’s potential. One successful managerjoked that the Investments O"ce dug so deep into his background that it inter-viewed his third-grade teacher.

Yale chooses to partner with managerswith whom the University can developlong-lasting relationships. The averagemanager tenure in Yale’s portfolio is tenyears, a period reflecting a suitable long-term orientation as well as responsivenessto inevitable changes in manager character-

istics. Several manager relationships spandecades. For example, one of Yale’s privateequity managers has been a close partnerfor thirty years.

Active managers worth hiring possesspersonal attributes that create reasonableexpectations of superior performance. Keymanager characteristics include a high levelof integrity, a passion for investing, and anentrepreneurial orientation. Employinginvestment managers with high moralstandards reduces the likelihood of con-flicts of interest, as ethical managers seri-ously consider the goals of Yale whenresolving conflicts. Top-notch managersinvest with passion, working to beat themarket with a nearly obsessive focus. They limit assets under management andmake aggressive, unconventional securitychoices, assuming substantial risks with the hope of generating superior investmentreturns. Entrepreneurial firms provide thegreatest likelihood of dealing successfully

with ever-changing market dynamics, ulti-mately increasing the chances of deliveringsuperior investment returns by puttingpeople ahead of bureaucracy and structure.

Aligning Incentives

The Investments O"ce looks for ways to mitigate the principal-agent conflictsinherent in external manager relationships.Partnering with ethical individuals is partof the solution, but ensuring that peopleoperate within properly constructed organ-izations is equally important. Structuralcharacteristics that play an important rolein aligning incentives include the level ofmanagement fees, form of incentive com-pensation, and size of manager co-invest-ment. Yale prefers managers who are paidfor superior performance, not for accumu-lating large amounts of assets under man-agement, and managers who invest mean-ingful amounts of their personal net worthalongside Yale’s capital.

Manager Characteristics

Yale’s seven asset classes are defined by di!erences in their expectedresponse to economic conditions, such as price inflation or changes ininterest rates, and are weighted in the Endowment portfolio by consider-ing risk-adjusted returns and correlations. The University combines theasset classes in such a way as to provide the highest expected return for agiven level of risk.

In July 1990, Yale became the first institutional investor to pursue abso-lute return strategies as a distinct asset class, beginning with a target allo-cation of 15.0 percent. Designed to provide significant diversification tothe Endowment, absolute return investments seek to generate high long-term real returns by exploiting market ine"ciencies. Approximately halfof the portfolio is dedicated to event-driven strategies, which rely on avery specific corporate event, such as a merger, spin-o!, or bankruptcyrestructuring to achieve a target price. The other half of the portfolio con-tains value-driven strategies, which involve hedged positions in assets orsecurities that diverge from underlying economic value. Today, the abso-lute return portfolio is targeted to be 17.0 percent of the Endowment,below the average educational institution’s allocation of 23.7 percent tosuch strategies. Absolute return strategies are expected to generate realreturns of 6.0 percent with risk levels of 10.0 percent for event-drivenstrategies and 15.0 percent for value-driven strategies.

Unlike traditional marketable securities, absolute return invest-ments have historically provided returns largely independent of overallmarket moves. Over the past ten years, the portfolio exceeded expecta-tions, returning 11.5 percent per year with low correlation to domesticstock and bond markets.

An important attribute of Yale’s investment strategy concerns the alignment of interests between investors and investment managers.To that end, absolute return accounts are structured with performance-related incentive fees, hurdle rates, and clawback provisions. In addition,managers invest significant sums alongside Yale, enabling the Universityto avoid many of the pitfalls of the principal-agent relationship.

Financial theory predicts that equity holdings will generate returns supe-rior to those of less risky assets such as bonds and cash. The predominantasset class in most U.S. institutional portfolios, domestic equity repre-sents a large, liquid, and heavily researched market. While the averageeducational institution invests 18.0 percent of assets in domestic equities,Yale’s target allocation to this asset class is only 7.0 percent. The domesticequity portfolio has an expected real return of 6.0 percent with a standarddeviation of 20.0 percent. The Wilshire 5000 Index serves as the portfoliobenchmark.

Asset Class Characteristics

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Domestic Equity

Absolute Return

Despite recognizing that the U.S. equity market is highly e"cient,Yale elects to pursue active management strategies, aspiring to outper-form the market index by a few percentage points annually. Becausesuperior stock selection provides the most consistent and reliable oppor-tunity for generating excess returns, the University favors managers withexceptional bottom-up fundamental research capabilities. Managerssearching for out-of-favor securities often find stocks that are cheap inrelation to current fundamental measures such as book value, earnings, or cash flow.

Fixed income assets generate stable flows of income, providing greatercertainty of nominal cash flow than any other Endowment asset class.The bond portfolio exhibits a low covariance with other asset classes andserves as a hedge against financial accidents or periods of unanticipateddeflation. While educational institutions maintain a substantial allocationto fixed income instruments and cash, averaging 12.4 percent, Yale’s targetallocation to fixed income and cash constitutes only 4.0 percent of theEndowment. Bonds have an expected real return of 2.0 percent with riskof 10.0 percent. The Barclays Capital 1-5 Year U.S. Treasury Index servesas the portfolio benchmark.

Yale is not particularly attracted to fixed income assets, as theyhave the lowest historical expected returns of the seven asset classes thatmake up the Endowment. In addition, the government bond market isarguably the most e"ciently priced asset class, o!ering few opportunitiesto add significant value through active management. Based on skepticismof active fixed income strategies and belief in the e"cacy of a highlystructured approach to bond portfolio management, the InvestmentsO"ce chooses to manage Endowment bonds internally. In spite of anaversion to market timing strategies, credit risk, and call options, Yalemanages to add value consistently in its management of the bond portfolio.

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Fixed Income

Night view of Ingalls Rink, home of Yale hockey.

Foreign equity investments give the Endowment exposure to the globaleconomy, providing diversification and the opportunity to earn outsizedreturns through active management. Yale allocates 4.0 percent of its port-folio to foreign developed markets and 2.5 percent of its portfolio toemerging markets. In addition, Yale dedicates 2.5 percent of the portfolioto opportunistic foreign positions, with the expectation that holdings willbe concentrated in markets that o!er the most compelling long-termopportunities, particularly China and India. Yale’s foreign equity targetallocation of 9.0 percent stands below the average endowment’s allocationof 19.5 percent. Expected real returns for emerging equities are 7.0 percentwith a risk level of 22.5 percent, while developed equities are expected toreturn 6.0 percent with risk of 20.0 percent. The portfolio is measuredagainst a composite benchmark of (a) developed markets, measured bythe Morgan Stanley Capital International (msci) Europe, Australasia,and Far East Index; (b) emerging markets, measured by the msciEmerging Markets Index; and, (c) opportunistic investments, measuredby a custom blended index.

Yale’s investment approach to foreign equities emphasizes activemanagement designed to uncover attractive opportunities and exploitmarket ine"ciencies. As in the domestic equity portfolio, Yale favorsmanagers with strong bottom-up fundamental research capabilities.Capital allocation to individual managers takes into consideration thecountry allocation of the foreign equity portfolio, the degree of confi-dence Yale possesses in a manager, and the appropriate asset size for aparticular strategy. In addition, Yale attempts to exploit compellingundervaluations in countries, sectors, and styles by allocating additionalcapital and, perhaps, by hiring new managers to take advantage of theopportunities.

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Foreign Equity

Silliman College courtyard.

Equity investments in natural resources—oil and gas, timberland, andmetals and mining—share common risk and return characteristics: pro-tection against unanticipated inflation, high and visible current cash flow,and opportunities to exploit ine"ciencies. At the portfolio level, naturalresource investments provide attractive return prospects and significantdiversification. Yale has a 9.0 percent long-term policy allocation to natu-ral resources with expected real returns of 6.0 percent and risk of 13.6percent.

The natural resources portfolio—created by the split of the realassets portfolio at the June 2011 Investment Committee meeting—is afundamental component of the Endowment, as it o!ers powerful diver-sification and promises strong returns. Pricing ine"ciencies in the assetclass and opportunities to add value allow superior managers to generateexcess returns over a market cycle. The inception-to-date return of Yale’soil and gas (1986) and timber (1996) portfolio clocks in at an impressive16.9 percent per annum.

Private equity o!ers extremely attractive long-term risk-adjusted returncharacteristics, stemming from the University’s strong stable of value-adding managers that exploit market ine"ciencies. Yale’s private equityportfolio includes investments in venture capital and leveraged buyoutpartnerships. The University’s target allocation to private equity of 34.0percent far exceeds the 10.7 percent actual allocation of the average educa-tional institution. In aggregate, the private equity portfolio is expected togenerate real returns of 10.5 percent with risk of 27.7 percent.

Yale’s private equity program, one of the first of its kind, isregarded as among the best in the institutional investment community,and the University is frequently cited as a role model by other investors.Since inception, private equity investments have generated a 30.3 percentannualized return to the University. The success of Yale’s program led to a1995 Harvard Business School case study—“Yale University InvestmentsO"ce”—by Professors Josh Lerner and Jay Light. The popular case studywas updated numerous times, most recently in 2011.

Yale’s private equity assets concentrate on partnerships with firmsthat emphasize a value-added approach to investing. Such firms workclosely with portfolio companies to create fundamentally more valuableentities, relying only secondarily on financial engineering to generatereturns. Investments are made with an eye toward long-term relation-ships—generally, a commitment is expected to be the first of several—andtoward the close alignment of the interests of general and limited part-ners. Yale avoids funds sponsored by financial institutions because of theconflicts of interest and sta! instability inherent in such situations.

Private Equity

13

Natural Resources

Investments in real estate provide meaningful diversification to theEndowment. A steady flow of income with equity upside creates a naturalhedge against unanticipated inflation without a sacrifice of expectedreturn. Yale’s 20.0 percent long-term policy allocation significantlyexceeds the average endowment’s commitment of 4.4 percent. Expectedreal returns are 6.0 percent with risk of 17.5 percent.

The real estate portfolio plays a meaningful role in the Endow-ment as a powerful diversifying tool and a generator of strong returns.While real estate markets provide dramatically cyclical returns, pricingine"ciencies in the asset class and opportunities to add value allow supe-rior managers to generate excess returns over longer time horizons. Sinceinception in 1978 the portfolio has returned 12.0 percent per annum.

The illiquid nature of private real estate combined with the expen-sive and time-consuming process of completing transactions creates ahigh hurdle for casual investors. Real estate provides talented investmentgroups with the opportunity to generate strong returns through savvyacquisitions and managerial expertise. A critical component of Yale’sinvestment strategy is to create strong, long-term partnerships betweenthe Investments O"ce and its investment managers. In the last decade,Yale played a critical role in the development and growth of severalorganizations involved in the management of real estate.

Yale Educational University Institution Mean

Absolute Return 17.5% 23.7% Domestic Equity 6.7 18.0Fixed Income 3.9 12.4 Foreign Equity 9.0 19.5 Natural Resources 8.7 8.6Private Equity 35.1 10.7 Real Estate 20.2 4.4 Cash -1.1 2.4Data as of June 30, 2011

Real Estate

14

Asset Allocations

15

Investments O"ce AlumniYale Investments O"ce alumni have goneon to pursue careers in fields ranging frominvestment management to business togovernment to law. Over the past twenty-five years, forty-one men and women have joined and left the Endowment, after working for an average of 4.1 years.Roughly 66 percent started work at theInvestments O"ce right out of college. Ofthose who left, about 33 percent went tobusiness school, predominantly at Harvardor Stanford, 25 percent joined money man-agement firms, 20 percent attended law orgraduate school, and 10 percent took lead-ership positions at endowments or founda-tions. In the past year, three yio financialanalysts moved on to new challenges: JonRhinesmith left to pursue a ph.d. in eco-nomics at Harvard, Mike Schmidt went towork at the Treasury Department in sup-port of the Financial Stability OversightCouncil, and Tess Dearing departed to pur-sue an m.b.a. at Harvard Business School.

Today, about 33 percent of yio alumnihold leadership positions at endowmentsor foundations; half of them hold the titleof chief investment o"cer. In the founda-tion world, Investments O"ce alums man-age investment operations at RockefellerFoundation, Carnegie Corporation, andConrad H. Hilton Foundation. In highereducation, endowments overseen by yio

alumni include those at mit, Princeton,Bowdoin, and Wesleyan. yio alumni havea passion to work in the non-profit worldand serve their communities, a reflection of the kind of people that the yio seeks tohire. Below we provide brief profiles ofsome of the Investments O"ce’s alumni.

Seth Alexander: President, mit Investment Management Company

“I cannot imagine a better place to havelearned the investment business than theYale Investments O!ce with its exception-al leadership, fabulous team, and stan-dard-setting investment thinking.”

Seth Alexander joined the InvestmentsO"ce after graduating from Yale College in 1995 with a degree in biology. Duringhis nearly eleven-year tenure at the yio,Seth focused on the Endowment’s assetallocation policies, as well as investments in timber and foreign and domestic mar-ketable securities. He co-authored thepaper “Illiquid Alternative Asset FundModeling” with Dean Takahashi, whichpresents a financial model that projectsfuture asset values and cash flows of illiq-uid alternative investments. In May 2006,Seth left Yale to manage mit’s endowment.In that capacity he has pursued a strategyfocused on developing a diversified invest-

ment base with a strong equity bias andfostering long-term partnerships withexceptional investment managers.

Andrew Golden: President, Princeton University Investment Company

“I often describe my time at the YIO asbeing the equivalent of a medical intern-ship and residency—it had that muchimpact on my professional and, indeed,intellectual development.”

Andy Golden started at the InvestmentsO"ce as an intern while he was a studentat the Yale School of Management, andjoined as a full-time member after graduat-ing in 1989 with a master’s degree in public

The yio o"ces now occupy the fifth floor of this Yale-owned building in downtown New Haven.

and private management. In 1993 he leftthe yio for the Duke Management Com-pany and since 1995 has headed Princeton’sendowment, presiding over the PrincetonUniversity Investment Company (prin-co). Under Andy’s stewardship, princo’sassets have grown almost five-fold to morethan $17 billion, net of $6 billion in distri-butions to university operations. In 2007the U.S. Treasury appointed Andy to theInvestors’ Committee of the President’sWorking Group on Financial Markets. Inaddition to his position at princo, Andyserves on the advisory boards of a numberof private equity and venture capital firms,including Bain Capital, Greylock Partners,General Catalyst Partners, saif Partners,and Northern Light Venture Capital.

Randy Kim: Vice President and Chief Investment O!cer, Conrad N. Hilton Foundation

“I will forever be grateful to David, Dean,and the rest of my former YIO colleaguesfor ten years of invaluable investmenttraining and personal mentorship. I amblessed for the opportunity to have madeso many great friends, and I wish my col-leagues at Yale every future success.”

Randy Kim joined the InvestmentsO"ce after graduating from Yale College in1998 with degrees in economics and politi-cal science. During his ten years at the yio,Randy worked on the Endowment’s abso-lute return, domestic equity, and foreignequity portfolios. While working nearlyfull-time for the yio, he earned an m.b.a.from the Yale School of Management in2004. Randy left the Investments O"ce

in 2008 to head the Hilton Foundation’sinvestment portfolio, where he works withDirector of Investments Jay Kang, class of2002, another yio alum. In addition to hiswork with the foundation, Randy serves onthe board of directors of the ucla Invest-ment Company.

Anne Martin: Chief Investments O!cer,Wesleyan University

“I can’t imagine a better place than theYale Investments O!ce to learn the artand science of investment management.I’ll always be thankful that David Swensenand Dean Takahashi took a leap of faith tobring me into the fold. It’s hard to imag-ine an environment that provides greaterbreadth in intellectual challenges, cutting-edge thinking, and exposure to the smart-est people in the investing world, a groupthat includes not only Yale’s investmentmanagers but my colleagues within theYale Investments O!ce.”

Anne Martin joined the InvestmentsO"ce in 2005. During her tenure at theyio, Anne worked primarily on the naturalresources portfolio, helping the Endow-ment identify new opportunities in the oiland gas space. She also worked on the pri-vate equity portfolio, specifically focusingon venture capital.

Prior to joining Yale, Anne worked as a general partner of private equity firmRosewood Capital, where she focused onInternet, software, and business serviceinvestments. Previously she was a manag-ing director at Alex. Brown in its technol-ogy practice, where she worked on corpo-

rate finance and mergers and acquisitionswith clients such as Amazon.com, eBay,and aol. She is a graduate of SmithCollege, cum laude, Phi Beta Kappa, andholds an m.b.a. from Stanford BusinessSchool.

Anne was a co-founder, board member,and board chair of the Packard Center forals Research at Johns Hopkins, an innova-tive non-profit organization dedicated tofinding therapies for amyotrophic lateralsclerosis. In addition, Anne serves on theinvestment committee of Smith College.She is currently co-chair of the NationalRowing Foundation, a non-profit organiza-tion devoted to preparing the next genera-tion of world-class rowers for internationalcompetition.

Anne rowed for the U.S. National Team,won a gold medal in the 1986 WorldChampionships, and was a member of the1988 Olympic team.

In 2010 she left the Endowment tobecome Wesleyan University’s chief investment o"cer.

Lauren Meserve: Deputy Chief Investment O!cer, Metropolitan Museum of Art

“I view my time at the Yale InvestmentsO!ce as a continuation of my undergrad-uate education. Working with David andDean, I learned something new every day.”

Lauren Meserve joined the InvestmentsO"ce after graduating from Yale College in 1993 with a degree in anthropology. Sheleft the Endowment in 1996 to join theAndrew W. Mellon Foundation, where shecollaborated on The Shape of the River:

Alumni (continued)

16

Long-Term Consequences of Considering Racein College and University Admissions (Bowenand Bok) and The Game of Life: CollegeSports and Educational Values (Bowen andShulman). After her work at Mellon, shepursued a master’s degree at PrincetonUniversity’s Woodrow Wilson School ofPublic and International A!airs. Since2002, Lauren has worked in the invest-ments o"ce of the Metropolitan Museumof Art, and since 2007 she has served asdeputy chief investment o"cer. In additionto her work at the Met, Lauren serves onthe boards of the Wenner-Gren Founda-tion for Anthropological Research and theAmerican Friends of the National Gallery,London.

Jonathan Rhinesmith: ph.d. Candidate,Harvard Economics Department

“YIO’s relentless e"orts to fully under-stand investment issues, and at times even to develop novel solutions to them,created a thriving, collegial environmentthat made the o!ce an excellent place at which to learn about how financial markets interact.”

Jonathan Rhinesmith joined the Invest-ments O"ce after graduating from YaleCollege in 2008 with a double degree inphysics and in economics and mathematics.As an undergraduate, Jon had a stronginterest in economics, serving as the editor-in-chief of the Yale Economic Review andinterning at Ellington, a hedge fund thatboasts a relationship with Yale economics

professor John Geanakoplos. Jon started atthe yio focusing on overall Endowmentperformance and absolute return. Afterthree years with the Investments O"ce, hematriculated at Harvard University to pur-sue a ph.d. in economics.

Kimberly Sargent: Managing Director for Marketable Securities, David and Lucile Packard Foundation

“It was a great honor to be a small part of a team of such talented investment profes-sionals at the Yale Investments O!ce forthree years. As a recent college graduate, I benefited from an intense lesson in allaspects of the world of investment man-agement. As a lover of learning, I was inan environment in which intellectual hon-esty and rigor were applied toward thechallenge of earning superior returns.And as someone who cared about doinggood in the world, I was thrilled to see theresults of our work go to benefit theUniversity and the globe.”

Kimberly Sargent came to the Invest-ments O"ce in 2001 from New York-basedMorrison Cohen Singer & Weinstein, acommercial law firm. During her threeyears at the Endowment, Kimberly focusedon capital markets and international equi-ties. Kimberly, a Yale College history major,earned her cfa charter and, while at theO"ce, helped Chief Investment O"cerDavid Swensen with his second book,Unconventional Success: A FundamentalApproach to Personal Investment.

Kimberly left the yio in 2004 to pursuean m.b.a. at Stanford Business School.After consulting for financial institutions

at McKinsey, Kimberly joined the PackardFoundation in 2008 as it was starting toexpand its investment team. She is cur-rently the foundation’s managing directorfor marketable securities.

Xiaoning Wu: Senior Associate, Hillhouse Capital Management

“The Investments O!ce gave me an opportunity to interact with the smartestinvestors in the world. I couldn’t have hada more memorable learning experience.”

Xiaoning Wu first joined the Invest-ments O"ce as an intern during herundergraduate years at Yale College. AnEast Asian studies and economics doublemajor, Xiaoning supplemented her aca-demic endeavors by working at the Endow-ment, researching investment opportunitiesin Chinese equities. Following graduation,Xiaoning postponed full-time employmentat the O"ce for one year and went toBeijing to study Chinese.

At the yio, Xiaoning focused on Yale’sabsolute return and emerging marketsportfolios. In that capacity she workedclosely with the University’s China-focusedpublic equities fund, Hillhouse CapitalManagement, ultimately doing two intern-ships with the fund, the first while at the Investments O"ce and the secondwhile at Stanford Business School.Xiaoning credits her time at the Invest-ments O"ce with her development of abroad-based foundation in finance andfamiliarity with a comprehensive spectrumof investment strategies.

17

The spending rule is at the heart of fiscal discipline for an endowed insti-tution. Spending policies define an institution’s compromise between theconflicting goals of providing substantial support for current operationsand preserving purchasing power of endowment assets. The spendingrule must be clearly defined and consistently applied for the concept ofbudget balance to have meaning.

The Endowment spending policy, which allocates Endowmentearnings to operations, balances the competing objectives of providing a stable flow of income to the operating budget and protecting the realvalue of the Endowment over time. The spending policy manages thetrade-o! between these two objectives by using a long-term spendingrate target combined with a smoothing rule, which adjusts spending inany given year gradually in response to changes in Endowment marketvalue.

The target spending rate approved by the Yale Corporation cur-rently stands at 5.25 percent. According to the smoothing rule, Endow-ment spending in a given year sums to 80 percent of the previous year’sspending and 20 percent of the targeted long-term spending rate appliedto the market value two years prior. The spending amount determined bythe formula is adjusted for inflation and constrained so that the calculatedrate is at least 4.5 percent, and not more than 6.0 percent, of the Endow-ment’s inflation-adjusted market value two years prior. The smoothingrule and the diversified nature of the Endowment are designed to miti-gate the impact of short-term market volatility on the flow of funds tosupport Yale’s operations.

Spending Policy4

18

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1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20101950 Spending Inflated Spending from Post-1950 Endowment Gifts Inflated Actual Spending

Milli

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Spending Growth Surpasses Inflation 1950–2011

The spending rule has two implications. First, by incorporatingthe previous year’s spending, the rule eliminates large fluctuations,enabling the University to plan for its operating budget needs. Over thelast twenty years, the standard deviation of annual changes in spendinghas been less than three-quarters that of annual changes in Endowmentvalue. Second, by adjusting spending toward the long-term target spend-ing level, the rule ensures that spending will be sensitive to fluctuatingEndowment market values, providing stability in long-term purchasingpower.

Despite the conservative nature of Yale’s spending policy, distribu-tions to the operating budget rose from $338 million in fiscal 2001 to$987 million in fiscal 2011. The University projects spending of $992 million from the Endowment in fiscal 2012, representing about 37 percentof revenues.

19

Kline Biology Tower, atop Science Hill. At left is a partial view of Kroon Hall, the home of Forestry &Environmental Studies, completed in 2009.

The Endowment is managed by a team ofinvestment professionals at the Yale Invest-ments O"ce. To keep pace with the grow-ing Endowment value, the investmentteam has grown over the past quarter-cen-tury and today consists of twenty-four professionals, including a team of junioranalysts and an experienced senior sta!.Each year, the O"ce hires student interns,who number among the most impressiveYale College students.

Senior Sta"

The senior sta! at the Yale InvestmentsO"ce drive the decisions and overall direc-tion of the University’s Endowment. Ledby David Swensen, senior sta! membersfocus their attention on key endowmentmanagement issues including setting assetallocation and conducting deep portfolioreviews as well as on special topics likeassessing the implications of fraud in man-agers’ portfolio companies. In addition toleading internal projects, senior sta! mem-bers serve as the important link betweenYale and its external managers; they workon evaluating, selecting, and monitoringfunds, they negotiate with managers onissues such as fund raising and fee struc-tures, and they collaborate on discussionsregarding organizational development.

Consistent with the O"ce’s emphasison teamwork and mentorship, senior sta!members actively involved their junior colleagues in research, analysis, and portfo-lio management. Such sharing breeds aculture of spirited, intellectual discussionsand encourages junior sta! to engage inthe decision-making process early in theircareers. Early responsibility prepares juniorsta! to take on larger roles, enabling theInvestments O"ce to promote from within. One former financial analyst hasremained with the O"ce for the past twoand a half decades and currently serves atthe director level.

Financial Analysts

Financial analysts perform much of theEndowment’s essential analysis. Yale’sfinancial analysts come from a variety ofacademic backgrounds, ranging from stu-dents who majored in history and biologyto those with degrees in economics. Thecommon thread among all analysts is aninterest in Yale, a curiosity about investing,and the desire to explore those interests inan entrepreneurial, hands-on organization.

The Investments O"ce’s financial analysts generally begin working for the

Endowment with little or no portfoliomanagement experience. Focused mentor-ships and extensive on-the-job trainingdevelop the analysts’ investment abilities.The collaborative, flat structure of theInvestments O"ce exposes analysts to thephilosophy and thought process of ChiefInvestment O"cer David Swensen, SeniorDirector Dean Takahashi, and the rest ofthe team starting from day one. In theirearly years, analysts develop quantitativeskills, qualitative skills, and investmentinstincts. In addition, all analysts at theInvestments O"ce prepare and sit for the

Chartered Financial Analyst (cfa) examination.

Once financial analysts develop theirfinancial literacy and analytical tools, theyreceive broad exposure to the investmentprocess and various facets of Yale’s portfo-lio. Analyst functions include assessinginvestment performance, examining theallocation of funds across di!erent assetclasses and investment strategies, andimplementing the University’s ethicalinvesting policy. They assist in the screen-ing, selection, and monitoring of moneymanagers through background research,manager meetings, and portfolio analysis.In line with Yale’s belief in the centrality ofexternal managers to the investment man-agement process, analysts travel the worldto meet managers in person to build andstrengthen long-standing investment relationships.

Interns

The Yale Investments O"ce hires studentinterns during the academic term and sum-mer. Interns add horsepower to the O"ce’scapacity and strengthen the connectionbetween the O"ce sta! and the University.At the Investments O"ce, interns gainexposure to a wide range of asset classesand investment strategies, assisting in thescreening and monitoring of funds throughresearch, performance evaluation, and par-ticipation in manager meetings. They workon a wide variety of strategic projects, suchas analyzing asset liquidity, industry bench-marks, and new investment opportunities.

Yale Investments O"ce Sta!

20

A lively exchange during a meeting in the Yale Investments O"ce.

Alexander C. Banker, a Director (right), and Senior Financial Analyst Cain P. Solto!, during an Investments O"ce meeting.

In October 1987, Treasury Secretary HenryPaulson, then senior executive at GoldmanSachs, spoke at Yale’s School of Manage-ment and articulated a compelling case forthe ideal work environment. Paulson saidthat high-quality individuals gravitatetoward entitities that operate on the cuttingedge, that embrace a global strategy, thatprovide opportunities to benefit fromfocused mentorship, and that encourageearly acceptance of significant responsi-bility. The Yale Investments O"ce hasworked to create such an environment over the past quarter-century.

After taking the helm of the YaleEndowment in 1985, David Swensen pio-neered a move away from traditional stockand bond investments and toward an illiq-uid, equity-biased portfolio. Since then,Yale has continued to innovate in the fieldof endowment management, identifyingnew opportunities, like timber investments,before they become mainstream. UnderDavid Swensen’s and Dean Takahashi’sstewardship, the Endowment has taken amore global view; over the past twenty-seven years, Yale’s allocation to domesticequity declined from over 60 percent to 7percent today, an acknowledgment of theabundance of attractive security mispric-ings outside of U.S. borders.

The driver behind the Endowment’scutting-edge, global work is its people. The rigorous nature of the work at theInvestments O"ce attracts people who areintellectually curious. Investments O"ceemployees enjoy digging deep into theirresearch and developing unconventionalapproaches to the problems they face. Inaddition to an academic interest in theirwork, sta! share an interest in Yale and indoing meaningful work. The combinationof those factors creates a strong culture inwhich people love what they do. That pas-sion attracts people who share the samevalues to join the O"ce, creating a virtuousfeedback loop.

The O"ce is a collaborative, team-ori-ented workplace. Every Monday, the entiresta! meets to present and challenge ideasin a group setting. The meetings are com-prehensive and allow sta! members to par-ticipate in the Endowment’s investmentprocess. In addition, the O"ce’s team-oriented work environment fosters men-torship as new hires learn the requisiteskills and strategies by working side-by-side with more experienced members ofthe O"ce.

Outside of the o"ce, the sta! membersorganize and participate in a wide range of

activities that promote a collegial culture.Every summer, the Investments O"ceorganizes a golf and tennis fundraiser tosupport New Haven youth and education.For the past six years, the event (which wasthe brainchild of President Richard Levinand benefits from his consistent participa-tion) raised in excess of $1 million eachyear to support Yale’s activities in the NewHaven community. The O"ce participatesin the University’s intramural sports

league, fielding full softball and basketballteams. The teams create a sense of unityand pride among the sta! members as they compete against other departments.Reflecting a strong competitive spirit, theInvestments O"ce teams have won twochampionships in as many years. In theo"ce, sta! members eat lunch together,and during late work nights they sharefamily-style dinners.

O"ce Culture

21

Yale Investments O"ce sta! pictured during a summer 2011 retreat at a wind power project site. Social gatherings like this play an important role in the life of the O"ce and its collegial working climate.

Softball provides the Investments O"ce sta! a welcome break. The team, made up of full-time O"ce sta!, interns, and family and friends, goes up against other Yale units in friendly competition.

Yale has produced excellent long-term investment returns. Over the ten-year period ending June 30, 2011, the Endowment earned an annualized10.1 percent return, net of fees, surpassing annual results for domesticstocks of 3.7 percent and domestic bonds of 5.2 percent, and placing it inthe top one percent of large institutional investors. Endowment outper-formance stems from sound asset allocation policy and superior active management.

Yale’s long-term superior performance relative to its peers andbenchmarks has created substantial wealth for the University. Over theten years ending June 30, 2011, Yale added $7.6 billion relative to its com-posite benchmark and $7.4 billion relative to the average return of a broaduniverse of college and university endowments.

Yale’s long-term asset class performance continues to be outstanding. Inthe past ten years, every asset class posted superior returns, significantlyoutperforming benchmark levels.

Over the past decade, the absolute return portfolio produced anannualized 10.2 percent, exceeding the passive benchmark of the One-Year Constant Maturity Treasury plus 6 percent by 1.2 percent per yearand besting its active benchmark of hedge fund manager returns by 3.8percent per year. For the ten-year period, absolute return results exhibitedclose to no correlation to traditional marketable securities.

For the ten years ending June 30, 2011, the domestic equity port-folio returned an annualized 7.6 percent, outperforming the Wilshire5000 by 3.7 percent per year and the Russell Median Manager return by4.3 percent per year. Yale’s active managers have added value to bench-mark returns primarily through stock selection.

Yale’s internally managed fixed income portfolio earned an annu-alized 5.2 percent over the past decade, staying in line with the BarclaysCapital Treasury Index and exceeding the Russell Median Manager returnby 0.4 percent per year. By making astute security selection decisions andaccepting a moderate degree of illiquidity, the Endowment benefited fromexcess returns without incurring material credit or option risk.

Investment Performance5

Yale’s Performance Exceeds Peer Results

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22

The foreign equity portfolio generated an annual return of 18.6percent over the ten-year period, outperforming its composite benchmarkby 7.0 percent per year and the Russell Median Manager return by 7.4percent per year. The portfolio’s excess return is due to astute countryallocation and e!ective security selection by active managers.

Private equity earned 10.2 percent annually over the last ten years,underperforming the passive benchmark of University inflation plus 10percent by 3.1 percent per year and outperforming the return of a pool ofprivate equity managers compiled by Cambridge Associates by 1.0 percentper year. Since inception in 1973, the private equity program has earnedan astounding 30.3 percent per annum.

Real assets generated a 11.0 percent annualized return over theten-year period, outperforming the passive benchmark of Universityinflation plus 6.0 percent by 2.5 percent per year and an active benchmarkof real assets manager returns by 2.3 percent per year. Yale’s outperfor-mance is due to successful exploitation of market ine"ciencies and timelypursuit of contrarian investment strategies.

23

0%2%

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14%16%

18%20%

Absolute Return

Domestic Equity

Fixed Income

Foreign Equity

Private Equity

Real Assets

Yale Return Active Benchmark Passive Benchmark

Active BenchmarksAbsolute Return: csfb/Tremont CompositeDomestic Equity: Frank Russell Median Manager, U.S. EquityFixed Income: Frank Russell Median Manager, Fixed IncomeForeign Equity: Frank Russell Median Manager Composite,

Foreign EquityPrivate Equity: Cambridge Associates CompositeReal Assets: ncreif and Cambridge Associates Composite

Passive BenchmarksAbsolute Return: 1-year Constant Maturity Treasury + 6%Domestic Equity: Wilshire 5000Fixed Income: BarCap 1-5 Yr TreasuryForeign Equity: Blend of msci eafe Index, msci em

Index, Custom Opportunistic Blended IndexPrivate Equity: University Inflation + 10%Real Assets: University Inflation + 6%

Yale Asset Class Results Beat Benchmarks2001–2011

Since 1975, the Yale Corporation Investment Committee has been respon-sible for oversight of the Endowment, incorporating senior-level invest-ment experience into portfolio policy formulation. The Investment Committee consists of at least three Fellows of the Corporation and otherpersons who have particular investment expertise. The Committee meetsquarterly, at which time members review asset allocation policies, Endow-ment performance, and strategies proposed by Investments O"ce sta!.The Committee approves guidelines for investment of the Endowmentportfolio, specifying investment objectives, spending policy, andapproaches for the investment of each asset category.

Management andOversight6Investment Committee Douglas A. Warner, iii ’68

ChairmanFormer Chairman J.P. Morgan Chase & Co.

G. Leonard Baker ’64 Managing DirectorSutter Hill Ventures

Joshua Bekenstein ’80 Managing DirectorBain Capital

Ben Inker ’92Director of Asset AllocationGMO

Paul Joskow ’72 ph.d.PresidentAlfred P. Sloan Foundation

Stefan Kaluzny ’88Managing DirectorSycamore Partners

Richard C. Levin ’74 ph.d.PresidentYale University

Ranji Nagaswami ’86 m.b.a.Chief Investment O!cerCity of New York

Carter Simonds ’99Managing DirectorBlue Ridge Capital

Dinakar Singh ’90ceo and Founding Partnertpg-Axon Capital

Fareed Zakaria ’86Editor-at-LargeTIME Magazine

24

In February 2009, with the country miredin the depths of the financial crisis, U.S.President Barack Obama issued an execu-tive order to establish the President’s Eco-nomic Recovery Advisory Board (perab).The purpose of the board was to provideindependent, nonpartisan analysis andadvice to President Obama as he and hissta! developed plans for America’s economic recovery.

The members of the board, chargedwith being “candid and unsparing in theirassessment,” reflected a diverse collection of perspectives from a variety of sectors ofthe economy. With regard to his selections,President Obama said, “I created this boardto enlist voices that come from beyond theecho chamber of Washington, d.c., and to ensure that no stone is unturned as wework to put people back to work and to get our economy moving.”

President Obama tapped DavidSwensen, Yale’s Chief Investment O"cer,to serve on perab. The nomination recog-nized David’s unusual set of experiencesand contributions to the world of financethroughout his career, during which heearned a ph.d. in economics from Yale,worked six years on Wall Street, led theYale Endowment to robust returns fornearly two and a half decades, and advisedon the finances of numerous entities rang-ing from The Brookings Institution andthe University of Cambridge to the NewYork Stock Exchange and tiaa. PaulVolcker, former Chairman of the FederalReserve, was named Chairman of peraband Austan Goolsbee (’91) took the role ofSta! Director and Chief Economist. Davidhad a number of opportunities to meetwith the President in the Oval O"ce todiscuss financial issues, including theVolker Rule, the overall structure of finan-cial regulatory reform, the regulation ofderivatives markets, and the appropriaterole of the government in the mortgagefinance industry.

After working with David for two years,Mr. Goolsbee said, “Dave Swensen set thestandard for seriousness and good judg-ment as a member of perab. PresidentObama respected and sought out David’sadvice. And whether it was about financialmarkets and regulation, housing and mort-gage finance, small business credit or manyother subjects, he was always willing tostudy and analyze issues if the Presidentneeded it.”

In turn, Mr. Volcker said, “DavidSwensen was a valuable member of perab,bringing dedication and years of practicalexperience to the table. He was particularlyhelpful to me as we crafted our advice tothe White House concerning financial

regulatory reform, and to the Treasury con-cerning housing and the mortgage market.I hope this or any future administrationwill call on David’s insight and experiencewhen needed.”

David Swensen and President’s Economic Recovery Advisory Board (perab)

25

U.S. President Barack Obama talks with Yale Chief Investment O"cer David F. Swensen during a meetingof the President’s Economic Recovery Advisory Board (perab) in the State Dining Room at the WhiteHouse on October 4, 2010 in Washington, d.c.

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26

The Investments O"ce manages the Endowment and other Universityfinancial assets, and defines and implements the University’s borrowingstrategies. Headed by the Chief Investment O"cer, the O"ce currentlyconsists of twenty-four professionals.

Investments O!ce David F. Swensen ’80 ph.d.Chief Investment O!cer

Dean J. Takahashi ’80, ’83 mppmSenior Director

Peter H. Ammon ’05 m.b.a., ’05 m.a.Director

Alexander C. BankerDirector

Alan S. FormanDirector

Timothy R. Sullivan ’86 Director

Stephanie S. Chan ’97Associate General Counsel

Deborah S. ChungAssociate General Counsel

Kenneth R. Miller ’71 Associate General Counsel

J. Colin SullivanAssociate General Counsel

Carrie A. AbildgaardAssociate Director

Michael E. FinnertyAssociate Director

Lisa M. Howie ’00, ’08 m.b.a.Associate Director

Celeste P. BensonSenior Portfolio Manager

R. Alexander Hetherington ’06Senior Associate

Matthew S. T. Mendelsohn ’07Senior Associate

John V. Ricotta ’08Senior Financial Analyst

Cain P. Solto! ’08Senior Financial Analyst

Nilesh V. Vashee ’09Senior Financial Analyst

Xinchen Wang ’09Senior Financial Analyst

Florence R. Dethy ’11Financial Analyst

David S. Katzman ’10Financial Analyst

Sebastian K. Serra ’11Financial Analyst

Kaiyuan Wang ’11Financial Analyst

Investment Committee

Investment Committee Chairmen

John Beckwith Madden (1975-1987)

John Beckwith Madden graduated fromYale College in 1941. During his time atYale, he was a member of the varsity wrest-ling team. After graduating, he served inthe Army during World War ii, rising tothe rank of captain. Madden joined thecredit department of Brown BrothersHarriman in 1946 and was made a generalpartner in 1955, one of the youngest in the

firm’s history. He was managing partnerfrom 1968 to 1983 and resumed his generalpartnership at that time, a role he helduntil he passed away in 1988. Madden wasa trustee of The Boys’ Club of New Yorkfor over thirty-five years. He also served onthe boards of The New York CommunityTrust, the James Foundation, the MaineCommunity Foundation, the PackerCollegiate Institute, the Visiting NurseAssociation of Brooklyn, and the BrooklynHospital. Madden was a generous sup-porter of residential colleges at Yale, andthe endowment for the Berkeley CollegeMastership is named in his honor.

Harold Edward Woodsum, Jr. (1987-1988)

Harold Edward Woodsum, Jr. graduatedfrom Yale College in 1953. During his timeat Yale, he majored in history and was astar wide receiver for the Yale footballteam. Woodsum’s record of fifteen careertouchdown receptions, which he set inthree years of play, stood for twenty-sevenyears. Even today, he is tied for fourth onthe all-time list. He went on to obtain aBachelor of Laws from Yale in 1958. After

six years at White & Case in New YorkCity, in 1965 Woodsum left to co-found the Portland, Maine law firm DrummondWoodsum and remained a partner in thefirm for twenty-three years. In 1988, at the request of President Benno Schmidt,Woodsum took a leave of absence andcame back to Yale to take on the role ofDirector of Athletics, a position he helduntil 1994. In addition to this service to the

27

University President Richard C. Levin ’74 ph.d.(right), with Investment Committee Chair DouglasA. Warner, iii ’68 (left) and Chief InvestmentO"cer David F. Swensen ’80 ph.d.

John Madden Harold Woodsum

A strong investment committee brings discipline to the endowment managementprocess. By thoroughly and thoughtfullyvetting investment recommendations, the committee inspires sta! to produceever more carefully considered proposals.Ideally, committees rarely exercise thepower to reject sta! recommendations. If a committee frequently turns down orrevises investment proposals, the sta!encounters di"culty in managing the portfolio. Investment opportunities oftenrequire negotiation of commitments sub-ject to board approval. If the board with-holds approval with any degree of regular-ity, sta! loses credibility in the eyes of theinvestment management community. Thatsaid, the committee must provide morethan a rubber stamp for sta! recommen-dations. In a well-run organization, com-mittee discussion of investment proposalsinfluences the direction and nature offuture sta! initiatives. E!ective portfoliomanagement requires striking a balancebetween respect for the ultimate authorityof the investment committee and delega-tion of reasonable responsibility to theinvestment sta!.

Committee members often provide

assistance between meetings, providingfeedback on past actions and suggestingstrategies for the future. Informed give-and-take elevates the investment dia-logue, challenging sta! and committee to improve the quality of investment decision making.

Investment committee members shouldbe selected primarily for having good judg-ment. While no particular backgroundqualifies an individual to serve on the com-mittee, broad understanding of financialmarkets proves useful in overseeing theinvestment process. Aggregating a collec-tion of investment specialists occasionallyposes dangers, particularly when commit-tee members attempt to manage the port-folio, not the process. Successful executivesbring a valuable perspective to the tableprovided they suspend their natural incli-nation to reward success and punish fail-ure. The sometimes deep-rooted corporateinstinct to pursue winners and avoid loserspushes portfolios toward fundamentallyrisky momentum-driven strategies andaway from potentially profitable contrarianopportunities. The most e!ective invest-ment committee members understand theresponsibility to oversee the investment

process and to provide support for theinvestment sta!, while avoiding actualmanagement of the portfolio.

Yale’s Investment Committee has existedsince 1975. The Committee has includedleaders in a number of fields, includingfinance, business, academia, government,media, and the non-profit world, all ofwhom share a passion for Yale. Below areprofiles of the Chairmen of Yale’s Invest-ment Committee since its founding alongwith the dates of their tenure.

University, Woodsum has donated gener-ously to Yale athletics. An advocate of envi-ronmental concerns, Woodsum joined theboard of directors of the National AudubonSociety in 1981 and became chairman ofthe board in 1988. Woodsum also served asa trustee and chairman of the University ofNew England.

Joseph H. Williams (1988-1989)

Joseph H. Williams graduated from YaleCollege in 1956. During his time at Yale,Williams was a member of the Army rotcand, after graduation, went to Fort Sill,Oklahoma to complete his training. Hejoined Williams Brothers, his family’s busi-ness, in 1959 and in 1968 became executivevice president. Williams was elected amember of the board in 1969 and namedpresident and chief operating o"cer in1971. He succeeded his cousin as chiefexecutive o"cer in 1979, a role he keptuntil his retirement in 1993. Williams hasserved on the boards of The WilliamsCompanies, Orvis, aea Investors, Amer-ican Express, and Prudential Insurance. He is also former chairman of the FederalReserve Bank of Kansas City. Williams has been a generous supporter of YaleUniversity’s School of Forestry & Environ-mental Studies.

Richard J. Franke (1989-1999)

Richard J. Franke graduated from YaleCollege in 1953. After graduation, he servedin the Army as an artillery o"cer. Follow-ing two years in the Army as a First Lieu-tenant, Franke went to Harvard BusinessSchool. He became vice president of TheJohn Nuveen Company in 1965 and rose to become chief executive o"cer in 1974, a

role he held until 1996. Franke is foundingchairman and director emeritus of theChicago Humanities Festival, life trustee of the Chicago Symphony Orchestra, andfounder of the University of ChicagoFranke Institute for the Humanities. Hereceived the National Humanities Medal in 1997. Franke has been a generous sup-porter of Yale University’s Sterling Mem-orial Library, the Graduate School of Arts and Sciences, and the WhitneyHumanities Center.

Charles D. Ellis (1999-2008)

Charles D. Ellis graduated from Yale Col-lege in 1959 before going on to HarvardBusiness School to earn an m.b.a. and New York University to complete a ph.d.His professional career centered on threedecades with Greenwich Associates, theinternational strategy consulting firm hefounded and led. An avid participant in thestudy of finance, he served in the leader-

ship of the cfa Institute and as an associ-ate editor of The Journal of PortfolioManagement and The Financial AnalystsJournal. He authored sixteen books onbusiness and finance, including the classicWinning the Loser’s Game. Ellis held facultyappointments at Harvard Business School,the Yale School of Management, and theInvestment Workshop at Princeton. Elliscurrently serves as the managing partner ofThe Partners of ’63, a pro bono partnershipof Harvard Business School classmates and friends who support entrepreneurial,change-oriented ventures in education,particularly those focused on underprivi-leged children. Ellis has been a generoussupporter of Yale facilities, providing fund-ing for the new School of Managementcampus, and of Yale faculty positions.

Douglas A. Warner, iii (2008-present)During his thirty-three-year career inbanking and financial services, Douglas A. Warner, iii rose to lead J.P. MorganChase & Co., having begun his career atJ.P. Morgan upon graduating from YaleCollege in 1968. In 1995, he was named the youngest chief executive o"cer in J.P.Morgan’s history and was chairman andchief executive o"cer until J.P. Morganmerged with Chase Manhattan in 2000.Following the merger, Warner served aschairman of the board of the combinedenterprise until his retirement in 2001.Since 1998 he has been chairman of theboard of Memorial Sloan-Kettering CancerCenter. He is a director of Motorola andGeneral Electric. Warner has been a gener-ous supporter of Yale facilities, providingfunding for the Warner House, and of Yale faculty positions.

Investment Committee (continued)

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Joseph Williams

Charles Ellis

Richard Franke

Douglas Warner

Sources

Financial and Investment InformationEducational institution asset allocations andreturns from Cambridge Associates.Much of the material in this publication isdrawn from memoranda produced by theInvestments O"ce for the Yale CorporationInvestment Committee. Other material comesfrom Yale’s financial records, Reports of theTreasurer, and Reports of the President.Pages 9, 29-30The sections on Manager Characteristics and Investment Committee draw on DavidSwensen’s Pioneering Portfolio Management(Simon and Schuster, 2009).

Pages 10-14Educational institution asset allocations andreturns from Cambridge Associates.Page 25: Quotation from President’s Executive Ordercreating the President’s Economic RecoveryAdvisory Board (perab) from ExecutiveOrder 13501 of February 6, 2009.http://www.whitehouse.gov/sites/default/files/microsites/perab-exec-order.pdf

Photo Credits

Front cover: Steve Dunwell Photography, Inc., BostonPage 25:Photographer: Chip Somodevilla. Collection: Getty Images NewsOther photographs:Michael Marsland, Yale O"ce of PublicA!airs and CommunicationsDesignStrong Cohen/D. Pucillo

Stone inscription from Berkeley College North, in honor of Henry Parks Wright, first Dean of Yale College. To commemorate Dean Wright’s twenty-five-year tenure, anOld Campus freshman residence (now known as Lanman-Wright Hall) was named for him in 1909.