CHAPTER 2: ENDOWMENT PURPOSES
1. Brooks Mather Kelley, Yale: A History. (New Haven: Yale University Press, 1974.)
2. The Governor and lieutenant governor continued to serve ex officio as Fellows of the Corporation, although in the modern era they have not participated actively in Yale’s governance.
3. Merle Curti and Roderick Nash, Philanthropy in the Shaping of American Higher Education (New Brunswick, NJ: Rutgers University Press, 1965); Frederick Rudolph, The American College and University: A History (Athens: University of Georgia Press, 1962).
4. Hugh Davis Graham and Nancy Diamond, The Rise of American Research Universities (Baltimore: Johns Hopkins University Press, 1997).
5. Ibid.
6. Howard R. Bowen, The Costs of Higher Education: How Much Do Colleges and Universities Spend per Student and How Much Should They Spend? (New York: McGraw Hill, 1980). See also Graham and Diamond, Universities, p. 97.
7. Denise LaVoie, “School Year Begins with New Unification Church Affiliation,” Associated Press, 28 August 1992.
8. New York Times
9. Joseph Berger, “University of Bridgeport Honors Reverend Moon, Fiscal Savior,” New York Times, 8 September 1995.
10. Lynde Phelps Wheeler, Josiah Willard Gibbs (New Haven: Yale University Press, 1951), 91–92.
11. Leonard Curry, “Congressional Hearing Puts Stanford Officials on Hot Seat,” The Orange County Register, 14 March 1991.
12. The 0.5 percent increment was designated “to support renewal of campus buildings and infrastructure.” See Stanford University Annual Financial Report, 1995.
13. The unpublished survey of endowment size and institutional quality relies on research conducted by the Yale Investment Office.
14. “The Fortune 1,000 Ranked Within Industries” Fortune, 28 April 1997.
15. “Best Colleges 1998,” U.S. News & World Report, 1 September 1997. USNWR ranks 28 of the 29 Carnegie Universities. Rockefeller University, because it does not grant degrees, is excluded from the study.
16. The National Center for Education and Statistics, Directory of Post Secondary Institutions, 1987–1997, vol. 1.
CHAPTER 3: INVESTMENT AND SPENDING GOALS
1. James Tobin, “What Is Permanent Endowment Income?” American Economic Review 64, no. 2 (1974): 427–432.
2. Harvard University, Managing Harvard’s Endowment. (Harvard University, 1990).
3. Even though Harvard’s 1974 spending policy rationale contains flaws, in practice the university spends at prudent levels, producing payouts similar to those of comparable institutions.
4. Yale University, Report of the Treasurer, 1965–66, ser. 62, no. 19 (New Haven: 1966), 6–7.
5. National Association of College and University Business Officers (NACUBO). Data are from various Endowment Studies. Prepared by Cambridge Associates, Inc.
6. In the 2006 NACUBO survey, 335 institutions reported using target spending rates.
7. See Table 2.2 for additional information.
8. Karen W. Arenson, “Q&A. Modest Proposal. An Economist Asks, Does Harvard Really Need $15 Billion?” New York Times, 2 August 1998.
9. Henry Hansmann. “Why Do Universities Have Endowments?” PONPO Working Paper No. 109, Program on Non-Profit Organizations, Institution for Social and Policy Studies, Yale University. January 1986, 21.
10. Ibid., 23.
11. Tobin, “Endowment Income,” 427.
CHAPTER 4: INVESTMENT PHILOSOPHY
1. Roger G. Ibbotson and Paul D. Kaplan, “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?” Financial Analysts Journal 56, no. 1 (2000): 32.
2. Ibid., 29.
3. Charles D. Ellis, “Winning the Loser’s Game” Timeless Strategies for Successful Investing, 3d ed. (New York: McGraw Hill, 1998), 11.
4. William N. Goetzmann and Philippe Jorion, “A Century of Global Stock Markets,” Journal of Finance (forthcoming).
5. Stephen J. Brown, William N. Goetzmann, and Stephen A. Ross, “Survival,” Journal of Finance 50, no. 3. (1995): 855.
6. Robert Lovett, “Gilt-Edged Insecurity,” Saturday Evening Post, 1937.
7. Cambridge Associates, Inc. 1997 NACUBO Endowment Study. Washington, D.C.: National Association of College and University Business Officers, 1998).
8. John Maynard Keynes, “Memorandum for the Estates Committee, King’s College, Cambridge, May 8, 1938.” in Charles D. Ellis, ed., Classics. An Investor’s Anthology (Homewood, Ill.: Business One Irwin in association with the Institutie of Chartered Financial Analysts, 1989), 79–82.
9. Gilbert Burck, “A New Kind of Stock Market,” Bank Credit Analyst, April 1998, 22. First published in Fortune, March 1959.
10. Ibid.
11. Endowment asset allocation figures come from Cambridge Associates, a consulting firm specializing in advising not-for-profit clients.
12. See Robert J. Shiller, Market Volatility (Cambridge: MIT Press, 1989).
13. Ibid., 2–3.
14. Burton Malkiel and Paul Firstenberg, Managing Risk in an Uncertain Era: An Analysis for Endowed Institutions (Princeton, NJ: Princeton University, 1976).
15. Brady Commission, Report of the Presidential Task Force on Market Mechanisms, January 1988. (Washington, D.C.: GPO, 1988), 53.
16. Keynes, The General Theory of Employment, Interest and Money. (New York: Harcourt and Brace, 1964), 155.
17. Ibid., 160.
18. Ibid., 151.
19. Benjamin Graham, The Intelligent Investor (New York: Harper Business, 1973), 279.
20. See Eugene Fama and Kenneth French, “Size and Book-to-Market Factors in Earnings and Returns,” Journal of Finance, 50, no. 1. (1995): 131–155, and Eugene Fama and Kenneth French. “The Cross-Section of Expected Stock Returns,” Journal of Finance 47, no. 2 (1992): 427–465.
21. Graham, Intelligent Investor.
22. Keynes, General Theory, 157.
23. Douglas Appell, “GMO’s Grantham not worried about the bulls,” Pensions & Investments, 5 March 2007.
CHAPTER 5: ASSET ALLOCATION
1. Moody’s Investor Service, Moody’s Transportation Manual (New York: Moody’s Investor Service, Inc., 1973), 358–370.
2. Richard Michaud, “The Markowitz Optimization Enigma: Is ‘Optimized’ Optimal?” Financial Analysts Journal 45, no. 1 (1989): 31–42.
3. Richard Bookstaber, “Global Risk Management: Are We Missing the Point?” (paper based on presentations given at the Institute for Quantitative Research in Finance, October 1996 and at the Internal Models for Market Risk Evaluation: Experiences, Problems and Perspectives Conference, Rome, Italy, June 1996.)
4. Keynes, General Theory, 1964, 155. The full quote from Keynes is: “The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future.”
5. Jeremy Grantham. “Everything I Know about the Stock Market in 15 Minutes,” Internal Memo.
6. Vijay Kumar Chopra and William T. Ziemba, “The Effect of Errors in Means, Variances, and Covariances on Optimal Portfolio Choice,” Journal of Portfolio Management 19, no. 2 (1993): 6–11.
7. Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns (1926–1974),” Journal of Business 49, no. 1, (1976): 11–47.
8. Paul M. Firstenberg, Stephen A. Ross, and Randall C. Zisler. “Real Estate: The Whole Story,” Journal of Portfolio Management 24, no. 3 (1988): 31. Apparently, the article continues to be highly regarded as it appears in the 1997 publication, Streetwise. The Best of the Journal of Portfolio Management, Peter L. Bernstein & Frank J. Fabozzi, editors, Princeton University Press.
CHAPTER 6: ASSET ALLOCATION MANAGEMENT
1. Linda Sandler, “Endowments at Top Schools Bruised in Market,” Wall Street Journal. 13 October 1998.
2. Sowood Capital Management: Sowood Alpha Fund (pitch book), 2004.
3. Gregory Zuckerman and Craig Karmin, “Sowood’s Short, Hot Summer,” Wall Street Journal, 27 October 2007.
4. Ibid.
5. Sowood letter to investors: 30 July 2007.
6. Roger Lowenstein, When Genius Failed. The Rise and Fall of Long-Term Capital Management (New York: Random House, 2001): 224–25.
7. John R. Dorfman, “Report on Common Fund Cites Warning Signs,” Wall Street Journal, 17 January 1996, C1.
8. Keynes, General Theory, 157.
CHAPTER 7: TRADITIONAL ASSET CLASSES
1. Ibbotson Associates, Stocks, Bonds, Bills, and Inflation 2006 Yearbook (Chicago: Ibbotson Associates, 2003): 27–28.
2. Jeremy Siegel, Stocks for the Long Run (New York: McGraw Hill, 2002): 6.
3. William N. Goetzmann and Philippe Jorion, “A Century of Global Stock Markets,” NBER Working Paper Series, Working Paper 5901 (National Bureau of Economic Research, 1997), 16.
4. Robert Arnott, “Dividends and the Three Dwarfs,” Financial Analysts Journal 59, no. 2, (2003): 4.
5. James K. Glassman and Kevin A. Hassett, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market (New York: Random House, 1999).
6. Siegel, Stocks for the Long Run, 210.
7. Geraldine Fabrikant and David Cay Johnston, “G.E. Perks Raise Issues About Taxes, “New York Times, 9 September 2002.
8. “Jack’s Booty,” editorial, Wall Street Journal, 10 September 2002.
9. David Leonhardt, “Reining In the Imperial C.E.O.,” New York Times, 15 September 2002.
10. Steve Lohr and Joel Brinkley, “Microsoft Management Tells Workers There Will Be No Breakup,” New York Times, 26 April 2000.
11. Jathon Sapsford and Ken Brown, “J.P. Morgan Rolls Dice on Microsoft Options,” Wall Street Journal, 9 July 2003.
12. Data from Wilshire Associates.
13. Ibbotson Associates, 2004 Yearbook, 224, 234.
14. Carole Gould, “Better Understanding of Bonds,” New York Times, 27 August 1995.
15. Publicdebt.treas.gov, “Treasury Calls 8-1/4 Percent Bonds of 2000–05,” http://www.publicdebt.treas.gov/com/com114cl.htm.
16. Bureau of the Public Debt, Press Release of January 15, 2004: “Treasury Calls 9-1/8 Percent Bonds of 2004–09.”
17. Stephen J. Brown, William N. Goetzmann and Stephen A. Ross, “Survival,” Journal of Finance 50, no. 3 (1995).
18. Antoine van Agtmael, The Emerging Markets Century (New York: Free Press, 2007): 307–8.
CHAPTER 8: ALTERNATIVE ASSET CLASSES
1. The amount of the capital required to execute the Newell Rubbermaid trade ranges from an aggressive value of the Rubbermaid price less the net proceeds from the short sale of Newell (1313/16 -2.28 = 11.5325), to a conservative value of the Newell short position (.7883 x 43.26 = 34.10). Choosing the value of the Rubbermaid share (3113/16) represents a middle-of-the-road position.
2. Roger G. Ibbotson and Peng Chen, “The A, B, Cs of Hedge Funds: Alphas, Betas, and Costs,” Yale ICF Working Paper No. 06-10 (Yale International Center for Finance, September 2006), 2.
3. Burton G. Malkiel and Atanu Saha, “Hedge Funds: Risk and Return,” Financial Analysts Journal 61, no. 6 (2005): 82.
4. “Merrill Lynch Factor Index. An Alternative to Investable Hedge Fund Indices,” Merrill Lynch, Global Markets and Investment Banking Group, September 2006.
5. Kevin Mirabile and Rosemarie Lakeman, Observations on the Rapid Growth of the Hedge Fund Industry. (Barclays Capital, 2004): 2.
6. Treas.gov, “Key Initiatives,” http://www.treas.gov/offices/domesticfinance/key-initiatives/tips.html.
7. Data from Bloomberg; LehmanLive; National Association of Real Estate Investment Trusts.
8. National Association of Real Estate Investment Trusts, “Forming and Operating a Real Estate Investment Trust,” http://www.nareit.com/aboutreits/formingaREIT.cfm.
9. Marc Cardillo, Robert Lang, Maggie Patton, and Andrew Heath, “U.S. Real Estate and REIT Investing. Executive Summary,” Cambridge Associates, 2007.
10. Green Street Advisors, “REIT Share Price Premiums to Green Street NAV Estimates,” http://www.greenstreetadvisors.com/premnav.html.
11. Matt Terrien, “Investing in Direct Energy: A Diversification Tool for Portfolios,” (Prepared for Merit Energy Company) Ibbotson Associates. 11 October 1999.
12. “Warburg Pincus Completes Acquisition of Bausch & Lomb,” Bausch & Lomb newsroom. www.bausch.com, 26 October 2007.
13. 2006 Investment Benchmarks Report: Buyouts and Other Private Equity (New York: Thomson Financial, 2006).
14. Steven N. Kaplan and Antoinette Schoar, “Private Equity Performance: Returns, Persistence, and Capital Flows,” Journal of Finance, no. 4 (August 2005): 1791.
15. 2006 Investment Benchmarks Report: Buyouts.
16. Josh Lerner and Antoinette Schoar, 17 January 2008.
17. Keynes, General Theory, 160.
18. Andrew Metrick and Ayako Yasuda, “The Economics of Private Equity Funds,” (September 9, 2007). Swedish Institute for Financial Research. Conference on The Economics of the Private Equity Market.
19. Estimated numbers, based on data collected by Cambridge Associates. Controlled capital is defined as current net asset value of the aggregate partnerships plus aggregate undrawn capital. All data refers to the U.S. market only.
20. Randall E. Stross, eBoys: The First Inside Account of Venture Capitalists at Work (New York: Ballantine Publishing Group, 2000): 182.
21. Ibid. xv.
22. 2006 Investment Benchmarks Report: Venture Capital (New York: Thomson Financial, 2006).
23. Kaplan and Schoar, Journal of Finance 40: 1792.
24. Kaplan and Schoar, Journal of Finance 40: 1809.
25. Estimated numbers, based on data collected by Cambridge Associates. Controlled capital is defined as current net asset value of the aggregate partnerships plus aggregate undrawn capital. All data refers to the U.S. market only.
CHAPTER 9: ASSET CLASS MANAGEMENT
1. Keynes, General Theory, 155–56.
2. The information on Granville is drawn from Rhonda Brammer, “10 Years After He Peaked, Will Joe Granville Rise Again?” Barron’s, 24 August 1992.
3. James J. Cramer, “The Bull Case of the Individual Investor,” TheStreet.com, 28 January 2000.
4. Ibid.
5. James J. Cramer, “Cramer the Contrarian Remains Unconvinced, Part 1,” TheStreet.com. 14 February 2000.
6. James J. Cramer, “Cramer the Contrarian Remains Unconvinced, Part 2,” TheStreet.com. 14 February 2000.
7. James J. Cramer, “Scrutinizing the Value Managers,” TheStreet.com. 11 February 2000.
8. James J. Cramer, “Cramer the Contrarian Remains Unconvinced, Part 4,” TheStreet.com. 14 February 2000.
9. Bill Alpert, “Shorting Cramer,” Barron’s, 20 August 2007: 23–25.
10. Thyra Mangan, “Comments of T. Mangan on S7-12-06,” 28 March 2007: Sec.gov.
11. Bill Alpert, “Shorting Cramer,” Barron’s, 20 August 2007: 25.
12. Irving Fisher, The Rate of Interest. Its Nature, Determination and Relation to Economic Phenomena (Macmillan Company, 1907): 217.
13. “Buffett’s Job Description: ‘They May Be Hard to Identify,’” Wall Street Journal. 28 April, 2007.
14. The discussion of entrepreneurial capitalism draws heavily on a 1997 essay by G. Leonard Baker, General Partner of Sutter Hill Ventures, “How Silicon Valley Works: Reflections on 25 years in the Venture Capital Business,” 1997.
15. Joseph A. Schumpeter, The Theory of Economic Development, trans. Redvers Opie (Cambridge: Harvard University Press, 1934), 66.
16. Joseph A. Schumpeter. Capitalism, Socialism, and Democracy, (New York: Harper & Brothers, 1950), 83.
17. Ibid.
18. Fortress Investment Group LLC, Form S-1, 8 November 2006: 4.
19. Fortress Investment Group LLC, Form S-1/A, 2 February 2007: 2.
20. Fortress Investment Group LLC, Form 10-K, 31 December 2006: 82–3.
21. Fortress, Form S-1/A, 62.
22. Ibid., 106.
23. Ibid., 15.
24. United Asset Management, United Asset Management Annual Report, 1997, 2.
25. Sara Calian and Laura Saunders Egodigwe, “Old Mutual Agrees to Acquire Asset-Management Firm UAM,” Wall Street Journal, 20 June 2000.
26. Ibid.
27. Douglas Appell, “Old Mutual Affiliates to Gain More Equity,” Pensions & Investments, 16 October 2007.
28. Andrew Ross Sorkin and Michael J. de la Merced, “Home Depot Said to Cut Price of Supply Unit by $2 Billion,” International Herald Tribune, 27 August 2007.
29. George Anders, “Captive Client: Morgan Stanley Found a Gold Mine of Fees,” Wall Street Journal, 14 December 1990, sec. A.
30. Ibid.
31. Wall Street Journal, 4 June 1991, 6.
32. Ibid.
33. Ibid.
34. Ibid.
35. Jenny Strasburg and Katherine Burton, “Goldman Global Equity Fund Gets $3 Billion in Capital,” Bloomberg.com, 13 August 2007.
36. Henny Sender, Kate Kelly and Gregory Zuckerman, “Goldman Wagers on Cash Infusion to Show Resolve,” Wall Street Journal, 14 August 2007.
37. “GS—Goldman Sachs Conference Call,” Thomson StreetEvents, Final Transcript; 13 August 2007: 4–5.
38. Wall Street Journal, 14 August 2007.
39. Jeffrey Taylor, “SEC Wants Investment Managers to Tell Clients More About ‘Soft Dollar’ Services,” Wall Street Journal, 15 February 1997, 5, 21.
40. Ibid., 40.
41. Barry B. Burr, “Soft Dollar Managers Pay.” (Chicago) Pensions and Investments, 10 August 1998, Editorial section, 10.
42. SEC, Inspection Report, 3.
43. Advisory Council on Employee Welfare and Benefit Plans, Report of the Working Groups on Soft Dollars/Commission Recapture. (Washington D.C., 13 November 1997), 5, 21.
44. Sec.gov, Christopher Cox, “Speech by SEC Chairman: Address to the National Italian-American Foundation” (Washington, D.C., 31 May 2007).
45. Sec.gov, Christopher Cox, “Speech by SEC Chairman: Address to the Mutual Fund Directors Forum Seventh Annual Policy Conference” (New York City, 13 April 2007).
46. Roger Lowenstein, Buffett: The Making of an American Capitalist (New York: Random House, 1995), 62.
47. Josh Lerner, “Discussion of ‘The Economics of Private Equity Funds’ by Metrick and Yasuda,” Harvard University and NBER.
48. Andrew Metrick and Ayako Yasuda, “The Economics of Private Equity Funds” (9 September 2007). University of Pennsylvania, The Wharton School, Department of Finance.
49. Gretchen Morgenson, “It’s Just a Matter of Equity,” New York Times, 16 September 2007.
50. Wall Street Journal, 15 July 1992.
51. Ibid.
52. “The 400 Richest Americans: #215 Neil Gary Bluhm,” Forbes.com: 21 September 2006.
CHAPTER 10: INVESTMENT PROCESS
1. Keynes, General Theory, 157–158.
2. James B. Stewart, Den of Thieves. (New York: Touchstone, 1992): 421.
3. Private Equity Analyst, August 2006: 32.
4. TIAA-CREF, 2006 NACUBO Endowment Study, www.nacubo.org.
5. Josh Lerner, Antoinette Schoar, and Wan Wong, “Smart Institutions, Foolish Choices? The Limited Partner Performance Puzzle,” Harvard University, National Bureau of Economic Research, and MIT (2005): 15–16.
6. Ellis, Successful Investing.
7. The 1987 stock market crash was a 20 standard deviation event. Backward looking estimates of volatility would naturally increase for periods in which the extraordinary data from October 1987 were included.
8. Information comes from the 2005 survey of investment returns sponsored by Cambridge Associates.
9. New York University, New York University Financial Report, 1977–1997, 20 vols. (New York: New York University, 1977–1997); New York University, New York University Annual Report, 1977–1985, 9 vols. (New York: New York University, 1977–1985).
10. Roger Lowenstein, “How Larry Tisch and NYU Missed the Bull Market’s Run,” Wall Street Journal. 16 October 1997.
11. The NACUBO (National Association of College and University Business Officers) Endowment Wealth Index reflects median annual changes in the aggregate endowment market value of institutions participating in the group’s annual survey. Year-to-year change in wealth includes the impact of investment returns, gifts, and spending.
12. David Barboza, “Loving a Stock, Not Wisely But Too Well.” New York Times, 20 September 1998, sec. 3.
13. New York Times, 20 September 1998.
14. David A. Rocker, “Refresher Course. Short Interest: No More Bullish Bellow,” Barron’s, 1 May 1995, 43.
15. Data from Russell Mellon and Bloomberg.
16. PIPER: Pensions & Investments’ Performance Evaluation Report (PIPER), Managed Accounts Report, December 31, 2007: Quarter End (New York: Pensions & Investments, 1997).
APPENDIX: IMPURE FIXED INCOME
1. Marie Nelson, “Debt Ratings,” Moody’s Investors Service, 23 July 2003.
2. “WorldCom’s Credit Rating Sliced to Junk by Moody’s,” Bloomberg, 9 May 2002.
3. Sharon Ou and David T. Hamilton, “Moody’s Dollar Volume-Weighted Default Rates,” Moody’s Investors Service, March 2003.
4. Data from Moody’s Investors Service.
5. Data from Lehman Brothers.
6. Nelson, “Debt Ratings,” Moody’s Investors Service.
7. Ibid.
8. Andrew Bary, “Paying the Piper,” Barron’s Chicopee 74, no. 15 (1994); Morningstar, Morningstar Closed-End Funds 10, no. 7 (March 1994).
9. Bary, “Paying the Piper,” Barron’s Chicopee.
10. Jeffrey M. Laderman and Gary Weiss, “The Yield Game,” Business Week, 6 December 1993.
11. Laura Jereski, “Mortgage Derivatives Claim Victims Big and Small,” Wall Street Journal, 20 April 1994.
12. Bary, “Paying the Piper,” Barron’s Chicopee.
13. “Update on Sub-Prime Mortgage Meltdown and State Board of Administration Investments,” SBA Florida, 9 November 2007: 5.
14. “Local Government Investment Pool Newsletter,” SBA Florida, Q3 2007: 4.
15. Ibid., 1.
16. David Evans, “Peddling Tainted Debt to Florida,” Bloomberg Markets, February 2008.
17. Ibid.
18. Data from Lehman Brothers.