2009The Yale Endowment

Endowment Highlights

Fiscal Year

2009 2008 2007 2006 2005

Market Value (in millions) $16,326.6 $22,869.7 $22,530.2 $18,030.6 $15,224.9Return -24.6% 4.5% 28.0% 22.9% 22.3%

Spending (in millions) $ 1,175.2 $ 849.9 $ 684.0 $ 616.0 $ 567.0Operating Budget Revenues 2,559.8 2,280.2 2,075.0 1,932.0 1,768.0(in millions)Endowment Percentage 45.9% 37.3% 33.0% 31.9% 32.2%

Asset Allocation (as of June 30)

Absolute Return 24.3% 25.1% 23.3% 23.3% 25.7%Domestic Equity 7.5 10.1 11.0 11.6 14.1Fixed Income 4.0 4.0 4.0 3.8 4.9Foreign Equity 9.8 15.2 14.1 14.6 13.7Private Equity 24.3 20.2 18.7 16.4 14.8Real Assets 32.0 29.3 27.1 27.8 25.0Cash -1.9 -3.9 1.9 2.5 1.9

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Contents

1. Introduction 22. The Yale Endowment 43. Investment Policy 54. Spending Policy 195. Investment Performance 246. Management and Oversight 28

Front cover:Wall carving from west façade, SterlingMemorial Library.

Right: The Harkness Tower clock at night.

Yale’s Endowment generated losses in fiscal year 2009, as returns of -24.6percent produced an investment decline of $5.6 billion.

Over the past ten years, the Endowment grew from $7.2 billionto $16.3 billion. With annual net investment returns of 11.8 percent, theEndowment’s performance exceeded its benchmark and outpaced institu-tional fund indices. The Yale Endowment’s twenty-year record of 13.4percent per annum produced a 2009 Endowment value of nearly seventimes that of 1989. Yale’s long-term record results from disciplined anddiversified asset allocation policies and superior active management.

Spending from the Endowment grew during the last decade from$253 million to $1,175 million, an annual growth rate of approximately 17percent. On a relative basis, Endowment contributions expanded from 20percent of total revenues in fiscal 1999 to 46 percent in fiscal 2009. Nextyear, spending will amount to $1,119 million, or 42 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.

Introduction

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Endowment Growth Outpaces Inflation 1950–2009

Yale’s Endowment produced a negative24.6 percent return in the fiscal year endingJune 30, 2009, a period marked by a finan-cial crisis during which global equity mar-kets declined by nearly 30 percent.

During this period, equity exposurehurt results, diversification failed to protectasset values, and illiquidity furtherdetracted from performance. With morethan 95 percent of assets invested to gener-ate equity-like returns, the portfolio’s per-formance su≠ered in an environment char-acterized by widespread declines in mar-ketable and non-marketable equity values.

Among Yale’s asset classes, marketableassets performed relatively well, withabsolute return, domestic equity, foreignequity, and fixed income in aggregatedeclining by 13.1 percent. As in previousyears, active management added substan-tial value to the University’s portfolio.Absolute return posted a credible -9.1 per-cent return. Even though the University’sabsolute return managers failed to achievethe goal of producing a positive return infiscal 2009, the hedged portfolio producedresults far superior to returns generated byequity markets. The University’s domesticequities fell by 18.6 percent, surpassingtheir Wilshire 5000 benchmark by 7.5 per-cent. Foreign developed equities shrank by14.4 percent, posting a 17.0 percent advan-tage over the msci eafe Index. Emergingmarket equities decreased by 19.2 percent,outperforming the msci Emerging MarketsIndex by 8.8 percent.

Yale’s private equity holdings in lever-aged buyouts and venture capital posted a24.3 percent loss. Real assets, Yale’s largestasset class, produced the worst perform-ance with a decline of 33.9 percent, therebyaccounting for the largest portion of theEndowment’s losses. Notably, in a yearwhen oil prices dropped from $140 onJuly 1, 2008 to $72 on June 30, 2009, Yale’senergy investments dropped a commensu-rate 47.4 percent.

Diversification and Equity Orientation

Based on the substantial decline in Yale’sEndowment during the financial crisis,some observers questioned the University’sinvestment philosophy, which rests on theprinciples of diversification and equityorientation. While the diversification pro-vided by the absolute return asset classmitigated the damage caused by declinesin marketable equities, the most profoundportfolio protection comes from holdingsof U.S. Treasury securities. Unfortunately,

the high opportunity costs of holding gov-ernment bonds in normal markets forcesensible long-term investors to limit hold-ings of the low-expected-return assets,thereby limiting their portfolio impact.

If diversification fails to protect a port-folio in the face of a financial panic, whybother to diversify? The answer lies inthe diversified portfolio’s lower risks andhigher returns. Consider the case of Japanin 1989. An undiversified portfolio invested100 percent in Japanese stocks would haveexperienced a decline from a peak level of38,816 in December of 1989 to 10,546 inDecember of 2009, corresponding to a lossof 72.9 percent and an investment result of-6.3 percent per annum. Diversificationmatters.

As to equity orientation, history teachesus that over reasonably long holding peri-ods, higher-risk equities outperform lower-risk bonds. In fact, for the capitalist systemto function properly, expected returns forequities must exceed expected returns forbonds. Both practice and theory pointlong-term investors toward portfolios withsignificant holdings of equity positions.Equity orientation makes sense.

Liquidity

Investors frequently encounter opportuni-ties to generate excess returns from accept-ing illiquidity. Of course, the correct con-clusion is not to pursue every premiumreturn associated with illiquid assets andthereby create a completely illiquid portfo-lio. Prudent investors maintain su∞cientliquidity to meet the full range of portfoliocommitments, which, in the case of anendowment fund, include annual spendingdistributions and contractual commitmentsto external money managers.

In many cases, portfolios characterizedby high percentages of long-term assetscontain more liquidity than might beimmediately apparent. Consider a fundthat holds marketable bonds and equities,absolute return positions, real assets (realestate, oil and gas, and timber), and privateequity (leveraged buyouts and venturecapital).

Even with a zero allocation to cash inthe portfolio, investment holdings gener-ate a fair amount of natural liquidity. Forinstance, bonds pay interest, stocks paydividends, real estate produces rents,energy reserves provide returns on capitalas well as returns of capital (throughdepletion), and private equity partnershipsdistribute proceeds from realizations.

Holdings of marketable securities pro-vide a source of non-disruptive liquidity,namely, liquidity generated in a mannerthat does not change the Endowment’sasset class exposure. For example, fixedincome positions and equity positions canbe used as collateral for short-term loans.(Technically, bond transactions are struc-tured as sales and repurchases, known as“repos,” while equity transactions are struc-tured as loans, known as “security lend-ing.”) The owner of the securities retainsthe economic exposure associated with thesecurities and receives the proceeds pro-duced by the loan, thereby generatingliquidity.

External borrowing represents anothersource of non-disruptive liquidity. Forexample, for nearly two decades, Yale hastapped the commercial paper market toprovide funds for operations, capital proj-ects, and investments. During the recentfinancial crisis, the University had accessto nearly $2 billion of fully supported com-mercial paper funding. The program pro-duced exceptionally attractive financing;from July 1, 2008 to June 30, 2009 Yale’scommercial paper costs averaged 1.76 per-cent, substantially below the three-monthlibor rate of 2.21 percent. Other sourcesof non-disruptive liquidity for endow-ments include internal transfers and gifts.

Marketable securities also provide asource of disruptive liquidity, namely, liq-uidity generated in a manner that changesthe Endowment’s asset class exposure.Outright sales of bonds or stocks generateliquidity, but alter portfolio characteristics.Withdrawals from absolute return man-agers constitute another source of disrup-tive liquidity. Private equity and real assetsrepresent a third source of disruptive liq-uidity. However, even under the best of cir-cumstances, sales of illiquid partnershipstake place at meaningful discounts to fairvalue. In the heart of a financial crisis, salesof illiquid holdings should be pursued onlyas a last resort, since transactions generallytake place at dramatic discounts to fairvalue.

Liquidity matters, even to portfolioswith modest spending requirements andlong-term horizons. By putting in placemechanisms to tap a variety of internal andexternal sources of liquidity, endowmentmanagers provide the means for educa-tional institutions to satisfy the full rangeof portfolio commitments.

Fiscal 2009 Performance

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Totaling $16.3 billion on June 30, 2009, 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 (18 percent), maintenance(4 percent), books (3 percent), and miscellaneous specific purposes(26 percent). Twenty-five percent of funds are unrestricted. Twenty-fourpercent 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 (25 percent), the library (7 percent),and other entities (7 percent).

Although distinct in purpose or restriction, Endowment fundsare 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 2009, the Endowment provided $1,175 million, or 46 per-cent, of the University’s $2,560 million operating income. Other majorsources of revenues were grants and contracts of $589 million (23 per-cent), medical services of $417 million (16 percent), net tuition, room,and board of $230 million (9 percent), gifts of $87 million (3 percent),and other income and transfers of $67 million (3 percent).

The Yale Endowment

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BooksMaintenance

Scholarships

ProfessorshipsMiscellaneousSpecific Purposes

Unrestricted

Endowment

Grants & Contracts

Tuition, Room & Board

Medical Services

GiftsOther Income & Transfers

Endowment Fund AllocationFiscal Year 2009

Operating Budget Revenue in MillionsFiscal Year 2009

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 torecognize 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 assetallocation process.

The combination of quantitative analysis and market judgmentemployed by Yale produces the following portfolio:

June 2009 June 2009Asset Class Actual Target

Absolute Return 24.3% 15.0%Domestic Equity 7.5 7.5Fixed Income 4.0 4.0Foreign Equity 9.8 10.0Private Equity 24.3 26.0Real Assets 32.0 37.0Cash -1.9 0.5

Investment Policy

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Under the direction of President RichardC. Levin, Yale has committed to being anational and international model for sus-tainability. From an operating perspective,the University’s e≠ort encompasses thedevelopment and implementation of cut-ting-edge systems that reduce Yale’s impacton ecosystems and human health locallyand globally. From an educational andresearch perspective, Yale contributes lead-ing scholarship to the field of sustainabledevelopment and exposes students to theinterdisciplinary nature of sustainabilityissues through a variety of course o≠erings.The University is also committed to usingthe campus as a living laboratory: encour-aging faculty and researchers to test andmodel innovative concepts related toenergy and sustainability locally so thatstudents can participate in hands-onlearning.

In 2005, President Levin establishedthe Yale O∞ce of Sustainability, whichpositioned Yale to become an internationalleader in institutional sustainabilitythrough research, operations, education,outreach, and partnership. Createdin the spirit of balancing ecosystem healthwith human well-being and economicvitality, the Yale O∞ce of Sustainabilityhas the mission of advancing sustain-ability principles by fostering innovation,streamlining operations, and preparing

tomorrow’s sustainability leaders. To thisend, the sustainability team works withstudents, sta≠, faculty, and research centersat Yale, as well as members of the sur-rounding community and networks ofother external institutions.

Yale is committed to reducing its green-house gas emissions by 43 percent below2005 levels by 2020. President Levin madethis commitment in 2005 based on therecognition that global emissions reduc-tions would be needed to curb globalwarming. The University is well on its waytoward its greenhouse gas goal, havingrealized a 7 percent reduction in emissionsdespite a 5.5 percent increase in the maincampus size. Activities to date includeupgrading heating and cooling systems;the installation of thermally e∞cient win-dows and automated heating and lightingcontrols; the launch of on-site renewableenergy projects; and campaigns to encour-age energy-saving practices among faculty,students, and sta≠.

The higher-education sector is animportant participant in the drive towardinstitutionalizing sustainability. Today’suniversity graduates face unprecedentedcircumstances in the world. They are beingchallenged to stabilize world population,reduce the emission of greenhouse gases,protect biological diversity, stop thedestruction of forests, conserve energy, andmitigate soil erosion. College graduateswill have a better chance of success inmeeting these global challenges if universi-ties are prepared to lead the way to a sus-tainable future through demonstratedaction. Yale University is committed tobeing such a leader.

Sustainability at Yale

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Two of Yale’s sustainability e≠orts are illustrated in this view of Becton Center near the heart of the cam-pus. Small wind turbines on the roof capture energy from wind currents traveling up the side of the build-ing. Each turbine is 6.5 feet tall, weighs 60 pounds, and produces up to 1 kW of clean energy. The YaleTransit Shuttle seen in front of the building uses 20 percent biodiesel and 80 percent ultra low sulfur diesel.The Yale Shuttle provided almost 1 million rides to the Yale community in 2009.

Green buildings are becoming part of the Yale landscape. The new three-story, 51,000 sq. ft. SculptureBuilding houses undergraduate and graduate sculpture programs of the School of Art. The building’sdesign features and construction process earned it a leed Platinum rating from the U.S. Green BuildingCouncil. Kroon Hall (illustrated on page 9 in this report) has also received a leed Platinum rating.

The target mix of assets produces an expected real (after inflation) long-term growth rate of 6.4 percent with a risk (standard deviation ofreturns) of 13.2 percent. Because actual holdings di≠er from target levels,the actual allocation produces a portfolio expected to grow at 6.5 percentwith a risk of 12.8 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 2009 meeting, Yale’s Investment Committee adopted anumber of changes in the University’s policy portfolio allocations. TheCommittee approved an increase in the private equity target from 21 per-cent to 26 percent to accommodate anticipated growth in private equityexposure. For similar reasons, the University increased the real assets allo-cation from 29 percent to 37 percent. The increases in the illiquid assetclasses were funded by a 6 percentage point decrease in the absolutereturn target allocation to 15 percent, a 5 percentage point decrease in theforeign equity target allocation to 10 percent, and a 2.5 percentage pointdecrease in the domestic equity target allocation to 7.5 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, theUniversity’s vulnerability to inflation further directs the Endowment awayfrom fixed income and toward equity instruments. Hence, 96 percent ofthe Endowment is targeted for investment in assets expected to produceequity-like returns, through holdings of domestic and international secu-rities, real assets, 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 1989, 70 percent of the Endow-ment was committed to U.S. stocks, bonds, and cash. Today, target allo-cations call for 11.5 percent in domestic marketable securities, while thediversifying assets of foreign equity, private equity, absolute return strate-gies, and real assets dominate the Endowment, representing 88.5 percentof 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 1989 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 exploiting illiquid,less e∞cient markets such as venture capital, leveraged buyouts, oil andgas, timber, and real estate.

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Yale’s long-term e≠orts in the study of theenvironment began in 1900, when theUniversity established the Yale ForestSchool, the first professional forestry pro-gram in the United States. The family ofGi≠ord Pinchot (b.a. 1889), the firstAmerican to receive professional forestrytraining in Europe, made possible thelaunch of the School through generousfinancial contributions. Mr. Pinchot wenton to become the first chief of the U.S.Forest Service, under President TheodoreRoosevelt. In 1972 the School was renamedthe Yale School of Forestry & Environ-mental Studies (f&es) to reflect itsexpanding curriculum. Yale alumni, par-ents, and friends have been generous insupporting the School since its inception.Recent decades have seen a steady increaseof support for environmental studies,enhancing Yale’s ability to contribute tounderstanding the world’s climates andecosystems.

The Franklin Muzzy Crosby UniversityProfessorship of the Human Environment(1976)

The Carolyn Foundation was establishedby the estate of Carolyn McKnightChristian, daughter of alumnus FranklinCrosby (b.a. 1897). To honor Mr. Crosby,the Carolyn Foundation created theFranklin Muzzy Crosby UniversityProfessorship of the Human Environment.Illustrious Yale faculty members who haveheld the Crosby Professorship includeMichael Smith, Harold Conklin, andAlison Richard, who also served as Provostof the University from 1994 to 2002.

Leonard G. Carpenter Fund (1989)

With gifts from the Andrew W. MellonFoundation and Leonard G. Carpenter(b.a. 1924), the Leonard G. CarpenterFund was established to provide competi-tively awarded support for scholarly proj-ects initiated by students. The fund aims tosupport graduate and undergraduate stu-dent research activities in various fieldsrelating to environmental and natural-resource topics.

The Bass Family Gifts

Dedicated alumnus Edward P. Bass (1967,b.s. 1968), who serves as co-Chair of theYale Tomorrow campaign, is from a familythat has been among the most generous inYale’s history. University e≠orts supportedby the family include the construction ofthe Nancy Lee and Perry R. Bass (b.s.1937) Center for Molecular and StructuralBiology, initiatives such as the BassWriting Program, and renovationsof Linsly-Chittenden Hall, William L.Harkness Hall, Rudolph Hall, BerkeleyCollege, and the Anne T. and Robert M.Bass Library (formerly known as CrossCampus Library).

Edward Bass made a landmark commit-ment in 1990 to create the Yale Institute forBiospheric Studies (yibs), a multidiscipli-nary center that promotes and integrateswork among science departments such asGeology and Geophysics and Ecology andEvolutionary Biology, as well as thePeabody Museum and the School ofForestry & Environmental Studies.

Mr. Bass’s wide-ranging support foryibs includes endowed funds for two fullprofessorships in biospheric studies, thepermanent directorship of the PeabodyMuseum, and a program of visiting envi-ronmental scholars. His initiatives havespurred funding for environmental studiesat Yale by many other donors. He con-tributed, in addition, toward the Environ-mental Science Center, Kroon Hall, andother buildings on Science Hill.

In continuing support for Yale’s e≠ortsto address climate change, Edward Bassmade a gift of start-up funding in 2009to create the Yale Climate and EnergyInstitute (ycei). The Institute will serve asthe University’s focal point for developingand evaluating solutions to climate changeby providing support for interdisciplinaryresearch, postgraduate education, and out-reach through conferences and workshops.

The Benjamin Zucker FamilyEnvironmental Fund (1990)

To spark student interest in sustainabilitytopics, Benjamin Zucker and Richard L.Zorn (both b.a. 1962) created theBenjamin Zucker Family EnvironmentalFund to support the Zucker EnvironmentalFellows program, which brings distin-guished environmental studies scholarsand leaders to Yale. The fund also supportsexhibits at the Yale Peabody Museum ofNatural History’s Hall of Minerals, Earth,and Space.

The Gilman Ordway Family ScholarshipFund for Environmental Studies (1991)

Financial aid is an important focus ofdonor support in all aspects of Yale’s cur-riculum. Gilman Ordway (b.a. 1947)established the Gilman Ordway FamilyScholarship Fund for EnvironmentalStudies to provide annual support for up toseven graduate students for studies in theenvironmental sciences. Mr. Ordway isknown for his support for environmentalcauses around the globe, and has had along association with Yale. He was one ofthe early donors to Kroon Hall, the newhome of f&es, which opened in May 2009,and the Ordway Learning Center at KroonHall is named for him.

Endowed Support for Environmental Studies

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Gi≠ord Pinchot (b.a. 1889), first chief of the U.S.Forest Service, was instrumental in founding Yale’sForest School in 1900 and launching studies inconservation and the environment at Yale. In 1972the School became the School of Forestry &Environmental Studies.

Edward P. Bass (1967, b.s. 1968) helped Yale tobuild on its strong foundations in environmentalsciences when he established the Yale Institute forBiospheric Studies in 1990. The multidisciplinarycenter encourages interaction among Yale’s sciencedepartments as well as the Peabody Museum ofNatural History and f&es.

The Gaylord DonnelleyEnvironmental Fellows Fund (1994)The Gaylord Donnelley Fund for Studiesin the Environment (1994)The Strachan and Vivian DonnelleyEndowed Scholarship Fund (2002)The Cameron and Gus SpethScholarship Fund (2007)

Throughout the past twenty years,noted Chicago environmentalist GaylordDonnelley (b.a. 1931) and his family havebeen exceptionally generous to the Uni-versity. The Gaylord Donnelley Environ-mental Fellows Fund provides postdoctoralresearch fellowships in disciplines relatedto the Yale Institute for Biospheric Studies.Through the Gaylord Donnelley Fund forStudies in the Environment, the familyunderwrote colloquia, special courses, pub-lic addresses, and other programs to enrichundergraduate life. In 2002 Mr. Donnelley’sson, Strachan Donnelley (b.a. 1964),created the Strachan and Vivian DonnelleyEndowed Scholarship Fund for financialaid “to support Yale’s e≠orts in buildingenvironmental leadership.” In 2007 a com-mitment from Strachan Donnelley, nowdeceased, created the Cameron and GusSpeth Scholarship Fund, to which manyothers have also contributed, in honor ofthe retiring Dean, James Gustave Speth(b.a. 1964, ll.b. 1969). The donorsannounced their intention “to honor DeanSpeth’s commitment to the School ofForestry & Environmental Studies gener-ally and to scholarship in particular.” TheSpeth Scholarship Fund will provide finan-cial aid for master’s students, either U.S. orinternational, with demonstrated financialneed, at f&es. Gustave Speth was Dean off&es from 1999 to 2009, and was a class-mate of Strachan Donnelley at Yale College.

Class of 1980 F&ES InternshipsFund (1999)Class of 1980 F&ES Scholarships (2007)

Members of the School of Forestry &Environmental Studies class of 1980, whograduated with the m.e.m., m.e.sc., m.f.,and m.f.s. degrees, continue to contributeto a fund established by their class at theSchool in 1999 to support research intern-ships undertaken by current students. Inhonor of their twenty-fifth reunion, a sec-ond fund was established to provide schol-arships for master’s students at f&es.

Edgar M. Cullman Family Fund forUndergraduate EnvironmentalStudies (2002)

Over the last several decades the Cullmanfamily has been a perennial Yale benefactor.The family has supported activities, coursework, and renovations across Yale depart-ments that range from athletics to arts. In2002, Edgar M. Cullman (b.a. 1940) andhis son Edgar M. Cullman, Jr. (b.a. 1968)turned their attention to the College’sEnvironmental Studies program and cre-ated the Edgar M. Cullman Family Fundfor Undergraduate Environmental Studiesto promote the teaching of courses in theundergraduate major in EnvironmentalStudies by f&es faculty. The fund isintended to underwrite courses on broadsubject matter, especially “the interdiscipli-nary relationship of the environment withbusiness, technology, law, politics, gover-nance, and other related areas.”

The Kroon Environmental StudiesScholarship Fund (2002)Kroon Hall (2009)

Richard E. Kroon (b.a. 1964) establishedthe Kroon Environmental Studies Scholar-ship Fund in 2002 to provide financial aidfor Yale College students who intend topursue advanced degrees at the School ofForestry & Environmental Studies. In 2009Yale finished construction of the highly

anticipated Kroon Hall, one of two build-ings at Yale that have received a platinumleed rating by the U.S. Green BuildingCouncil. Some of the environmentallyfriendly features of the Kroon buildinginclude rooftop photovoltaic panels, rain-water collection and filtration facilities,

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Richard E. Kroon (b.a. 1964) has endowed scholar-ships to f&es for graduates of Yale College, in addi-tion to his generous support for the construction ofYale’s new “green” home for the School, KroonHall. This is Yale’s second building to win a plat-inum leed rating for ecological e≠ectiveness. Thestudent lounge on the top floor is shown in thephoto below.

locally sourced sandstone walls, andground-source heat pumps. The buildingprovides o∞ce space for approximately 75faculty and sta≠, as well as classroom spaceand a 175-seat auditorium. Kroon Hall wasnamed for Richard E. Kroon and his familyin recognition of his leadership supportfor f&es.

Sara Shallenberger Brown Professorship(2002)

The Sarah Shallenberger Brown Professor-ship at the School of Forestry & Environ-mental Studies was established by Mrs.Sara S. Brown and her son Owsley Brownii (b.a. 1964), with a preference for a per-son to be engaged in research in the field ofclimate change and energy. The inauguralholder is James Gustave Speth, the formerDean of the School.

The Emily and Carl KnoblochEnvironment Center (2005)The Carl W. Knobloch, Jr. Deanship atthe School of Forestry & EnvironmentalStudies (2008)The Carl W. Knobloch, Jr. FellowshipFund (2009)

Carl W. Knobloch, Jr. (b.a. 1951), a busi-nessman and philanthropist, donated fundsto construct Kroon Hall’s Emily and CarlKnobloch Environment Center, whichhouses a range of environmental activities.In 2008 Mr. Knobloch made a new gift to

create the Carl W. Knobloch, Jr. Deanshipat the School of Forestry & EnvironmentalStudies, which is now held by Sir Peter R.Crane. Through the Knobloch FamilyFoundation, Mr. Knobloch sponsored theCarl W. Knobloch, Jr. Fellowship Fund forjoint-degree students enrolled at both theYale School of Management and f&es. YaleUniversity’s joint-degree program awardsstudents the m.b.a. (Master of BusinessAdministration) and the m.e.m. (Master ofEnvironmental Management) in recogni-tion of the important connection betweenbusiness and the environment. In 1982,when this program was established, Yalebecame the first U.S. university to create amaster’s degree curriculum linking the twodisciplines.

The Catalyst Fund for CriticalEnvironmental Issues (2006)

Howell L. Ferguson (b.a. 1966) and hiswife, Sharon Maxwell Ferguson (Yale par-ents), together with fellow members of theclass of 1966 in honor of their fortiethreunion, established this fund “to advancepublic dialogue on the critical environmen-tal issues of the day, to close the gapbetween scholarly research and publicpolicy with an emphasis in the immediatefuture on climate change and relatedenergy issues.” The donors further stipulatethat “the fund may be used to provide sup-port for the School’s outreach, communica-tions, and related policy engagement.”

Other donors, in addition to the class of1966, have also contributed to the CatalystFund since its inception.

Williams Fund for UndergraduateTeachingWilliams Internships Fund (2007)

In honor of his fiftieth Yale Collegereunion and in support and recognition ofthe role played by the School of Forestry &Environmental Studies in its mission oftraining future leaders in natural resourceand environmental management, JosephH. Williams (b.a. 1956) established twofunds. The first is for teaching in theundergraduate program in EnvironmentalStudies in Yale College. The second is tosupport students in their research, with apreference for work with land conservationgroups.

David T. Schi≠ Research Fund (2007)

David T. Schi≠ (b.e. 1958) has establisheda scientifically based research fund to sup-port a results-oriented program at theYale School of Forestry & EnvironmentalStudies “to advance the understanding ofworldwide issues pertaining to wildlife,habitat, and the environment, and withthe aim of helping humans attain a greaterappreciation for nature and the need to livein harmony with it.”

Teresa and H. John Heinz iiiiiiProfessorship in Chemistry for theEnvironment (2008)

To commemorate and honor her late hus-band John Heinz iii (b.a. 1960) and hispublic role as a member of the U.S. Houseof Representatives, to which he was firstelected in 1971, and later as a member ofthe U.S. Senate, Teresa Heinz establishedthe Teresa and H. John Heinz iii Profes-sorship in Chemistry for the Environmentin the Yale School of Forestry & Environ-mental Studies. The professorship may beoccupied by a scholar in environmentalchemistry, including the field of greenchemistry. The inaugural holder is Profes-sor Paul T. Anastas.

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Carl and Emily Knobloch

Yale’s six asset classes are defined by di≠erences in their expected responseto economic conditions, such as price inflation or changes in interestrates, and are weighted in the Endowment portfolio by considering risk-adjusted returns and correlations. The University combines the assetclasses in such a way as to provide the highest expected return for a givenlevel of risk.

In July 1990, Yale became the first institutional investor to pursueabsolute return strategies as a distinct asset class, beginning with a targetallocation of 15 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 portfoliocontains value-driven strategies, which involve hedged positions in assets or securities that diverge from underlying economic value. Today, theabsolute return portfolio is targeted to be 15 percent of the Endowment,below the average educational institution’s allocation of 22.5 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 11.4 percent per year with low correlation to domesticstock and bond markets.

An important attribute of Yale’s investment strategy concerns thealignment of interests between investors and investment managers. Tothat 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 19.3 percent of assets in domestic equities,Yale’s target allocation to this asset class is only 7.5 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

11

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. Recognizing the di∞culty of outperforming the market on a consistent basis, Yale searches for managers with high integrity, soundinvestment philosophies, strong track records, superior organizations,and sustainable competitive advantages.

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 21.0 percent, Yale’s targetallocation to fixed income and cash constitutes only 4.5 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 and expected returns of the six 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.

12

Fixed Income

Memorial Hall, which connects University Commonsand Woolsey Hall, was erected in 1901 to commemo-rate the University’s bicentennial.

Investments in overseas markets expose the Endowment to the globaleconomy, providing substantial diversification along with opportunitiesto earn above-market returns through active management. Emergingmarkets, with their rapidly growing economies, are particularly intrigu-ing, causing Yale to target 3.0 percent of its portfolio to such opportuni-ties, just short of the 4.0 percent allocated to foreign developed equities.Yale dedicates 3.0 percent of the portfolio to opportunistic foreign posi-tions, with the expectation that holdings will be concentrated in marketsthat o≠er the most compelling long-term opportunities, particularlyChina and India. Yale’s foreign equity target allocation of 10.0 percentstands below the average endowment’s allocation of 18.2 percent.Expected real returns for emerging equities are 8.0 percent with a risklevel of 25.0 percent, while developed equities are expected to return 6.0percent with risk of 20.0 percent. The portfolio is measured against acomposite benchmark of: (a) developed markets, measured by theMorgan Stanley Capital International (msci) Europe, Australasia, andFar East Index; (b) emerging markets, measured by the msci EmergingMarkets Index; and (c) opportunistic investments, measured by a customblended 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.

13

Foreign Equity

Exterior view of the Saybroook College dining hall,from Branford courtyard.

Private equity o≠ers extremely attractive long-term risk-adjusted returncharacteristics, stemming from the University’s strong stable of value-added managers that exploit market ine∞ciencies. Yale’s private equityinvestments include participations in venture capital and leveraged buy-out partnerships. The University’s target allocation to private equity of26.0 percent far exceeds the 8.3 percent actual allocation of the averageeducational institution. In aggregate, the private equity portfolio isexpected to generate real returns of 11.0 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 30.4 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 in 1997, 2000, 2003, and again in 2006.

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

14

The International Center for Finance at the YaleSchool of Management occupies this historic man-sion on Hillhouse Avenue.

Real estate, oil and gas, and timberland share common characteristics:sensitivity to inflationary forces, high and visible current cash flow, andopportunity to exploit ine∞ciencies. Real asset investments provideattractive return prospects, excellent portfolio diversification, and a hedgeagainst unanticipated inflation. Yale’s 37.0 percent long-term policy allo-cation significantly exceeds the average endowment’s commitment of 10.7percent. Expected real returns are 6.0 percent with risk of 13.6 percent.

The real assets portfolio plays a meaningful role in the Endow-ment as a powerful diversifying tool and a generator of strong returns.Pricing ine∞ciencies in the asset class and opportunities to add valueallow superior managers to generate excess returns over a market cycle.Since inception in 1978 the portfolio has returned 14.3 percent per annum.

The illiquid nature of real assets combined with the expensive andtime-consuming process of completing transactions create a high hurdlefor casual investors. Real assets provide talented investment groups withthe opportunity to generate strong returns through savvy acquisitionsand managerial expertise. A critical component of Yale’s investment strat-egy is to create strong, long-term partnerships between the InvestmentsO∞ce and its investment managers. In the last decade, Yale played a criti-cal role in the development and growth of more than a dozen organiza-tions involved in the management of real assets.

Yale Educational University Institution Mean

Absolute Return 24.3% 22.5% Domestic Equity 7.5 19.3Fixed Income 4.0 16.2 Foreign Equity 9.8 18.2 Private Equity 24.3 8.3 Real Assets 32.0 10.7 Cash -1.9 4.8Data as of June 30, 2009

Real Assets

15

Asset Allocations

Through Yale’s venture capital program,the Endowment has invested in some ofthe most recognizable companies in theworld, including Cisco Systems, JuniperNetworks, Google, YouTube, and Face-book. As awareness of global climatechange impels governments, businesses,and consumers to rethink the way they useenergy, the venture portfolio’s next crop ofsuccess stories may just spring from thecleantech space.

Cleantech companies aim to providesolutions to global resource challenges by improving energy e∞ciency, reducingenergy consumption, and trimming wasteproduction. Valued at over $100 million onJune 30, 2009 and representing over 6.4percent of the Endowment’s venture capitalportfolio, Yale’s exposure to cleantech isgrowing rapidly. In the past year alone,Yale’s venture capital managers invested inover nine new cleantech companies. Yalehas increased its exposure to the sector inthe marketable, real assets, and leveragedbuyout portfolios as well.

Although the risk characteristics of ven-ture capital will inevitably produce a fairnumber of failures among the more thanseventy early-stage cleantech companiesthat currently populate the Yale portfolio,we are confident that the University standsto benefit enormously from the Endow-ment’s involvement in green ventures, bothas an investor and as a stakeholder in thehealth of the environment. Below we pro-file two promising cleantech companies inYale’s portfolio.

Silver Spring

In 2002 a group of entrepreneurs began totoss around the idea of upgrading electricalgrids throughout the United States. Inmost U.S. cities, homes and businesses areconnected to grids designed using powerdistribution technologies that were avail-able 120 years ago, when pioneering engi-neer Nikola Tesla invented the alternatingcurrent distribution system. As the productof an age when light bulbs accounted forthe majority of electricity consumption,traditional electrical grids leave a lot to bedesired.

When Silver Spring was founded in2002, the available “smart” technology was limited to remote control devices thatallowed linemen to turn meters on and o≠ from parked street vans. Silver Springsought broader solutions for network communication and automation. The company started developing technology for smart grids.

At their most basic, smart grids increasethe connectivity and coordination betweenelectric utilities and consumers. Accordingto a study of energy e∞ciency by Deloitte,over 16 percent of all energy used is expected to be in the form of electricity in 2009. Traditional electricity grids oper-ate at an average e∞ciency of 33 percent,meaning that of the 100 units of energyheld within a fossil fuel, only 33 units ultimately reach consumers. Smart gridsalmost double this average to 60 percent.

One of the biggest issues utilities grap-ple with is electricity load management. Inorder to prevent outages, power providersgenerally keep a “spinning reserve,” a back-up store of electricity that is drawn duringpeak usage. If reserves run low, utilitiesresort to using “peaker plants,” the oldest,least e∞cient, and most polluting powergeneration stations that are only used whennormal plants are tapped out. Utilities con-nected to a traditional grid are forced tobuild total generation capacity that meetsor exceeds the incidental peaking levels onthe system. Consequently, for 99 percent of

the year, 20 percent of total capacity goesunused.

Legacy electricity networks do not havereal-time data collection capabilities, a factthat has two consequences for load man-agement. First, without pricing transpar-ency, most consumers are unaware thatelectricity is much more expensive to gen-erate and costs more during peak hours.Smart grid technology provides real-timedata about costs. Some systems go further,providing minute-by-minute informationabout how much carbon dioxide is gener-ated by running electronics and appliances. If customers are alerted to the dollar andcarbon impact of their electricity habits,they might be more likely to shut o≠ anunwatched television or turn o≠ anunneeded light. In 2008 Silver Springworked in conjunction with Oklahoma Gas& Electric to conduct a pilot program withtwenty-five area customers, each of whomreceived a tabletop device that receiveddetailed information about their electricityconsumption. Customers saved an averageof 10 percent to 15 percent on their power

16

Green Ventures

Silver Spring Networks, founded in 2002, is devoted to upgrading electrical power delivery throughout theU.S. by developing technology for smart grids. Silver Spring enables utilities to connect with their cus-tomers in real time via a two-way communications network using the smart meter and interface cardshown here.

bills. Only one customer failed to realizelower costs.

Second, without meter data that isattuned to time of usage, utilities are forced to estimate the amount of spinningreserves they must keep. In order to avoidservice outages, utilities tend to over-reserve or use peaker plants, wasting gen-eration resources and causing unnecessarypollution. Silver Spring provides powercompanies with the requisite data to designpricing mechanisms that better match elec-tricity demand with its generation costs,allowing market forces to smooth loadcurves, and reduce the need for large spin-ning reserves. By allowing utilities to useexisting power plants more e∞ciently,smart grids ease the demand for newplants.

In addition to moderating electricitydemand, smart grids reduce pollution byrationalizing power generation operations.Smart meters allow utilities to read andcontrol electricity meters remotely, elimi-nating the need for the large van fleets that currently perform such tasks. Just likecomputers, each smart meter has a uniqueip address that can send information aboutelectricity outages seconds after such eventsoccur. Under most current grid systems,utilities are alerted to outages only whencustomers call, which can lead to unneces-sary trips into the field by linemen.

Silver Spring’s products are importantcatalysts for the expanded use of alternativeenergy. Although smart grids cannot elimi-nate reliance on fossil fuels, they are instru-mental to bringing more renewable energyonline by allowing utilities to improvetracking and routing of non-traditionalpower sources. Most U.S. grid systems arecurrently unable to integrate disparatesources of energy—rooftop solar panels orplug-in cars, for example—into the electricgrid. With a smart grid in place, utilitiescan more e∞ciently tap into available alter-native energy, and consumers will havegreater transparency into electricity that issold back into the grid.

Despite its short operating history,Silver Spring has been able to win con-tracts with some of the biggest utilities inthe country, including Florida Power &Light, Washington D.C.’s Pepco Holdings,and California’s pg&e, which expects toreplace more than 5 million meters withSilver Spring’s smart meters by 2012.Altogether, the company has partneredwith utilities serving more than 20 percentof the U.S. population. Silver Spring tech-nology is now deployed in over 1.5 million

homes and businesses, and each week over 50,000 new endpoints are networked.The company and its clients may be thebeneficiaries of support from Federal andstate governments, which have allocatedsignificant funds for smart grid develop-ment. The 2009 Federal stimulus billassigned $11 billion to smart grid technol-ogy, including $4.5 billion for smart tech-nology matching grants. With revenues ofunder $20 million in 2008, Silver Spring’sshipments exceeded $100 million during2009 and it turned profitable during thefourth quarter of 2009. Demand from U.S.utilities has continued to be robust, provid-ing Silver Spring with the prospect of dou-bling or tripling its revenues over each ofthe next several years.

Silver Spring’s ambitions extend beyondthe United States. The company’s clientroster includes four Australian utilities.According to ceo Scott Lang, “If we execute well, this is a global play thatbecomes a brand name known to every citizen in the world.”

Mascoma

Biofuels, simply put, are any fuels derivedfrom raw biological materials, and the termencompasses everything from the vegetableoil recovered from Chinese restaurants toengineered biodiesel, biogas, and high-techsecond-generation fuels. Bio-ethanol hasrecently become both one of the most

prominent biofuel technologies and one ofthe most controversial, generating a heateddebate about feasibility and sustainability.

Bio-ethanol is ethyl alcohol produced bybreaking down and fermenting the com-plex sugars found in agricultural feedstock,most commonly corn, wheat, or soybeans.Traditional starch ethanol fuels like thesehave been shown to reduce carbon dioxideoutput by about 30 percent compared tofossil fuels. Environmentalists, economists,and politicians have raised concerns, how-ever, about the fuel-or-food trade-o≠ thatusing food products to power cars intro-duces. Further concerns have arisen overthe relatively high energy input required toproduce bio-ethanol. The amount of fossilfuel required to produce conventionalethanol has been so great that recent stud-ies indicate typical starch ethanol may havea net climate warming e≠ect over its life-span from production to combustion.

Mascoma, a bio-ethanol research and development company centered inLebanon, New Hampshire, is engineeringnovel forms of the fuel and more e∞cientways to produce it. Founded in 2005 byDartmouth environmental engineeringprofessors Lee Lynd and Charles Wyman,along with green business bu≠ RobertJohnsen, Mascoma puts its molecular biol-ogy, strain development, and bioprocessmodeling expertise to work to develop abetter biofuel: cellulosic ethanol.

17

This gm Chevy hhr was driven by Bruce Jamerson, ceo of Mascoma Corporation, on December 18, 2008in Rome, New York. The car was fueled with E-85 cellulosic fuel ethanol produced for the first time thatweek in Mascoma’s Rome Pilot Plant.

Cellulosic ethanol is the same end product as conventional ethanol, but it is created from wood, grass, and non-edibleplant derivatives rather than edible food-stu≠s. While cellulosic ethanol was firstproduced in the late nineteenth century, ithas recently been revived and technologi-cally enhanced because of its unique capac-ity to transform biomass detritus intousable energy. Because cellulosic ethanol isderived from waste products, it alleviatesconcerns about diverting foodstu≠s toenergy production. Mascoma, for example,uses wood, straw, corn stover, and switch-grass to produce its ethanol. In a particu-larly inspired innovation, Mascoma beganconverting paper pulp, which typicallycosts $80 per ton to dispose of but cannow be used as energy.

Cellulosic ethanol production also sub-stitutes biomass, specifically lignan, whereconventional ethanol production relies onfossil fuels to do the work. Taking fossilfuels out of the production equation cutsthe carbon footprint of ethanol productionby about 250 percent compared to conven-tional ethanol.

The only problem is that cellulosic bio-mass is extremely recalcitrant, so its break-down is about twice as expensive as that ofthe feedstock used to generate conventionalethanol. Because of the energy potentialand cost ine∞ciency of cellulosic ethanol,Mascoma’s research and development hasthe potential to transform the biofuel land-scape. Mascoma developed a consolidatedbioprocessing system (cbp) to create cellu-losic ethanol more e∞ciently than naturalprocesses. The company is currently alter-ing the dna makeup of existing organismsto develop two types of bacteria and a newtype of yeast that can use cellulose and ferment sugars.

These e≠orts have yielded impressivereturns. In 2009, for example, Mascomaannounced the development of new cbpbiotechnologies that reduce both the car-bon input and the cost associated with cel-lulosic ethanol production by 60 percent.Specifically, Mascoma’s recombinant cel-lolytic yeasts showed an increased expres-sion of the enzyme used to break down cellulose of more than 3,000 percent. Dr. Bruce Dale, a member of Mascoma’sScientific Advisory Board, explained theinvention as “a true breakthrough thattakes us much, much closer to billions ofgallons of low-cost cellulosic biofuels…Mascoma has permanently changed thebiofuels landscape from here on.”

Environmentalists and scientists alikestand behind the development of cellulosicethanol. In a recent study, the NationalCommission on Energy found that thisbiofuel, when developed in tandem withincreasingly e∞cient automobiles and othersmart growth initiatives, could cut U.S. oildependency in the transportation sector toone-third of its current level within thenext forty years. Furthermore, the transi-tion to cellulosic ethanol could be relativelyseamless because the fuel can be used inexisting internal combustion engines withfew or no adjustments.

The market for this “green gold” is pro-jected to expand tremendously and rapidly,growing to an international market valuedat $10 billion by 2012, and Mascoma ispoised to be a leader. The company hasreceived equity financing and federal andstate grant money totaling upward of $170million. With engineering o∞ces in themetro-Boston area, research and develop-ment o∞ces and labs in Lebanon, NewHampshire, a demonstration plant inRome, New York, and a factory about toopen in Kinross, Michigan, Mascoma isgeared to shape the biofuel landscape foryears to come.

18

Visitors tour the Mascoma ethanol plant in Rome, New York. Mascoma’s renewable fuel could yield con-siderable reductions in U.S. oil dependency.

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 one year 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 Policy

4

19

$1400

$1200

$1000

$800

$600

$400

$200

01950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

1950 Spending Inflated Actual SpendingSpending from Post-1950 Endowment Gifts Inflated

Mill

ions

Spending Growth Surpasses Inflation 1950–2009

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, annual changes in spending have been one fourth asvolatile as annual changes in Endowment value. Second, by adjustingspending toward the long-term target spending level, the rule ensuresthat spending will be sensitive to fluctuating Endowment market values,providing stability in long-term purchasing power.

Despite the conservative nature of Yale’s spending policy, distribu-tions to the operating budget rose from $253 million in fiscal 1999 to$1,175 million in fiscal 2009. The University projects spending of $1,119million from the Endowment in fiscal 2010, representing 42 percent ofrevenues.

20The interior of Sterling Memorial Library.

Much of the news about emerging marketscenters on two things: rapid economicdevelopment and equally rapid environ-mental degradation. Conventional wisdomconnects the continuation of the formerwith the exacerbation of the latter. Judgingby the rarity of blue skies in cities likeBeijing and New Delhi, this observationhas largely proved correct.

A new crop of emerging market entre-preneurs are working to undo the connec-tion between economic growth and envi-ronmental decay while providing investorswith handsome returns along the way.Over the past several years, the Endow-ment has invested in a number of publicand private emerging market companiesthat provide solutions to reduce reliance on highly polluting fossil fuels. Below weprofile two such companies.

HT Blade

The smog hanging over Linfen is some-times so impenetrable that taxi drivers useheadlights at noon just to see the car infront of them. Located in China’s Shanxiprovince, Linfen recently earned the dis-tinction of being the most polluted city inthe world.

Like many cities in China’s northernprovinces, Linfen is surrounded by coalmines, coal processing plants, and coal-fired utilities. Coal is by far the most abun-dant source of energy in China; it hasfueled much of China’s growth. Coal is also a national health hazard; it fills the airwith particulate matter; it produces crop-ruining acid rain; it doses water with largeamounts of mercury; it causes upward of400,000 premature deaths per year.

China’s leaders are becoming increas-ingly aware of the need to rein in the coun-try’s environmental degradation and haveturned toward alternative energies likewind power as a key element in reducingits dependence on coal. China built its firstwind farm in 1986; it is currently theworld’s fifth largest wind power producer.The country aims to increase levels of windpower generation from its current 6 giga-watts to 100 gigawatts in the next decade.

A windmill consists of a set of turbineblades, each of which spans 65 to 130 feet,and a generator that converts the kineticenergy generated by the spinning bladesinto electricity. Zhong Hang Huiteng WindPower Equipment Co., Ltd. (HT Blade),headquartered in Hebei province, beganproducing wind turbine blades in 2001.HT Blade is well positioned to grow into a

dominant player in China’s windmill mar-ket through both price competitiveness andtechnological innovation. The company’sturbine components are relatively lessexpensive than those of its internationalcompetitors because Chinese wind farmsare able to spend less on transportationfees. Moreover, because the company’s

blades travel a shorter distance, end-customers benefit from less transport-associated product damage.

In addition to cost e∞ciency, HT Bladefocuses intently on research and develop-ment. HT Blade produces ten differenttypes of blades, ranging in capacity from600 kilowatts to 3 megawatts. Seeking

Green Investments in Emerging Markets

21

The development of Model HT40A/B blades (2.0 mw) was completed in 2007, and static and fatigue test-ing was concluded in May 2008. To date, 14 and 22 HT40A and HT40B turbine blades, respectively, havebeen manufactured and installed in wind farms in Inner Mongolia.

Production of Model HT31 turbine blades (1.25 mw) began after the completion of this model’s develop-ment in September 2007. By November 2009, more than 280 turbine blades had been manufactured andinstalled in 11 wind farms, including ones located in Yingkou city in Liaoning province, Laizhou city inShandong province, and Youyu county in Shanxi province.

greater blade e∞ciency, the company devel-oped testing instruments to pinpoint loca-tions on the blade that could benefit fromstructural improvements. HT Blade oftenworks in conjunction with the central andlocal governments on projects to improveturbine technology.

HT Blade has grown exponentially overthe past eight years. It is China’s largestturbine blade manufacturer, single-hand-edly supplying 90 percent of domesticdemand for 600 kilowatt and 750 kilowattblades. With the help of its investors, HTBlade has enlarged its physical footprintfrom one factory in Hebei to four locatedacross China. Despite this rapid expansion,the company currently produces at capac-ity, making more than 6,000 sets of bladesper year. Spurred by the continuing growthof Chinese wind farms, HT Blade hopes touse future ipo proceeds to increase factoryspace.

In May 2009, a Dallas-based energycompany ushered HT Blade onto the worldstage when it signed a $300 million dealwith the company to equip wind farms inTexas. Between its domestic success and its entrée into international markets, HTBlade is poised to take a major role in theglobal e≠ort to reduce pollution.

Suntech Power Holdings

Dr. Shi Zhengron founded Suntech PowerHoldings, the largest solar cell manufac-turer in the world. This success has led himto be called the “Solar King.” Little in Shi’schildhood suggested that he would one dayinspire this moniker—he was given up foradoption by parents too poor to afford achild; he was born toward the tail end ofChina’s widespread agricultural famine(but caught the Cultural Revolution in itsentirety); the family farm was located inthe middle of a river.

Shi left home when he was sixteen to goto college. After finishing a master’s degreeat the Shanghai Institute of Optics, Shi wasselected for further graduate studies in theUnited States. He practiced his Americanaccent. He was sent to Australia instead.

In 1989, Shi met the University of NewSouth Wales professor Martin Green, apioneer in the field of solar energy. Aftercompleting his ph.d. in just under threeyears, Shi joined Green’s joint venturecompany, where he became part of a teamdeveloping technologies to reduce the costof producing solar cells. Shi lived a com-fortable life—his researcher’s salary allowedhim to buy a home in one of Sydney’s

suburbs—but a trip to China in 2001 madehim reconsider the decision to stay inAustralia.

One of the biggest barriers to wide-spread adoption of solar technology is cost.Before Shi entered the game, the industrystandard was $4.50 per watt. Shi thoughtthat with China’s cost advantages, whichincluded labor, land, and materials, hecould get the price down to $3.00 per watt.

Shi’s plans caught the attention of the government of Wuxi, a city in Jiangsuprovince, which offered an investment of$6 million to finance Suntech’s start-upcosts and helped find an additional $5 million in research grants.

In 2002, Suntech opened its first manu-facturing facility in Wuxi. Shi designed amanufacturing process that substantiallyreduced silicon wafer breakage, a signifi-cant source of costs for traditional solar cellmanufacturers. By 2003, Suntech’s solarcells cost $2.80 per watt. Shi’s consistentfocus on cost control and an upsurge inglobal demand pushed Suntech to profita-bility seven months after it opened itsdoors for business.

In 2005, Suntech became the firstChinese solar manufacturer to debut on the New York Stock Exchange. The ipovalued the company at $2.3 billion andbriefly made Shi the richest man in China.Suntech paved the way for a shift in thesolar industry’s center of gravity from theUnited States and Europe toward China,where six solar cell manufacturers havebecome big enough to achieve listings inthe U.S. or the U.K. In Jiangsu provincealone, there are around 160 companiesinvolved in the solar industry.

With an annual production capacity ofaround 1,000 megawatts, Suntech is by farthe largest player in China and ranks in thetop five in the world. The bulk of Suntech’sproducts are sold to European countries,

22

Dr. Shi Zhengron, founder of Suntech PowerHoldings in Wuxi, China, the largest solar cellmanufacturer in the world.

Workers in the Suntech Power factory in Wuxi, Jiangsu province, China, where solar panel production hasbeen optimized, strongly reducing the price of solar energy.

predominantly Germany and Spain, wherelongstanding government policies have cre-ated a robust market. The Chinese solarmarket, although still in its infancy, hasreceived a boost from directives promotingthe use of solar, wind, and hydroelectricpower. Already 80 percent of China’s hotwater is generated by solar technology. Forthe 2008 Olympics, Suntech installed a 130kilowatt solar energy system at the BeijingNational Stadium. In a boon to solar cellproducers like Suntech, the Chinese gov-ernment recently promulgated the nation’sfirst renewable energy law, which encour-ages utilities to use renewable resources forat least 15 percent of their output by 2020.

Like China, the United States is poisedto become a large market. Suntech has pro-vided systems for a number of high-profileinstallations in the U.S.: an 8 megawattproject for the Alamosa Power Plant inColorado; a 1.6 megawatt project forArizona State University; and a 1.6megawatt project for Google’s Californiaheadquarters, which provides enough elec-tricity to meet 30 percent of the “Google-plex’s” peak electricity needs. Suntech isactively looking for factory space in theUnited States as part of its plan to pene-trate this key market.

Despite strong prospects for futuregrowth, the surge in the number of newsolar cell manufacturers has taken its tollon the industry. According to industryresearch, solar panel output is expected to increase 62 percent from 2008 to 2009,while installed panels are only expected toincrease 10.5 percent.

Shi acknowledges that it will be toughgoing in the short run but is abundantlyoptimistic about the company’s marketposition in the long run. Suntech’s cultureof cost consciousness and innovationremains, as Shi relentlessly focuses onimproving conversion e∞ciency, theamount of electricity derived from a unit of silicon. Solar analysts project that every1 percent increase in conversion e∞ciencyresults in a 6 percent cost reduction. InMarch 2009, Suntech announced the suc-cessful development of a new breed of pho-tovoltaic cells (dubbed “Pluto”) with rou-tine conversion e∞ciencies of 17 to 19 per-cent. Conventional technologies producecells with e∞ciencies of 15 to 16.5 percent.

Although government policies are stillan important driver of solar industrygrowth, Shi is confident that the continuedadoption of solar energy will be deter-mined by private sector cost considera-tions. His goal for Suntech is to achievegrid parity (the point at which solar energy

costs the same as energy from competingfossil fuels) by 2012, an ambitious objectiveby any stretch of the imagination. But whystop there? Shi predicts that in the nearfuture, “solar will be cheaper than coal or gas.”

23

Suntech Headquarters in China.

Production of PV modules at the Suntech plant in China.

Yale has produced excellent long-term investment returns. Over the ten-year period ending June 30, 2009, the Endowment earned an annualized11.8 percent return, net of fees, surpassing annual results for domesticstocks of -1.2 percent and domestic bonds of 6.0 percent, and placing it inthe top one percent of large institutional investors. Endowment outper-formance stems from sound asset allocation policy and superior activemanagement.

Yale’s long-term superior performance relative to its peers andbenchmarks has created substantial wealth for the University. Over theten years ending June 30, 2009, Yale added $5.1 billion relative to its composite benchmark and $10.1 billion relative to the average return of a broad universe 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 11.4 percent, exceeding the passive benchmark of the One-YearConstant Maturity Treasury plus 6 percent by 1.1 percent per year andbesting its active benchmark of hedge fund manager returns by 4.5 per-cent 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, 2009, the domestic equity port-folio returned an annualized 7.4 percent, outperforming the Wilshire5000 by 8.7 percent per year and the Russell Median Manager return by7.9 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 6.4 percent over the past decade, exceeding the Barclays Capital 1-5Year U.S. Treasury Index by 0.4 percent per year and the Russell MedianManager return by 0.7 percent per year. By making astute security selec-tion decisions and accepting a moderate degree of illiquidity, the Endowment benefited from excess returns without incurring materialcredit or option risk.

Investment Performance

5

24

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

$5000

$4000

$3000

$2000

$1000

0

Endowment InflationMean of Broad Universe of Colleges and Universities

Performance by Asset Class

Yale’s Performance Exceeds Peer Results1999 to 2009, 1999=$1,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

$5000

$4000

$3000

$2000

$1000

0

Endowment InflationMean of Broad Universe of Colleges and Universities

The foreign equity portfolio generated an annual return of 13.5percent over the ten-year period, outperforming its composite benchmarkby 6.9 percent per year and the Russell Median Manager return by 7.2percent per year. The portfolio’s excess return is due to astute countryallocation and e≠ective security selection by active managers.

Results from Yale’s non-marketable assets demonstrate the valueof superior active management. Private equity earned 25.8 percent annu-ally over the last ten years, outperforming the passive benchmark of Uni-versity inflation plus 10 percent by 11.5 percent per year and the return ofa pool of private equity managers compiled by Cambridge Associates by15.4 percent per year. Since inception in 1973, the private equity programhas earned an astounding 30.4 percent per annum.

Real assets generated a 13.5 percent annualized return over theten-year period, outperforming the passive benchmark of Universityinflation plus 6.0 percent by 3.4 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.

25

30%

25%

20%

15%

10%

5%

0%

-5%Absolute

ReturnDomestic

EquityFixed

IncomeForeign 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: Barclays Capital 1-5 Year U.S. Treasury IndexForeign Equity: Blend of msci eafe Index, msci emf

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

Yale Asset Class Results Beat Benchmarks1999–2009

Timber is one of the world’s most abun-dant and flexible renewable resources.When managed responsibly and harvestedsustainably, timber is an environmentallyfriendly option for use as both a fuel and a building material.

Governments across Europe andCanada recognize timber as a source ofrenewable energy and support initiatives to promote the expansion of wood pelletheating. Wood combustion releasesapproximately the same amount of carbonas natural biodegradation and representsan emissions saving of 98 percent whencompared to burning equivalent units offossil fuels. Most wood pellets are madefrom timber scrap that would otherwiseend up unused, making pellets an econom-ically attractive heating option. There areapproximately one million pellet stovescurrently in operation in the United States;many environmental groups are eager tosee these numbers rise.

Lumber also represents a carbon savingscompared to materials such as steel whenused during construction. Wood productsare large reservoirs of sequestered carbon;after wood is harvested, it stores indefin-itely the carbon dioxide accumulated dur-ing the growth process. In a 2004 life-cycleinventory comparison of the environmentalimpact of steel-frame residential homesand wood-frame residential homes, theConsortium for Research on RenewableIndustrial Materials (corrim) found thatwood-framed houses required around 17percent less energy and emitted 26 percent

to 31 percent less carbon dioxide during theconstruction process when compared tosimilar-sized steel-frame houses.

Kroon Hall is Yale’s greenest building inboth senses of the word: it is the newestand the most environmentally friendly.One feature that makes Kroon Hall amodel in green design is its extensive useof wood. Locally sourced, sustainably har-vested red oak is used throughout thebuilding. Kroon Hall is one of the largestbuildings in the U.S. to receive a platinumLeadership in Energy and EnvironmentalDesign (leed) rating.

In the early 1990s, Yale identified tim-berland as a misunderstood and ine∞-ciently priced asset with risk-return charac-teristics that complement the University’sinvestment portfolio. Similar to other realassets, timber provides attractive diversify-ing characteristics, protection againstunanticipated inflation, and potential togenerate outsized returns through activemanagement.

Yale’s timber investments are focused inNorth America. At the end of fiscal 2009,the University’s interests comprised overthree million acres, roughly equivalent tothe size of Connecticut. The University’stimber interests are all managed in a sus-tainable fashion, with over 99 percent ofacreage certified through either the ForestStewardship Council or the SustainableForestry Initiative, the two most prominentforestry certification organizations in theUnited States.1

In addition to focusing on sustainableoperations, the University’s investmentmanagers actively work with environmen-tal groups to establish conservation ease-ments, setting aside large tracts of landthat are removed from consideration fordevelopment. Groups that have partnered

Timber Investments

26

The tree species illustrated on these pages are common in Yale’s forest holdings. The poplar (gen. populus),above, of the Salicaceae family, is a deciduous tree native to most of the northern hemisphere. The yellowpoplar, in particular, is one of the tallest hardwood trees in North America. Its wood is used in buildingfurniture and musical instruments, among other objects.

1Certification is a voluntary process by which forestrycompanies verify, with the oversight of an independentauditor, that forests are being managed to protect theircapacity as a renewable resource, minimize harm to old-growth tree stands, and avoid disruptions to the surround-ing ecosystem.

The larch (Larix europaea) is an evergreen commonat higher altitudes up to 5,000 feet. Its highlydurable wood is widely used for posts and in earlier times served to make pipes.

with Yale’s managers in this programinclude the Nature Conservancy and the Trust for Public Lands. Over the lastdecade, the University’s partners have created nearly 650,000 acres of conserva-tion lands through easement programs.

In recent years, Yale’s timberland man-agers have become increasingly involved inalternative energy projects that curtail car-bon dioxide emissions. For example, bio-mass refinement technologies help timber-land owners dispose of pre-merchantabletimber and waste wood, turning scrap into a clean source of power. Continuedimprovements in gasification technologycould help develop biomass facilities intosignificant suppliers of energy. Cellulosicethanol, although still unproven, holds the potential to provide clean energy. Wind farm development on forestlands represents yet another opportunity inwhich the Endowment’s managers seeabundant potential.

Wind Developments

The wind industry has grown tremen-dously in the past few years. In the UnitedStates, installed wind generation capacityhas grown from 2,579 megawatts (mw) in 2000 to 25,410 mw at the end of 2008,enough capacity to power over 5.5 millionhomes. One driver of this remarkablegrowth has been rapid technologicalimprovement; since 1996, the average cost of wind power generation has fallen by half as turbine sizes and e∞ciency haveincreased.

The ultimate amount of energy pro-duced by a windmill is a function of twofactors: wind speed and consistency. Givenan average wind speed for a site, the capac-ity factor measures the actual energy out-put from a wind turbine as a percentage ofits rated capacity. For instance, a 100 mwproject on a site with a capacity factor of 30percent would generate an average outputof 30 mw per hour over the course of theyear, enough electricity to power over25,000 homes. More consistent windmeans a higher capacity factor and morepower generation. Generally, capacity factors above 25 percent are su∞cientlyattractive to garner the interest of develop-ers; capacity factors above 35 percent arevery good.

Yale’s timber interests span long stretches of contiguous ridgelines with the strong, consistent winds necessary forwind farms to be economically feasible.Beginning in 2007, Yale’s managers, in con-junction with local wind power develop-ment firms, have identified several siteswith attractive capacity factors. The Uni-versity’s partners have initiated develop-ment for a handful of sites.

Investments in wind on Yale lands couldprovide a meaningful economic return tothe Endowment while helping the Univer-sity achieve its sustainability goals. Yale’swind power projects could play a criticalrole in helping Yale reach its stated goal

of reducing 2020 emissions to 10 percentbelow 1990 levels, furthering Yale in itsquest to become the world’s greenest university.

27

Douglas fir, above, another tree common in the northeastern U.S. where Yale forests are located, is an ever-green coniferous of the Pseudotsuga genus. The name honors nineteenth-century Scottish botanist DavidDouglas, who introduced many American plant species to the old world. One of the strongest coniferoustrees, Douglas fir wood has many uses in construction.

Beginning in 2007, Yale’s managers, in conjunctionwith local wind power development firms, haveidentified several sites that can support projectswith capacity factors of over 30 percent. TheUniversity’s partners have initiated development for a handful of wind farm sites.

The southern pine is noted for its tall, straightgrowth habits, which make it suitable for poles aswell as for lumber, flooring, and pulpwood. Itsdensity makes it one of the strongest soft woods.The longleaf (Pinus palustris, Mill.), o∞cial statetree of Alabama, has cones about seven inches longand can reach heights of about 150 feet, although its growth is very slow in its first years.

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 InvestmentCommittee 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 andOversight

6Investment 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

James Leitner ’75PresidentFalcon Investment Management

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

Henry F. McCance ’64Chairman EmeritusGreylock Management

William I. Miller ’78 ChairmanIrwin Management Company

Ranji Nagaswami ’86 m.b.a.Former Chief Investment O∞cerAllianceBernstein Investments

Honorable Barrington Parker ’65, ’69 ll.b.JudgeUnited States Court of Appeals for the Second Circuit

Dinakar Singh ’90ceo and Founding Partnertpg-Axon Capital

Fareed Zakaria ’86EditorNewsweek International

28

29

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

Anne MartinDirector

Timothy R. Sullivan ’86 Director

Stephanie S. Chan ’97Associate General Counsel

Deborah S. ChungAssociate General Counsel

Kenneth R. Miller ’71 Associate General Counsel

Michael E. FinnertyAssociate Director

Suzanne K. WirtzAssociate Director

Celeste P. BensonSenior Portfolio Manager

Carrie A. AbildgaardSenior Associate

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

R. Alexander Hetherington ’06Senior Financial Analyst

Matthew S. T. Mendelsohn ’07Senior Financial Analyst

Tess A. Dearing ’09Financial Analyst

Jonathan Rhinesmith ’08Financial Analyst

John V. Ricotta ’08Financial Analyst

Michael R. Schmidt ’08Financial Analyst

Cain P. Solto≠ ’08Financial Analyst

Nilesh V. Vashee ’09Financial Analyst

Xinchen Wang ’09Financial Analyst

Harkness Tower, seen from Branford courtyard.

Yale’s Recycling ProgramsLike many Yale institutions, the Univer-sity’s recycling programs began with thee≠orts of dedicated and passionate stu-dents. In 1970, several undergraduatesbanded together to form Yale Recycling.They went door-to-door on a mission tocollect recyclable paper from Yale depart-ments and o∞ces. The group relied on stu-dent volunteers and an old station wagon.A decade of operations transformed YaleRecycling into a small business of sorts—the University paid Yale Recycling for pick-up and hauling services, while the studentsarranged for transportation and storagelogistics. The addition of a box truck, courtesy of an anonymous donor, greatlyimproved Yale Recycling’s haulage. By1988, Yale Recycling collected over 200tons of paper per year. Still, the operationdepended on informal student participa-tion and was “really hippy dippy,” accord-ing to Cyril May (m.e.m. 1989), the cur-rent head of Yale’s recycling operations.

Beginning in 1991, the State of Con-necticut imposed a series of mandatoryrecycling laws. At around the same time,Yale’s waste disposal costs, which had beenas low as $15 per ton, rose rapidly to $98per ton. Although the e≠orts of YaleRecycling alleviated some of the Univer-sity’s mounting trash problems, the stu-dent group was operating at capacity at atime when Yale required a larger program.Administrators asked May, an active YaleRecycling member then in his final year at the School of Forestry & EnvironmentalStudies, to study the University’s wastestream and propose an expansion of recy-cling e≠orts. May’s research became thebasis of his master’s thesis, in which heproposed the establishment of a Yaledepartment with professional sta≠ to coordinate recycling initiatives betweenstudents, academic and administrative

o∞cials, and custodial and maintenanceworkers. In 1990, he received a call fromYale inviting him to implement the propos-als he made as a student.

Yale Recycling is now a Universitydepartment that May runs from his o∞cesin the basement of Welch Hall on OldCampus. Despite a ground-swell of sup-port from students and administrators,Yale’s recycling rate stalled at 22 percent in2008, the latest year of record. May positsthat the University could easily double thisrate. In the past several years, the Univer-sity has experimented with a number ofprograms to reduce the amount of wastethat ends up in landfills.

All in Good Waste

An obvious place to start is one of Yale’slargest o≠enders: the dining halls. Eachyear, Yale produces roughly 500 tons offood waste, which includes pantry waste(moldy English mu∞ns), preparation foodwaste (discarded eggshells), serving waste(Elis’ unclaimed breakfast sandwiches),and plate waste (uneaten bacon sent downthe Commons conveyer belt). The firstthree categories of waste end up in thedumpster, while plate waste is processedand poured down the drain.

Food waste disposal used to be a rela-tively no-hassle, low-cost process. As lateas 1990, local farmers used Yale dining hallleftovers as hog feed. The decline of theregional farming industry combined withfears about trichinosis led to the dissolu-tion of this arrangement. Connecticuteventually enacted a law that prohibitedfeeding post-consumer food to livestockunless that food is re-cooked, a costlyprocess. Currently, most food waste ishauled away by the University’s contractedtrash hauler and any processed plate wastesent down the drain goes to Connecticut’s

Water Pollution Control Authority, wherethe liquid is treated before being piped outto Long Island Sound. For this service, the University currently pays upwards of$100,000 beyond normal sewage fees, withcosts projected to rise to $200,000 in thefuture.

In 2005, Yale College senior GiovanniZinn found a better place to stash dininghall grease: Yale shuttle buses. With a$25,000 grant from the Yale Green Fund, a$1 million fund established by the O∞ce ofthe Provost in 2002 to support University-wide environmental initiatives, Zinnworked with Chemistry department sta≠member David Johnson to build a proces-sor that turned fry oil into biodiesel. Zinnfilled his truck’s tank with his homemadebiodiesel and was pleased to find that it ranperfectly well. Yale Recycling organizedstudents to collect dining hall grease,allowing Zinn to produce enough biodieselto power the furnaces at Yale’s BethanyObservatory Station. The manager of Yale’sshuttle service soon got word of Zinn’s fueland decided to start using a mixture of 20percent biodiesel in the shuttle fleet. Yale’sgrease processor was shut down in 2006,but the University’s shuttle buses continueto run on a biodiesel mix.

Beginning last summer, Yale Recyclingexpanded its recycling target to include allorganic waste generated by the University’sdining halls. May’s team introduced a pilot program at Commons, Branford,Saybrook, and Berkeley that aimed to turnunused food into compost, which couldthen be sold to the local Lowe’s and HomeDepot. Yale Recycling convinced dininghall sta≠ers to collect organic waste in spe-cially designated, compostable bags andcontracted with recycling services and NewMilford Farms for pick-up and compostingservices. While the plan was received withenthusiasm by participants, unforeseen

Student workers during annual Earth Day celebration.

30

Using an electric truck, sta≠ers load clothing andother items donated by departing Yale students aspart of the University’s annual Spring Salvage program, which collects more than 50 tons ofdonations per year.

Students conducting a waste stream analysis oftrash on Old Campus.

problems soon dampened spirits: bagscouldn’t mask the smell of rotting food,leaks left kitchen floors stained and sticky,and thrice-weekly scheduled pick-upscouldn’t keep up with the mounting gar-bage. Commons alone generates roughly4,500 pounds of biodegradable waste perweek. Stockpiling several hundred poundsof rotting food on any given day wasbecoming untenable.

Lacking su∞cient funding to installindustrial composting facilities, which cancost several million dollars, Yale Recyclingbegan a trial with the Somat Company, amanufacturer of pulpers and water extrac-tors that turn food waste into a semi-drypulp, reducing waste weight by 80 percent.Although nobody has figured out quite yet what to do with the pulp, Somat’smachines prevent organic pollutants from going down the drain (and into theoceans) and reduce the University’s refusehandling fees. Yale Dining Services andFacilities are currently evaluating the trial.

Spring Forward Salvage Back

Like Yale’s dining hall recycling programs,Spring Salvage has evolved into its currentform through a process of trial and error.In the weeks after graduation, Yale’s dump-sters overflow with the discarded para-phernalia of dorm life—mini-fridges, hotplates, and the occasional Scooby Doo cos-tume. Over a decade ago, May gathered ateam of students to collect reusable items(mostly clothing) for donation to the localSalvation Army. Yale Recycling lacked thelogistical resources to collect heavier items,such as furniture. By 2000, Yale Recyclingwas donating approximately eighteen tonsof clothing a year.

In 2005, Sara Smiley Smith and H.Dean Hosgood won a $9,000 grant fromthe Green Fund to expand and institution-alize Spring Salvage. Smith and Hosgoodworked with Yale Facilities to locate storagespace, a key missing component from prioryears, and used Green Fund support torent an additional truck. The storage spacegreatly improved the salvage workers’ ability to sort and distribute the haul fromSpring Salvage. In a move that was criticalto the success of Spring Salvage, Smith andHosgood began to place collection binsdirectly next to entryway doors, making itmuch easier for students to recycle thandiscard (dumpsters were located in theback of the colleges).

Most importantly, Smith and Hosgoodintroduced the concept of Zone Leaders,

students who coordinated the e≠orts ofstudent recycling workers and custodialsta≠. The lack of logistical coordinationhamstrung previous recycling e≠orts.Mismatched schedules created a significantamount of friction; custodial sta≠ werefrustrated by the students’ absence in theearly mornings, when the custodial work-days typically start, while students com-plained that custodians were impossible toreach after 3:30 pm. Moreover, the partieshad conflicting goals: Recycling wanted tosave as much as possible, while Mainten-ance and Facilities wanted trash out of thedorms, into the dumpsters, and o≠ thegrounds as soon as possible. Zone Leaderseased these tensions by providing a singlepoint of contact for all parties involved.

With new resources and a more e∞cientcommunication system in place, SpringSalvage became one of Yale’s most success-ful recycling events. In 2007, over 54 tonsof student items were collected duringSpring Salvage, a 40 percent increase fromthe haul in 2006 and a whopping 302 per-cent increase from 2005. In 2008, Yale'scollection efforts resulted in 60 tons ofmaterial being recycled. The Universitydonates over 80 percent of the collecteditems to local charities, with the rest goingto international disaster relief organizationsor recycling facilities.

Spring Salvage has collected a numberof unusual items, including an Xbox, a lap-top, an espresso machine, and an unusedangora sweater. The recycling e≠ort, whichhas a “take it or leave it” philosophy that

encourages student workers to keep thingsthat they can use, has become a popularemployer for students looking to outfitnext year’s dorms. Smith once found aChinese armoire. She kept it for her apart-ment. She also kept Hosgood, who is nowher husband.

Even with the success the SpringSalvage enjoys, more can be done. Forexample, with current resource constraints,salvage workers are unable to sort usedbooks, a potentially significant source offunding for New Haven’s local charities.Even more than additional resources,Smith hopes that Yale’s recycling e≠ortsmight encourage students and businessesto think twice about the culture of dispos-ability. Smith recalls one year in whichSpring Salvage collected several hundredunused Commerce Bank plastic water bot-tles, the result of a campus promotion thebank ran during the school year. Althoughcollege students might never be convincedthat buying (and keeping) a durable book-shelf is superior to using (and discarding)a cheap plywood alternative, Smith hopesto increase awareness that when it comes to“stu≠,” reduce and reuse go hand-in-hand.

In the meantime, Yale Recycling is onhand to help with the reuse portion of the equation. May’s office has received agroundswell of support. He notes withpride that recycling has evolved from its“hippy dippy” past to become an integralfeature of the Yale community, and today,he happily observes, recycling “is some-thing that Yalies do.”

31

Sneakers are recycled through Nike’s Reuse-a-Shoe program.

32

Sources

Financial and Investment Information

Educational 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 11-15, 24-25Educational institution asset allocations andreturns from Cambridge Associates.

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A view of Kroon Hall from the south, near Sachem Street.

Acknowledgments

Special thanks to:

Eric Dresselhuys, Silver Spring NetworksCyril May, Yale UniversityJulie Newman, Yale UniversitySara Smiley Smith, Yale University

Photo Credits

Front cover: Steve Dunwell Photography, Inc., Boston

Pages 1, 12, 13, 14, 20, 29, inside back coverMichael Marsland, Yale O∞ce of PublicA≠airs

Page 6Yale O∞ce of Sustainability/O∞ce ofFacilities

Page 8 (left)Manuscripts and Archives, Yale UniversityLibrary

Pages 8 (right), 9 (above), 10Harold Shapiro

Page 9 (below)Robert Bensen

Page 16 Courtesy of Silver Spring Networks

Page 17-18Courtesy of Mascoma Corporation

Page 21Courtesy of Zhong Hang Huiteng WindPower Equipment Co., Ltd. (HT Blade),Hebei province, China

Pages 22-23Courtesy of Suntech Power Holdings Co., Ltd.

Pages 26-27 iStock Photos

Pages 30-31 Yale Recycling

DesignStrong Cohen/D. Pucillo