China in Yale University Endowment

Chidem Kurdas

China’s Shanghai Composite index is at a six-month low after premier Wen Jiabao said there is “huge pressure” on the Chinese economy.  This is not altogether a surprise. The economy has been slowing down.  Short seller James Chanos predicted a bust in Chinese markets for some time. Some US investors sold off their holdings in 2011 or early this year.

But not Yale University—at least, not as far as its direct foreign equity portfolio goes. The endowment invests most of its assets in hedge funds, private equity, natural resources and real estate. But a portion of the around $19 billion is in index funds. Interestingly, these were led by the Vanguard MSCI Emerging Markets ETF and the FTSE/Xinhua China 25 index (as of April).

Chief investment officer David Swensen and his team have in the past identified China and India as offering the most compelling long-run opportunities. That view may be adjusted for the current downturn but Mr. Swensen is known for favoring long-term perspectives.

The Yale endowment has done exceptionally well with foreign stocks, making 18.6% annually over the past 10 years through 2011 and beating its benchmarks by a wide margin. The investment team attributes this high return in part to country selection—China and India boosted performance.

Still, during the 2008-2009 slump endowments suffered steep losses in emerging markets equity.  Mr. Swensen may rue not selling the EM and in particular China indexes earlier. Then again, he may be determined to keep some exposure.


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