Yale Endowment Fund Asset Allocation

An endowment fund or what is popularly known as a financial endowment is the name given to the money which is transferred to an institution which can differ from academic, to cultural and religious institutions. One of the most common and known names in this category is the Yale Endowment Fund. Yale endowment fund is known as the pioneer in the approach which followed the process of investing heavily in investments like real estate and private equity. David Swensen, in his career spanning 25 years, is credited with starting this

Yale Endowment Fund management.
Asset allocation allows investors to manage risks and their portfolio’s volatility. Portfolio owners can maximize their returns only by allocating their assets appropriately. It is not the funds or individual stocks in your portfolio that count but the manner in which investors chooses to combine the assets and give a proper structure to their portfolio so that they can increase their returns.

Yale Endowment Fund Asset Allocation approach has been received well by many investors. The model has produced great returns for many investors. A look at the Yale Endowment Fund Asset Allocation model suggests that the fund uses simple allocation methods and is yet amazingly effective.

Yale Endowment Fund Asset Allocation model focuses on investing in multi-asset class (including cash, bond or equity), which offers higher annual returns and reduces risk and volatility since the investor does not depend on one particular class of assets. The Yale Endowment Funds accesses the leading private equity, hedge and institutional fund managers, which is what makes them so successful and assures the investors of greater returns.

The Yale Endowment Funds Asset Allocation model relies mainly on the modern portfolio theory. The modern portfolio theory was designed by Professor Harry Markowitz who also won the Nobel Prize for designing the theory. The theory basically portrays how by simply diversifying assets that are variedly co-related with each other, investors can minimize risk and improve the returns from their portfolio.

The Yale Endowment Fund managers focus on five basic principles, which has become the very basis of the Yale Endowment Fund Asset Allocation model. These principles include, investing in equities, as being an owner is much better than being a lender, holding a portfolio that is diverse, fine-tuning asset allocations at extreme valuations and avoiding market timing, investing in private markets that do not have complete information and low liquidity to enhance returns on a long term basis, using managers from outside for all except the most indexed or routine investments and allocating capital to investment organizations managed and owned by people who actually do the investments on their own to minimize conflicts of interest.

Based on these very principles, the Yale Endowment focuses on diverse assets and has always invested primarily in equities. The success of the Yale Endowment Funds Asset Allocation model resulted in other lager endowments following the same model. In a matter of a decade that ended on 30th June 2008, Yale Endowment offered a return of 16.3 per cent on an annual basis to its investors. Yale Endowment Funds increased to 22.9 billion dollars from a mere 6.6 billion dollars in ten years.

The Yale Endowment Funds Asset Allocation model has been consistent in achieving higher investment returns and less volatility owing to its approach of investing in multi-asset class. Therefore, those investors who chose to shun the traditional model of investment and adopted the Yale Endowment Funds Asset Allocation have realized that the application of multi-asset class principles to a portfolio that is based on index is what that can help them in maximizing their returns.

The fund follows the following principles which are being described briefly below:

Increased Diversification, and re-allocation during the period of extreme valuation for the asset classes.

This model was followed for diversifying the endowment fund into different other portfolios for providing a cushion to the losses that might be in the offing for the fund. This model followed a simple principle of diversified portfolio carrying lower risks with higher returns.

Allocation of more funds to equity.

The principle behind this model was that it is always better to own something in return of your investment rather than lending money out as a mode of investment.

Using active managers rather than following an easy method of investment.

Yale actively pursued the policy of active approach of management strategies, with the planning to stay ahead of the market by some percentages year on year.

Hiring of outside investment firms.

This model was followed to ensure that there remains no conflict of interest between the managers handling the fund and the income generated by the fund. To ensure the same, Swensen hired external investment firms and other primary investors for handling the fund.

Increasing the fund allotment to private markets along with non-asset classes.

Non-asset classes or the commodities were added to the fund’s portfolio as it was believed and these commodities provide a better value than the normal equity as this class of investment carries low risk due to their low dependence on the equity and other markets.

Though these principles gave good results to Yale in the beginning but gradually they were criticized by financial gurus and fund managers world -wide. It had a bad year in 2009 with the fund suffering losses and was not left untouched by the financial crisis which had shaken the world market. Still, the consolation remains that though Yale suffered losses during FY09, it had always maintained that most of the fund is invested into asset classes which come with risk along with returns on a comparable table with private equities. Though, it is true that diversifying the fund can definitely provide with the shock absorbers that are required for protecting a fund as big as held by Yale, but still one cannot fight the abnormalities of the market. This fund comes with some important lessons for other big funds while also providing some important insights with small investors though it is advised not to blindly follow these models.

[The following is a guest post]

Yale Endowment Fund

The opportunities laid out for endowment funds benefit the students; as well as, the school itself.  In general, a university will be able to generate necessary funds through annual revenues generated from endowment funds.  Although particular schools will vary as to how these funds are allocated, it has remained to be an integral part in drawing out prestige and maintaining a status among the best of the best.  There are numerous endowment funds that support a wide range of programs within a university.  Some examples include: scholarships, fellowships, loans, professorships, research and development projects, and countless other special programs. There is no doubt that these donations; which may reach to the millions of dollars, have made an enormous impact on the school’s quality of education and enrollment.  One such school that maintains these high ideals and brings to reality the possibilities of acquiring excellence in all respects is Yale University.

Building the Foundations

Yale University and its law school has established several successful ways to place endowment funds at the peak of their purpose, accepting gifts that merit different programs and facilities to enhance teaching and offer students every resource to succeed.  As it were, certain amounts in gifts will merit a particular program to be named.  $500,000.00; for example, will allow the creation of a research fund.  A gift of several millions will name a certain position within the faculty, depending on the amount.   Most endowment funds will go toward continuing advancements in student opportunities; both for undergraduate and graduate courses.  Under the graduate program, $7 million will name students as tutors, scholars, and program directors.  While some gifts will create an endowment fund that will directly benefit the law school and its initiatives to sustain innovative programs, others will impact the surrounding facilities.  These endowment funds may encompass the development, renovation, or construction of different buildings, classrooms, halls, library, and other structures within the scope of the learning environment.

Shaping the Future

One of the main objectives of endowment funds; at least within Yale, is to create a future that is rich in educational resources and to create career opportunities.  This is done through various forms of development found by way of endowments.  Perhaps the most important aspect would be in establishing scholarships programs to assist in the growth and development of students.  In fact, a pledge of $10,000.00 to $50,000.00 will undoubtedly aid in the payment of tuition fees, which can be spread in increments within a period of approximately five years.  It is financial aid; in this respect, that sets standard for progress and ultimate success; especially for Yale University.  In its rich history, Yale has proved itself to be among the top universities in the world.  Its efforts in establishing endowment funds have truly made the school shine above many others.  It has used resources appropriately to the advantage of its students and those who dream of getting quality education.  Endowments given are not only gifts to the school, but they are gifts to ensure a more successful future.

What makes Yale Endowment Fund interesting is that its asset allocation model could perhaps offer us insights into our own asset allocation and how we ought to manage our investment portfolio.  But that is perhaps best left to another posting.

First REIT again?

I have been monitoring First REIT for sometime after exiting it for a tidy profit a while back. First REITs had been consistently giving out good dividends. Its yield was relatively high compared to the other REITs and it also had a very low gearing of 15%. During the recession, the price dipped quite a bit but slowly recovered and I decided to lock in some profits and sold my entire stake in it.

The reasons for exiting it are mainly twofold. While it is a healthcare REIT, it does not really have a parent company to back it up. That is unless u consider Lippo to be its parent. The other thing that weighs heavily on my mind is that majority of its assets are based in Indonesia. There are thus country risks involved. And that is perhaps the reason why it is trading at a seemingly more attractive valuation than the other REITs counters. Personally, I did not want to hold something that was overly exposed and narrowly focused. And that was why I decided to exit it. A stock is cheap for certain reasons and the same applies to First REIT. It reminds me a bit of various s-chip shares I had held over the years because it was cheap when compared to its peers. Remember Unifood and Pfood?

The decision I took then was to start investing in blue chip companies and avoid stocks that were of a higher risk. And that will remain my strategy at least for the time being. I hope to liquidate my small cap stocks slowly and transfer them to bigger and better blue chips. Of course, we are in the midst of an expansion right now so I will perhaps wait a little longer before I start refocusing my efforts.

Though I was tempted to enter into First REiT recently, I shall resist it for the moment.

The Gone Fishing Portfolio

As most people will have heard before : "Never put all your eggs into one basket". 

This saying is perhaps what everyone hears when they first start investing.  But how many of us truly understand what it means to diversify?

When I first heard of this saying, I thought it meant not to put all my investment money into 1 single stock.  How wrong was I!  The proper interpretation of this saying should be " Never put all your money into stocks alone "

Asset allocation is perhaps the single most important determining factor of any investor's investment returns.  Based on the Nobel Prize Winning Modern Portfolio Theory, rational investors ought to use diversification to optimise their portfolios.  This does not mean just diversifying within stocks in a single stock exchange but across countries and across other investment instruments like bonds, gold, commodities, fixed income instruments, etc.

In the book Gone Fishing Portfolio, Alexander Green who is the investement director of The Oxford Club proposes an asset allocation that beats both the S&P500 in returns for both good years and bad years by just spending 15 minutes a year for making your investment decisions.

In the Gone Fishing Portfolio, the Vanguard mutual funds is chosen because of its low cost and also because it provides an excellent diversification opportunity.  5 principal long term investments are used : stocks, bonds, property, cash and precious metals.

Your eggs are spread around by diversifying into investment instruments that do not perform similarly so that your overall investment is protected in both good times and bad times.

Have you been burnt by the recent selloff in the stock market?  Has your networth depreciated significantly?  This could be due to the fact that you have placed all your eggs into a single basket called the stock market.  Perhaps it is useful to take this opportunity to diversify your assets so as to optimise your returns for both good years and bad years.

The proposed asset allocation mix under the Gone Fishing Portfolio is as follows:

Vanguard Total Stock Market Index (VTSMX) - 15%
Vanguard Small-Cap Index (NAESX) - 15%
Vanguard European Stock Index (VEURX) - 10%
Vanguard Pacific Stock Index (VPACX) - 10%
Vanguard Emerging Markets Index (VEIEX) - 10%
Vanguard Short-term Bond Index (VFSTX) - 10%
Vanguard High-Yield Corporates Fund (VWEHX) - 10%
Vanguard Inflation-Protected Securities Fund (VIPSX) - 10%
Vanguard REIT Index (VGSIX) - 5%
Vanguard Precious Metals Fund (VGPMX) - 5%