5.1 Yale endowment asset allocation
The following activity examines the unusual aspects of the asset allocation of the Yale endowment fund.
Activity 9 Critiquing the asset allocation strategy of the Yale endowment fund
a.
Yale has most of its assets in US equities.
b.
Yale has more unlisted than listed equity.
c.
Yale has large real estate and natural resources assets which can increase in value over the long term.
d.
The high allocation to absolute return or investments designed to never have negative returns.
e.
The low allocation to domestic equities and bonds.
f.
Yale has more listed than unlisted equity.
g.
Yale aims to match the relevant indices.
h.
Yale uses portfolio theory to determine its asset allocation and alters this in subjective ways.
i.
Yale uses equal weighting for its asset allocation.
The correct answers are b, c, d, e and h.
Answer
Yale has a large percentage in assets which can be expected to increase in value over the long term – real estate and natural resources. This reflects its very long term time horizon. This is why Yale is less preoccupied with liquidity than other types of investor.
Yale has a very active strategy with respect to equity – it has more in unlisted (private) equity than in listed equity, but even the listed equity is chosen to be very different from a standard spread of US equities linked to, say, the S&P 500 index.
The high allocation to ‘absolute return’, in other words, investments designed to never have negative returns. These are often benchmarked relative to a 100% cash benchmark.
The low allocation to domestic equities and to bonds – just over 10% in total. This is very very different from the classic allocation of pension funds around the world of around 80% bonds plus equities.
Note how Yale uses mean variance analysis (Portfolio theory) to determine its asset allocation but also note how it alters this in a number of subjective ways.