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    The Yale Endowment Fund

    Ian has spoken before of the high regard that the Yale Endowment Fund is held in. Their performance over the long term has been outstanding. They are pioneers in identifying and implementing cutting edge investments that have helped them to produce these outstanding returns.

    I have had a look at their 2007 report, and it certainly is an impressive outfit. As at 30 June 2007 the fund was $ 22.5bn in size having returned 28% for the year (in USD). The previous three years saw the fund return 22.9% (2006), 22.3% (2005), and 19.4% (2004) growing almost $ 10bn in this time!

    In Yale’s case the Endowment is now so large that last year they were able to spend $ 684 million (which was 33% of the university’s budgeted revenue). They have got to this stage as a result of the fund’s superb performance. The superb performance is down to both their excellent asset allocation decisions and also due to the fact that they have been able to outperform each of their asset class’ benchmarks over time.

    Below is a list of the assets and their weighting in the portfolio. You will notice that there is a fairly even spread across the asset classes, and there is a relatively low correlation between these assets. Importantly there is only a 5.9% exposure to assets that can be deemed as ‘non growth’ assets, bonds and cash. The rest of the funds are invested into growth assets.

    Absolute Return (23.3%) – Yale’s endowment looks to invest in event and value driven strategies which looks to generate a real return of 6% per annum with standard deviation half to three quarters of the stock market, but importantly with no correlation. The lack of correlation is important in that it reduces the volatility of the total portfolio by smoothing returns. This is done without reducing the return profile of the overall fund.

    Domestic Equity (11.0%) – You will notice that there is an extremely low allocation to local equity markets. Preference is given to other less researched assets.

    Fixed Income (4.00%) – They have a very small allocation to an asset class that has low return expectations, and only serves to reduce volatility.

    Foreign Equity (14.1%) – This amount is split between developed and developing economies. Expected returns from these assets are higher than the average, but they understand that there will be more volatility.

    Private Equity (18.7%) – The fund has used private equity as an asset class for a long time, and it has performed handsomely, returning 31.4% per annum since inception. This is down to the approach that is made with private equity firms whereby a partnership is created to enhance the fundamental value of the firm. Financial engineering (which is what a lot of private equity companies only do) is of only secondary importance.

    Real Assets (27.1%) – This includes investments into a wide variety of real assets including real estate, oil, timber, and other commodities. Real assets typically protect a portfolio against inflation, and provide stability in times of market turmoil. The assets are typically of an illiquid nature, but have returned 17.8% pa since inception of this investment in 1978 (turning $ 100 into $ 11 567).

    Cash (1.90%) – Residual cash holding.

    The importance of asset allocation to an investment strategy cannot be underestimated with over 90% of investment returns generated from this decision. It is important to have a formal strategy (like Yale) that invests into uncorrelated assets, and sets limits for each asset class.

    Ian has updated Seed’s 2 page monthly market summary, which looks at valuations of local and global markets and asset classes. This normally only goes out to our clients, but if you would like a copy, please sign up on our newsletter list and we will send it out early next week. Visit www.seedinvestments.co.za and sign up for the newsletter.

    Have a good weekend,

    Mike Browne

    Permalink2008-03-14, 16:51:57, by Mike Email , 4 comments
    Trackback address for this post: http://blog.sharenet.co.za/htsrv/trackback.php/689

    Comments, Trackbacks:

    Comment from: courtney ralphs [Visitor] Email
    how can one invest in this fund i am a new fairly unsuccessful trader/investor till now but i am seeking to change that any advisement or guidance would be greatly appreciated thank you for your time...courtney
    PermalinkPermalink 2008-06-21 @ 15:54
    Comment from: Mike [Member] Email
    Hi Courtney,
    Unfortunately individuals are unable to invest into this endowment, as it's managed purely for Yale's benefit. At Seed Investments we advise and manage our clients' investments on a similar basis, looking to spread their investments across various uncorrelated growth assets. Mike
    PermalinkPermalink 2008-06-23 @ 08:41
    Comment from: J. Emery Thibodeau [Visitor] Email
    How can I learn more about this fund and are there any investment firms that follow the Yale model?
    PermalinkPermalink 2008-07-28 @ 08:05
    Comment from: Registered Investment Advisor [Visitor] Email · http://www.mzcap.com
    Here is another article about Harvard/Yale endowments' multi-asset class approach. Our firm follows their model.
    PermalinkPermalink 2008-10-17 @ 05:44

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