Investment lessons from Yale University endowment


Summary

The Yale University endowment has become the best performing endowment fund among its peers. David Swensen, the Chief Investment Officer of the university, developed a robust investment process that can also be applied to family office investments.

Introduction

University endowments are long-term investment vehicles with the purpose of supporting the teaching, research, and public service missions of colleges and universities.

The Yale University endowment was established in 1718 from an initial contribution of £562 and has grown to be worth more than $30 billion over the ensuing 300 years. Under the guidance of David Swensen, the Chief Investment Officer of the fund, the endowment has comfortably generated annual returns ahead of any of its peers since the mid-1980s. During the first 20 years of managing the fund, Swenson managed annualised returns of 16.1 percent. For that achievement, he earned the nickname "Yale's 8-billion-dollar man" in reference to growing the endowment from $1 billion in 1985 to nearly $8 billion by 2005. The endowment value currently totals more than $30 billion. Over the past 30 years, Yale's investments have returned an unparalleled 12.6 percent per annum, adding $32.7 billion in value.

Yale investment model

The investment model developed by Swensen consists of dividing a portfolio into five or six equal parts and investing each in a different asset class. Central to the model is broad diversification and a focus on equities, avoiding asset classes with low expected returns such as fixed income and commodities.

Given the long investment horizons of these types of funds, the model advocates for a significantly higher allocation to alternative assets, such as venture capital and private equity. Alternative investments tend to behave differently than typical listed investments; adding these to a portfolio improves diversification and enhances long-term returns.

Another unconventional asset class preferred by the endowment is emerging businesses. The Yale University endowment was an early investor in famous technology companies such as Google, Amazon, Facebook, LinkedIn, and Airbnb.

The endowment has more recently moved away from investments in companies that have a large greenhouse footprint and companies that do not make reasonable efforts to reduce carbon emissions.

Swensen warns that poor asset allocation, ill-considered active management, and perverse market timing are the main errors made by investors. He provides three main points of investment advice:

Conclusion

The Yale model of managing long-term investment portfolios offers valuable guidance for family offices in search of sustainable capital preservation and growth.



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