The Yale Endowment Fund is well known as the second largest university endowment fund, behind Harvard’s. For many years, Yale’s fund has also been the model for university endowment funds, including Harvard’s, espousing modern portfolio theory and reasonably high reliance on private equity and hedge funds. Many trustees may believe that these models can be utilized for family and charitable trusts as well.
The Yale Model, as developed by David Swensen (Yale’s Chief Investment Officer), has five basic principles:
Owning is preferable to lending, so prefer equities to bonds;
Maintain a diversified portfolio and re-allocate when asset classes are at extreme valuations;
Adding exposure to private markets increases long-term returns;
Use managers except for indexed or very simple investments; and
Use investment firms owned and managed by primary investors to reduce manager conflicts of interest.
- SPDR S&P 500 ETF Trust (NYSEARCA:SPY)
Description: Corresponds to the S&P 500 Index
Yale’s Position Value on 12/31/2010: $34,832,750 (277,000 shares)
Yale’s Position Value on 4/29/2011: $37,791,110
4 Month Performance: 8.49% increase
- iShares MSCI Emerging Markets Index (NYSEARCA:EEM)
Description: Corresponds to the MSCI Emerging Markets Index
Yale’s Position Value on 12/31/2010: $30,868,014 (647,916 shares)
Yale’s Position Value on 4/29/2011: $32,395,800
4 Month Performance: 4.94% increase
- iShares S&P 100 Index (NYSEARCA:OEF)
Description: Corresponds to the S&P 100 Index (Large Blend)
Yale’s Position Value on 12/31/2010: $7,197,090 (127,000 shares)
Yale’s Position Value on 4/29/2011: $7,740,650
4 Month Performance: 7.55% increase
- iShares MSCI EAFE Index (NYSEARCA:EFA)
Description: Corresponds to EAFE Index (Large Blend of Europe, Australia and Far East Asia)
Yale’s Position Value on 12/31/2010: $6,171,320 (106,000 shares)
Yale’s Position Value on 4/29/2011: $6,773,400
4 Month Performance: 9.75% increase
- Theravance Inc. (THRX)
Description: Biotechnology pharmaceutical company
Yale’s Position Value on 12/31/2010: $ 5,777,758 (230,465 shares)
Yale’s Position Value on 4/29/2011: $6,345,403.75
4 Month Performance: 10.69% increase
The first four appear in line with the Yale model and Swensen’s principles. The fifth, Therevance, appears slightly out of whack with the system unless it is considered to be a simple investment (and biotechnology is rarely simple). Therevance has also performed the best of the five, with over 10% appreciation in four months, even after being down 3.31% on the day of tabulation.
Prior to the recent financial crisis, many believed the techniques these clever funds utilized were bulletproof, and likely to produce above average positive returns regardless of the market’s direction. Since the middle of 2009, critics have begun to pop up, arguing that these funds held dangerously low levels of cash and high levels of illiquid alternative investments.
For example, Yale’s portfolio indicated a negative level of cash (-1.9%) in 2009, after setting a target of 0.5% cash. The fund subsequently set the 2010 target cash level to 4%. Additionally, the largest holding listed on Yale’s 13F-HR is currently worth less than $40 million, though the endowment is supposedly valued at over $16 billion. This must mean that the fund continues to dramatically favor private equity and hedge fund options.
Please share your opinions as to the Yale model as a choice for trust and general portfolio management.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.