1. How is Yale’s investment philosophy reflected in its strategic asset allocation?
Yale’s investment philosophy is one of the critical factors that played into the success of the fund’s performance in the past years. The philosophy is based on 5 principles: focus on equity, diversification, opportunities in inefficient markets, outside managers and alignment of manager’s incentives with Yale’s interests. In the paragraphs below I will discuss how each of these principles is reflected in the endowment’s asset allocation, as shown from Exhibit 1.
Yale’s belief in equities is reflected through the endowment’s heavy allocation in equity from 1985-2010. The weight allocation, however, is heavier in the earlier years (1985-1999) than in later years (1999-2010). In the early years, the allocation equity (both domestic and foreign) has been higher than other class assets. From 2000- onwards, allocation to other asset class such as private equity, real assets, and absolute return starting to rise and dominate the asset portfolio. By 2010, the weight of real assets (27.5%), private equity (30.3%), and absolute return (21%) individually are higher than the weight of both equities combined (16.9%). This is not exactly in line with their philosophy focusing on equities.
Yale’s second philosophy is diversification to reduce risk by limiting exposure to any single class. This is reflected in their asset allocation over the years. In Exhibit 1, Yale has been consistently investing in 6 asset classes: domestic equity, foreign equity, bonds, cash, real assets, private equity, and absolute return. While the weight of these asset class changes over time, Yale maintain their philosophy and still invest in all of these class. They change the weight in a particular class if they feel that market misvalued a particular class and therefore opportunity for further gain.
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