The Yale Model and University Endowments
Everything has its limits, no matter how well you had planned it. We will look at one of the most successful university endowment model to get some insights.
The Yale model, named after David Swensen at Yale university, invested a wide range of "alternative assets", like private equity fund and hedge fund to diversify asset allocation besides conventional equity and fixed income assets. In addition to these, real estate investment is also an important component in the portfolio, which is relatively less liquid. For universities, this is usually fine because universities do not need high liquidated asset for short term. More importantly, alternative assets reduce volatility from equity markets. So this is by and large a diversified strategy.
This model was widely successful in the years since its inception until the 2008 crisis hit. Yale University endowment, for years under Swensen's leadership, provided double digit return. The model has been duplicated too. For example, the University of California endowment, follows the same pattern: as from the record on December 21, 2009, UC Regents has total securities $5.7B. Assets were allocated in equity ($2.6B), fixed income ($1.1B), and alternative assets ($2.0B) (data is from State Street). In particular, alternative assets include private equity and real estate.
The model hit a wall in 2008. Nationally, the value of college endowments declined by 23 percent in the fiscal year, which ended in June 2009. The Yale endowment lost 25% and Harvard lost $10B or 30%. Among the Golden State's major players, Stanford University saw a 26.7% drop in endowment value in 2009, to $12.6 billion. The UC Regents' endowment assets took a 20.6% dive, to $4.9 billion, and the University of Southern California plunged 25.6%, to $2.7 billion. Given universal equity loss in 2008/2009, illiquid alternative asset did not provide much diversification but worked against overall performance. In other words, when liquidity was much needed, the portfolio did not come to rescue.
That brings up a question: what else could have or can be done? The Yale model is the most diversified allocation that scatters around all available financial tools. Should endowments be more concentrated in equity and fixed income to have high liquidity? Recall that the equity market was hammered by about 30% in 2008/2009, it is interesting to see that the Yale model didn't provide much diversification compared to a simple S&P 500 index fund when such large scale crisis came. In other more plain words, no matter what have been done, the disaster could not be avoided, as long as you were in the market.
This is why "black swan" always has its supporters.
The Yale model, named after David Swensen at Yale university, invested a wide range of "alternative assets", like private equity fund and hedge fund to diversify asset allocation besides conventional equity and fixed income assets. In addition to these, real estate investment is also an important component in the portfolio, which is relatively less liquid. For universities, this is usually fine because universities do not need high liquidated asset for short term. More importantly, alternative assets reduce volatility from equity markets. So this is by and large a diversified strategy.
This model was widely successful in the years since its inception until the 2008 crisis hit. Yale University endowment, for years under Swensen's leadership, provided double digit return. The model has been duplicated too. For example, the University of California endowment, follows the same pattern: as from the record on December 21, 2009, UC Regents has total securities $5.7B. Assets were allocated in equity ($2.6B), fixed income ($1.1B), and alternative assets ($2.0B) (data is from State Street). In particular, alternative assets include private equity and real estate.
The model hit a wall in 2008. Nationally, the value of college endowments declined by 23 percent in the fiscal year, which ended in June 2009. The Yale endowment lost 25% and Harvard lost $10B or 30%. Among the Golden State's major players, Stanford University saw a 26.7% drop in endowment value in 2009, to $12.6 billion. The UC Regents' endowment assets took a 20.6% dive, to $4.9 billion, and the University of Southern California plunged 25.6%, to $2.7 billion. Given universal equity loss in 2008/2009, illiquid alternative asset did not provide much diversification but worked against overall performance. In other words, when liquidity was much needed, the portfolio did not come to rescue.
That brings up a question: what else could have or can be done? The Yale model is the most diversified allocation that scatters around all available financial tools. Should endowments be more concentrated in equity and fixed income to have high liquidity? Recall that the equity market was hammered by about 30% in 2008/2009, it is interesting to see that the Yale model didn't provide much diversification compared to a simple S&P 500 index fund when such large scale crisis came. In other more plain words, no matter what have been done, the disaster could not be avoided, as long as you were in the market.
This is why "black swan" always has its supporters.
posted by Intl.investment.services at
9:19 PM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home