No, You Shouldn’t Invest Like Yale

No, You Shouldn’t Invest Like Yale




by Roger Nusbaum, ETF Strategist, AdvisorShares

The Yale University endowment recently announced its return for the year ending June 30th, 2016 as well as its asset allocation targets for the current year. The endowment netted 3.4% but the overall size of the endowment declined slightly as the withdrawal exceeded the investment performance.

They published allocation targets as follows:

Absolute Return:        22.5%
Venture Capital:          16.0%
Foreign Equity:           15.0%
Leveraged Buyouts:    15.0%
Real Estate:                 12.5%
Bonds and Cash:         7.5%
Natural Resources:      7.5%
Domestic Equity:        4.0%

A look at the allocation seems like a logical follow up to last week’s post titled Allocation Efficiency. In years past we have looked at the allocations from Harvard as well as Yale and a couple of other similar pools of capital.

Zooming out a little, Yale says it wants a minimum of 30% in non-correlated assets which it believes includes cash, bonds and absolute return. It limits 50% of the portfolio to illiquid assets which it says includes venture capital, leveraged buyouts, real estate and natural resources. Back when Jack Meyer ran the Harvard Endowment he might have included timberland in illiquid asset bucket. Jeremy Grantham has been a fan of timberland in recent years as well.

It is not practical for the typical advisory client or individual investor to emulate Yale’s portfolio for a couple of big reasons; endowments have infinite time horizons and access to some of these market segments is either unavailable or the choices that are available aren’t so great. Venture Capital is an example of this. The press release does not mention private equity but I am assuming that they mean venture capital and while there are quite a few exchange traded products (funds and individual issues) that seek to track the private equity space one way or another there are far fewer that I am aware of that track venture capital. The one that I do know (mentioning names becomes tricky for compliance reasons) went down with the broad equity market during the crisis but hasn’t really participated in the bull market since (up 28% since March of 2009 vs up 194% for the SPX).

If you’ve been reading this blog for a while then you know that I believe in small allocations to things like gold, merger arbitrage, certain forms of hedge fund replication and funds that sell short all in order to help manage correlation. There can be no assurance of infallibility but the track record and firsthand experience is good enough for me.

While I began to seek these out before the financial crisis, the alternative space has continued to evolve along with just about everything else. Over the weekend Barron’s touched on catastrophe bonds which help insurance companies manage reinsurance risk for events like hurricanes and pay relatively high interest rates while waiting for the next tornado to hit…or not. Barron’s contends that by virtue of being tied to catastrophic events they don’t take on interest rate risk. There was also a column in Barron’s on floating rate loans which are probably more familiar to most investors even if they played a smaller part in the typical portfolio up to this point.

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