Why Is The Yale Endowment Investing Approach So Successful?

Why Is The Yale Endowment Investing Approach So Successful?

Developed Yale Chief Investment Officer David Swensen and Director of Yale Investments Office Dean Takahashi, Yale University’s model of asset allocation has been the benchmark in endowment investing. An article in Chief Investment Officer explores what makes the model so successful, and how much of Yale’s investment successes are based on the model.

Maintaining a long-term mindset is a major factor in the model’s success, as well as a focus on alternative assets. Alternative assets provide an opportunity to take advantage of market inefficiencies using active management, as those assets usually aren’t as efficiently priced as traditional securities. Also, many alternative investment contracts lock investors in for a period of time—usually 3 to 10 years—which forces investors to ignore short-term market activity like the current volatility. According to Yale’s 2020 endowment report, “The endowment’s long time horizon is well suited to exploit illiquid, less efficient markets.”

However, some critics say the endowment’s success is due to Yale’s prestige as an Ivy League school, and that lower-tier universities would not be able to replicate that success based on the model alone, the article contends. Charlie Eaton, assistant professor of sociology at the University of California Merced, is has written a book that studies the relationship between board member connections and investing success. His research shows that billionaires with connections to hedge funds and private equity are 3x more apt to join the board of a Forbes-ranked top 30 university than other schools. And 15 out of the 23 current members of Yale’s investment staff went there as undergrads.

That certainly doesn’t mean that less prestigious universities can’t thrive in the endowment space. Washington University in St. Louis returned an incredible 65% on its investments in the past year through a generalist model that relied heavily on co-investing. That allowed them to buy into very lucrative investments without having to pay the high fees that generally come with private equity, the article explains.

Though Yale didn’t lead in Ivy League investing this year, their endowment still returned an enviable 40.2% for the fiscal year 2020-2021. Analysts expect alternative investments to play a big role in successful endowment investing in the future. Yale allocated 17.5% of its portfolio to leveraged buyouts in 2020, as opposed to 8.4% at other institutions. And venture capital took up 23.5% of their portfolio that year—more than 3x the 7.7% allocation elsewhere. Indeed, smaller endowments were much less likely to adhere to the focus on alternatives in the Yale model, according to the 2020 endowment report from NACUBO. But while that can be one aspect of a successful endowment, to thrive in the alternatives space an endowment also needs a top-notch manager, an active and dedicated team, and a solid alumni network to keep it on the path to success.