Yale University’s endowment earned 20.2% investment return for the year ending June 30, 2014 finishing at $23.9 Billion. It has been under the stewardship of David F. Swenson for the past twenty years growing from $3.5 Billion to $23.9 Billion.
The investment strategy was implemented at Harvard and Stanford, and later numerous other pension plans. It is structured using a combination of Modern Portfolio Academic Theory and informed market judgment.
There are three core premises to the Yale Model.
1. Savers are paid to take risks. Measuring Risk is done by the Sharp Ratio of a portfolio. The Sharpe ratio tells us whether a portfolio’s returns are due to smart investment decisions or a result of excess risk. The greater a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been. Your portfolio’s Sharp Ratio should be greater than one.
2. Universities and other Institutions have long term time horizons and utilize concepts such as Asset Class Investing, Science, Academic Research, and a Structured Disciplined Approach to buying and selling.
3. Maintaining a Well-diversified and Equity–oriented portfolio. Currently the Yale Model is: Private Equity 31%; Absolute Return 20%; Real Estate 17%; Foreign Equity 13%; Natural Resources 8%; Domestic Equity 6%; Bonds and Cash 5%.
APPLICATIONS for PRIVATE INDIVIDUAL PORTFOLIOS
For a private individual the Absolute Return component could be reduced or transferred to other components as involves a great deal of active trading to work towards returns focused on event and value driven strategies. A proper evaluation of an investor’s risk level is needed.
Private Equity and Real Estate components can now be obtained via the Business Development Companies and Real Estate Investment Trusts on the market for individuals.
Foreign Equity, Natural Resources, Domestic Equity, and Bonds are available through specific Asset Class Investing principles
Designing an Individual Portfolio can be achieved and monitored through user friendly software available today.
There is no guarantee that the Business Development Company (BDC) will achieve its investment objectives. Investing in private equity and private debt is subject to significant risks and may not be suitable for all investors. These risks may include limited operating history, uncertain distributions, inconsistent valuation of the portfolio, changing interest rates, leveraging of assets, reliance on the investment advisor, potential conflicts of interest, payment of substantial fees to the investment advisor and the dealer manager, potential illiquidity and liquidation at more or less than the original amount invested.
Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Investing involves risks including possible loss of principal. Past performance does not guarantee future results.
About the Author: Charles Marsala is a Financial Advisor with Benchmark Investment Group with Securities offered through LPL Financial, a member FINRA/SIPC. He can be contacted at Charles.Marsala@lpl.com