By Manuela Badawy
Jan 16 Yale University's Endowment makes more
money than most in the infrequently traded and illiquid world of
alternative assets by picking the most skillful of managers.
The Yale endowment, which reached $19.3 billion in assets,
fiscal-year ending June 30, 2012, has been one of the most
secret and most successful in the past two decades partly
because the quality of its active managers, according to its
annual Endowment Update.
In its fiscal 2012 Yale's endowment generated an investment
gain of $913 million, or 4.7 percent, compared with a 21.9
percent return in the previous year.
U.S. college and university endowments lost an average of
0.3 percent for fiscal 2012, down sharply from a gain of 19.2
percent a year earlier, pressured by volatile international
markets, according to data gathered from 463 institutions by
Commonfund Institute and the National Association of College and
University Business Officers.
Over the past 10 years, the Yale endowment grew from $10.5
billion to $19.3 billion as a result of disciplined and
diversified asset allocation policies and strong active
management results, the report said.
Yale, considered by many fund managers to be a secretive and
closed-lipped organization, publishes its Endowment Update once
a year, allowing the public a glance of its investment strategy.
In fiscal 2012, the endowment cut its absolute return
portfolio to 14.5 percent, from 17.5 percent, which was below
the average educational institution's allocation of 23.8 percent
to such strategies. Yet over the past decade, the absolute
return portfolio returned 10 percent per year with low
correlation to domestic stock and bond markets, according to the
Absolute return investments are designed to provide
diversification to the endowment by exploiting market
inefficiencies. The portfolio is invested in strategies such as
mergers, spin-offs or bankruptcy restructurings, as well as
strategies that involve hedged positions in assets or securities
with prices that diverge from their underlying economic value.
According to the report, Yale has beaten the median
endowment, as measured by Cambridge Associates, by 5.2
percentage points per year over the past two decades. During
that same period, nearly 80 percent of Yale's success relative
to the average endowment was attributable to the value added by
the university's active managers, while only 20 percent was the
result of its asset allocation.
The university's strategy is to place skilled active
managers in less efficient markets to add value to their
investment and reap greater variability in return.
For the endowment, placing active management in U.S.
Treasury securities is inefficient and not that profitable, "as
the spread between top and bottom quartile results for active
bond managers measures an astonishingly small 0.8 percent per
annum for the decade," the report said.
Emerging markets, which tend to be less efficiently priced
than the U.S. markets because of their thinner liquidity,
present greater opportunity for stock selection and manager
Yet, illiquid alternative investment managers "succeed or
fail by dint of their skills and abilities, not by the action
(positive or negative) of the market," according to the report.
Before hiring those skillful managers, Yale goes through
relentless evaluations of the group's investment acumen,
strategy, character and ethics, as well as its bottom-up
Yale also looks for managers who can execute concentrated
portfolios by focusing on bottom-up, security-specific
investments and on companies with earnings driven by factors
that can be forecast, such as production, costs, distribution
Yale focuses on long-term partnerships as a crucial part of
its investment strategy, and "targets employee-owned firms to
ensure that incentive compensation appropriately benefits the
Yale often develops close relationships with firms early in
their life cycle as their assets under management are limited,
which allows flexibility, and managers tend to be more motivated
and capable of earning substantial returns.