March 18, 2010 / 11:13 PM / in 8 years

UPDATE 1-Yale's Swensen favors private equity, commodities

* Yale says sticking with diversification strategy

* Increased real estate, commodities and private equity

* Reduced allocation to U.S. and foreign equities

(Adds money manager comments, Harvard moves, byline)

By Aaron Pressman

BOSTON, March 18 (Reuters) - Yale University Chief Investment Officer David Swensen’s losses on big bets in private equity, real estate and commodities have not deterred the noted contrarian.

Yale disclosed on Thursday that it had increased significantly its allocations to those sometimes risky and illiquid asset classes at the end of its last fiscal year in June 2009.

“If diversification fails to protect a portfolio in the face of a financial panic, why bother to diversify?,” Swensen’s investment group wrote in the university’s annual endowment report released on Thursday. “The answer lies in the diversified portfolio’s lower risks and higher returns.”

As a result, Yale’s investment committee voted at the close of its fiscal year to increase its targeted allocation in private equity to 26 percent from 21 percent and in commodities and real estate to 37 percent from 29 percent, Yale disclosed in the report.

The university’s private equity investments posted a loss of 24 percent in fiscal 2009 while real estate and commodities lost 34 percent, making them the two worst performing segments in its $16 billion portfolio. Overall, the endowment lost almost 25 percent for the year ended June 30, 2009.

Swensen’s latest moves could benefit from the fact that many other large investors have been trying to reduce their private equity investments by dumping the hard-to-shed stakes at discounted prices, Christopher Bittman, former chief investment officer for the University of Colorado, said.

“If you have enough liquidity, taking advantage of others’ panic and illiquidity has been a sound strategy,” said Bittman, who now runs Perella Weinberg Partners’ Agility Funds unit helping endowments manage money.

The even bigger bets on illiquid assets could “pay off tremendously,” agreed money manager Mebane Faber, author of The Ivy Portfolio, a book about university endowment investing.

But a repeat of the wave of deleveraging experienced in 2008 poses the biggest risk to the strategy. “If that happens again this portfolio will get hammered,” Faber, managing director at Cambria Investment Management, said.


Swensen also indicated he had no interest in devoting more money to fixed income investments, keeping the endowment’s asset allocation target at just 4 percent versus 21 percent at the average educational endowment. The bond allocation gained 5 percent in value in 2009.

“Yale is not particularly attracted to fixed income assets, as they have the lowest historical and expected returns of the six asset classes that make up the Endowment,” the university’s annual report noted. “In addition, the government bond market is arguably the most efficiently priced asset class, offering few opportunities to add significant value through active management.”

The increased allocations came at the expense of U.S. equities, reduced to a target of 7.5 percent from 10 percent, international equities, reduced to 10 percent from 15 percent, and hedge fund-like strategies, reduced to 15 percent from 21 percent.

As the university reported in September, the 25 percent drop was significantly worse than the average 19 percent decline for large endowments calculated by the National Association of College and University Business Officers.

Still, Yale retained an almost unmatched long-term performance record despite the one-year drop. Over the past 10 years, the fund, the second-largest endowment -- behind Harvard University -- gained almost 12 percent a year, triple the performance of the average institution.

Harvard’s endowment, which also relied heavily on illiquid investments, suffered an even greater loss than Yale last year. Harvard said its $26 billion fund lost over 27 percent in fiscal 2009. The fund has gained 9 percent a year over the past 10 years.

Harvard has sought to sell some of its private equity stakes. The university said last September that it had reduced its commitments to future private equity deals by $3 billion.

Reporting by Aaron Pressman; Editing by Phil Berlowitz

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