Source: Yale Investments Office, holdings chart by Investor’s Advantage Corp.
This isn’t your typical 60 percent stocks and 40 percent bond portfolio. The Asset Allocation report http://investments.yale.edu/
the past 30 years, Yale dramatically reduced the Endowment’s dependence on domestic marketable securities by reallocating assets to nontraditional asset classes. In 1985, over four-fifths of the Endowment was committed to U.S. stocks, bonds, and cash. Today, domestic marketable securities account for approximately one-tenth of the portfolio, while foreign equity, private equity, absolute return strategies, and real assets represent nearly nine-tenths of the Endowment,” according to Yale Investments Office.
Further, “The heavy allocation to non-traditional asset classes stems from their return potential and diversifying power. Today’s actual and target portfolios have significantly higher expected returns and lower volatility than the 1985 portfolio. Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management. The Endowment’s long time horizon is well suited to exploiting illiquid, less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber, and real estate.” In closing, “In 1985, when alternative asset classes accounted for only 12 percent of the Endowment, Yale faced a 21 percent chance of a disruptive spending drop, in which real spending drops by 10 percent over two years, and a 36 percent chance of purchasing power impairment, in which real Endowment values fall by 50 percent over fifty years. By 2016, when absolute return, private equity, and real assets accounted for approximately 74 percent of the Endowment, disruptive spending drop risk fell to 8 percent, and purchasing power impairment risk declined to 10 percent.”
There is no recommendation in my article here for investors to try and follow Yale’s model. But if it is the case that success leaves clues, as I believe it does, there may be some things we can learn from some of the best and the brightest. Yale observed, “The rigor required in conducting mean-variance analysis brings an important element of discipline to the asset allocation process.” What I find encouraging is that Yale is doing exceptional work. I am inspired to follow their lead. As opposed to a two asset class composition of 60% stocks and 40% bonds (or vice versa), please do notice Yale holds eight asset classes outside of cash. Please pay particular attention to their holdings by percentage in U.S. equity and fixed income.
It is my opinion that to be better prepared for the good, the bad, and the unforeseen savvy investors will diversify unlike they have ever diversified in the past. As you can see in the chart below, in 1995 a 7.5% return was simply achieved with 100 percent bonds. To achieve the same 7.5 return results in 2005, bonds were 52 percent, US equity 25 percent, real estate 14% and private equity 4%.