6 min read

What a University Can Teach Us About Boosting Returns and Protecting Our Money

Carmine Meoli

Feb 10, 2020

In a nutshell:

  • It is no wonder that investors are looking for alternatives in times when traditional asset classes provide disappointing returns while the overall risk of losing money in the next down-turn is increasing
  • David Swensen demonstrated with his Yale-Investment-Model that one could generate compelling returns from investing in alternative asset classes and diversifying strategically while reducing exposure to traditional publicly traded assets
  • Through its marketplace, Stableton is a pioneer in providing efficient, quick and easy access to alternative investments for everyone

Return expectations for traditional portfolios are modest for 2020

If one is to believe Research Affiliates, a global leader in smart beta and asset allocation with USD 193 billion in assets under management, the outlook is rather dire. According to Research Affiliates’ 10-year real-return expectations for the US Market, equities will return only 0.3% p.a. over this timeframe, while fixed income is expected to provide negative real returns of -0.1% p.a. Even more sobering, long-dated US Treasuries have an expected annualized return of −1.3% in real terms.

Fixed income today is by far not as safe as it looks, and used to be

Within their fixed income allocation, many conservative investors in this current low interest-rate environment are forced to expose their portfolios to a higher percentage of so-called high-yield bonds. As the name implies, such bonds have a significantly higher default probability, i.e., risk, for which investors expect to be compensated.

Add to this the fact that many market participants today believe stock markets to be somewhat inflated. Experience teaches us that the next market downturn will bring with it’s increased levels of unwanted price action.

No wonder that many investment managers today are looking for alternative sources of return and a way to deal with potential spikes in volatility. Ideally, such alternatives would have a low correlation, i.e., not be overly dependent on the negative performance of traditional assets like stocks and bonds.

What a university’s endowment fund has in common with our own investment needs

Yale University’s endowment fund has a clear mission – to significantly contribute to funding the university’s day-to-day operations while preserving the principal capital, which was endowed to the organization mostly by private donors.

Translated into the world of an individual investor this would read as: I need an investment approach that will allow me to regularly take out money from my investment accounts to help fund significant acquisitions such as a new car, traveling the world with my family, professional education, or repairs and upgrades to my house. Or, as I approach retirement, the ability to preserve my standard of life I have been working hard all of my life, by covering the shortfall of my existing (and often less than stellar-performing) retirement plans.

And do all of this without cutting into the initial investment capital, thereby preserving the substance for next year’s investment performance.

How a new investment approach turned Yale University’s endowment into a USD 31 billion giant

When David Swensen was asked to take over Yale’s endowment fund in 1985, he chose to reallocate the fund’s portfolio from the ground up. His idea of diversification meant he would lay a firm focus on including assets that, at the time, were far away from being publicly traded.

Those assets were called alternative investments, and Swensen’s way of investing led the fund to grow from USD 1 billion in 1985 to USD 31 billion today (Source: Jack Devlin/ Bilanz 2019).

Since 1996, Yale’s endowment fund, on average, returned 12.2% each year. Which is nearly double the return expectation of a traditional portfolio. This comparison does not even consider overall portfolio volatility. Risk-adjusted, Yale’s outperformance might be even more striking. Swensen’s success in turning the university’s portfolio around became widely known in professional investor circles. Today many investment managers all over the world are adopting what has become known as the Yale-Investment-Model.


A $100k USD investment in 1996 using the Yale Endowment Strategy would be worth $1.4 million USD today
Source: Stableton, Yale Investment Report

What every investor can learn from the Yale-Investment-Model

As one of the pioneers of multi-asset-investing, Swensen and his team understood the importance of strong diversification and the relativity of holding periods. Yale’s portfolio allocation consists of 77% alternative investments, of which 21% is targeted to be allocated in venture capital while 23% is in absolute return, which, by the way, is their significant portfolio stake. In David Swensen’s investment philosophy, timing plays a minor role, since investing to him is a medium to long term activity. This also explains Yale’s investment in a forest which they sustainably maintain. It generates returns by chopping the wood and selling it. Timing is secondary since the power of alternative investments and subsequent asset allocation model yields the desired results. Their focus lies on investment strategy, which by the way, according to Roger Ibbotson, is responsible for 90% of wealth management returns.


Portfolio allocation of the Yale Endowment Fund
Source: Stableton, Yale Investment Report

Generating performance by deliberately missing out on the US equities bonanza

When looking closer to Yale’s asset allocation, you instantly recognize something. While most managers are generally home-biased, Yale and other endowment funds are consciously holding a small percentage only of US-equities in their portfolios. According to Bilanz, Yale only contains 2.75% of US equities in its portfolio. Nevertheless, Yale still showed annual portfolio returns of 11.1% over the past ten years. This is remarkable when compared to a domestic US stock portfolio with 14.7% (which happened to benefit from an unprecedented, and hardly repeatable, decade-long bull run) and a fixed income portfolio with an average 3.9% annual return. Although Yale is standing out with its performance amongst the university endowments, it is hard not to interpret the averaged 8.5 % yearly performance as a strong indicator that Swensen’s approach to alternative investments appears to work.

Broad adoption among both professional and individual investors indicates that Yale’s investment model works far beyond the academic world

Today, alternative investments such as private equity, venture capital, absolute return products, or real assets are in a big favor and investor interest is expected to increase even more. As a Schroders Study from 2019 points out, 52% of institutional investors already use alternatives to diversify their portfolio (tendency increasing), providing a strong indication that Yale’s endowment strategy works.

The encouraging news is that we observe individual and non-professional investors not only showing interest but also actively looking to increase their exposure to alternative investments.

It is fair to say that the days are over when alternative investments were only available to those who could afford high investment minima and had the necessary access to an exclusive network of insiders.

Stableton’s approach – enabling everyone to invest like the leading endowment funds of this world

Since our foundation,  Stableton’s mission has been to break down those barriers to entry by providing efficient access to alternative investments through our marketplace. Our goal is to enable investors to build their Yale-style portfolios requiring a fraction of the funds it took only a couple of years ago.

While our platform and its advisors focus on sourcing and selecting investment opportunities, investors can start optimizing their portfolio with ticket sizes as small as CHF 10’000.–.

Whether you are a professional financial advisor looking to enhance the portfolios of your clients or a qualified individual investor, it has never been more convenient to take the next step now by contacting your Stableton representative today.

Request more information! We are happy to contact you directly.

By clicking on that link you confirm that you are a resident of Switzerland and a Qualified Investor according to the new Swiss legislation on collective investment schemes (CISA and CISO).

    *Disclaimer: The above article is for educational purposes only and does neither constitute investment advice nor should it be considered to be an invitation or recommendation to buy securities or any other investment products. Please consult your financial advisor about the risks and opportunities prior to making investment decisions. 

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