Yale University Investments Office: August 2006 case analysis

The study of a funds management especially serves an important purpose for large institutions. Financial management is a required skill for the stable operation of any institution that would continue into the foreseeable future. The following is a case study about Yale’s investment policy focusing on the past few decades to 2007. Yale is a college founded in 1701 and started with an endowment of five million dollars at the end of the century. The investment policy of Yale could be reflected to the economic characteristics of that particular era. In the 1930’s, Treasurer Laurence Tighe implemented the strategy of holding two dollar of fix income to every one dollar of equities. The 60’s have another shift in policy where more funds is allocated toward equities. During this particular era, Yale also began to contract out financial decisions to outside management firm. The move caused the endowment fund to lose around half of the original amount, thus, Yale chose to terminate the contract.

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[...] Yale would seek active managers that focused in “non-public markets characterized by incomplete information and illiquidity”. Another principle that leads Yale to a competitive edge would be investing in publicly and privately trade equities. The current holding of allocation into bond is at a maximum. The reason behind this was explained by Swensen stating that “equities are claim on a real stream of income”. The fifth and final principle is to hold a diversified portfolio. Asset Selection and Allocation Yale’s averaged superior asset selection and allocation in domestic/foreign equities, bonds, cash, absolute returns, real assets, and private equities. [...]

[...] Yale holds domestic equities consisting of US Common Stocks that serves to have relatively lower returns. The problem is the US market is too efficient. The foreign equities market serves to be a better investment as it is more diversified and consist of a more inefficient market. Some of the emerging countries with attractive financial markets include Asia, Latin America, and Eastern Europe. However, Swensen find it hard to find qualified managers in these markets, which are small firms with a focus on research intensive and fundamentally based analysis. [...]

[...] Performance Evaluation In order to evaluate the performance of Yale’s portfolio, the performance attribution approach was taken. For the first step in creating the performance attribution analysis, we had to create a Bogey Portfolio with a benchmark index for each portfolio component. The index and associated returns that were used throughout the analysis, which was also kept constant, were from Yale’s 2006 target benchmark: The below table shows a summary of the evaluation that compares Yale’s Endowment versus those of large billion+ in its portfolio) and all university endowments in 2006. [...]