Yale University Investments Office: August 2006

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Targeting an Advantage through Strategic Asset Allocation and Active Management

The Lessons of The Yale Endowment Executive Summary Presented by Old Mutual June 2008

Executive Summary
The Yale Endowment is known in the financial industry as a pioneer in using a combination of innovative asset allocation and active management to produce impressive long-term performance. In fact, the Endowment produced a 17.8% average annual return, net of fees, in the ten-year period ending June 30, 2007.1 This performance is particularly impressive given that, in recent years, the Endowment portfolio has carried less than a 40% weighting in equities. Instead, under the leadership of Chief Investment Officer Dave Swensen, the Yale Investments Office has pursued investment opportunities in nontraditional asset classes such as absolute return strategies, private equity partnerships and real assets including real estate, oil and gas assets, and timberland. (See the table.) Returns from these alternative asset classes may have low correlations to those of the U.S. equity market and therefore may provide enhanced portfolio diversification.

Asset Class
Domestic Equity Foreign Equity Fixed Income Absolute Return Private Equity Real Assets Cash

June 30, 2007
11.0% 14.1 4.0 23.2 18.7 27.1 1.9

June 30, 2007 Targets
11.0% 15.0 4.0 23.0 19.0 28.0 0.0

Diversification is not the only reason that the Yale Investments Office pursues investments in nontraditional assets. Another reason is Swensen’s view that these markets offer more opportunities for active managers to add value. The use of outside, fundamentally-oriented active fund managers has been a key factor in the investing success of the Yale Endowment, accounting for more than half of its performance advantage between 2001 and 2006.2 The Yale Investments Office views its relationships with outside managers as long-term partnerships, and carefully structures compensation so that manager interests are aligned with...
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