The Yale Endowment Fund Asset Allocation

Written by The Dividend Guy on April 1, 2008

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I find that I am talking a lot about asset allocations these days - the reason is simple. Asset allocation is how investors can manage risk, reduce the volatility in their portfolios, and above all else, is what drives the majority of the returns in a portfolio. Consider the following statement from the folks over at Merriman Berkman Next (Sound Investing Podcast):

Dimensional Fund Advisors studied the returns of 44 institutional pension funds with about $450 billion in assets over various time periods averaging nine years. The study concluded that more than 96 percent of the variation in returns could be attributed to the kinds of assets in the portfolios. Most of the remaining 4 percent was attributable to stock picking and the timing of purchases and sales.

Read that again if it didn’t sink in. 96% of the variation in returns could be attributed to the kinks of assets in your portfolio. In other words, it is not about the individual stocks or funds you hold in your portfolio. It is primarily about the structure of that portfolio and the combination of assets you hold. Like last weeks article which looked at asset allocation of pension funds I had a look at some other big-time money managers for how they structured their asset allocations. This lead me to do some research on what the asset allocations of one of the most successful investment funds of our time - The Yale Endowment Fund. The Yale fund has boasted an annualized return of 17.2% during the last 10 years (source)! With returns like that I think it is wise to see how they did it.

It came down to their asset allocation. The asset allocation used by the fund was simple, yet very effective. Here is how it broke down:

Yale Asset AllocationClick to Enlarge

To fully describe what each of these asset classes entail within the fund, I would need about 10 pages and I would also bore you to death. However, I do truly believe that if you are managing your own portfolio you need to read the annual report from the fund to read about each of these classes. I found that I learned a lot in doing so.


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6 Comments so far

  1. Dividend growth investor April 1, 2008 7:43 am

    This is quite an interesting article. I learned about timber as a separate asset class after researching the Yale endowment.

  2. lotsofpulp April 1, 2008 4:47 pm

    Very informative article. I am still a little confused about the “Absolute Return” asset class. I read it on Yale’s annual report and it seems to be more speculative investments, but they didn’t really say it specifically. Do you have any more information about this asset class?

  3. bob April 2, 2008 4:54 pm

    Hi Dividend Guy, I enjoy your blog.

    Mebane Faber on “Seeking alpha” reported on the Harvard and Yale endowments back in 2006 (http://etf.seekingalpha.com/article/20922).

    I subsequently wrote this message board entry on these endowments:
    http://dripinvesting.org/Boards/Read.asp?MID=55216

    where I compared the asset allocations in the 2 funds and reflected on what could be done by retail investors.

  4. This and That April 4, 2008 7:46 am

    […] Dividend Guy wrote about the asset allocation of the Yale Endowment Fund. The caveat is that David Swensen warns individual investors not to try to emulate Yale at […]

  5. Invest for Financial Freedom April 13, 2008 8:59 pm

    Carnival of Equity Trading #1- April 13, 2008…

    Carnival of Equity Trading #1- April 13, 2008 trackback…

  6. MuniBondGuy June 21, 2008 4:21 pm

    standard deviation of returns is not risk. i recommend that people who think that it is become familiar with the writings of Taleb…The Black Swan. once people wake up to the fact that the world of investing, whether it is Treasury bonds, high-yield bonds, large cap stocks, small cap stocks, commodities, currencies, real estate, and yes even timber, measures such as standard deviation simply do not apply…so why are people using it…because its simple and easy to understand. there is simply no way to synthesize risk into one number…people, please read Taleb

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