Over the past 10 years, Yale’s $29.4 billion endowment has earned annual returns of 7.4%, outpacing its benchmark and institutional fund indices, and adding $6.5 billion in value—roughly the size of the University of Chicago’s entire endowment –during that time. And for six of the past 10 years, Yale’s 10-year record has ranked first in the Cambridge Associates universe.
How has it managed to achieve this success on a consistent level over the long term? Not by being like everyone else, that’s for sure—and definitely not by being passive. A look at the asset allocation of Yale’s endowment shows just how vastly different its thinking is from other university endowments.
Yale has more than three times the allocation to venture capital and real estate than the educational institution mean, and more than twice the allocation to leveraged buyouts. At the same time, it has one-sixth the domestic equity allocation, less than half the fixed-income allocation, 50% less than foreign equity, and the amount it holds in cash is nearly one-seventh the amount that most endowments have.
“The heavy allocation to nontraditional asset classes stems from their return potential and diversifying power,” said Yale in its annual report. “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 biggest differences between Yale and the average endowment are in its allocations to venture capital, real estate, domestic equity, and cash.
While the average endowment has venture capital as its third-smallest allocation at 5.5%, Yale has 19% invested in the asset class, which is the second-largest allocation in its portfolio next to absolute return at 26.1%. According to Yale, venture capital investments provide “compelling option-like returns,” allowing it to gain exposure to innovative start-up companies from an early stage.
The university’s investments office said the venture capital portfolio of the endowment is expected to generate real returns of 16% with risk of 37.8%. It also boasted that over the past 20 years, the venture capital program has earned an astounding 165.9% per annum.
And while domestic equity is the second-largest allocation for most endowments at 20.4%, it’s the second-smallest allocation for Yale, which only has 3.5% of its portfolio invested in them. Yale also has less than half the allocation to fixed income at 4.2%, compared to the mean of 8.8%.
And while the average endowment has only 3.2% allocated to real estate, Yale has 10.3% of its portfolio invested in real estate. As for cash, Yale keeps only a small amount of it—0.5% of its portfolio—compared to the average allocation of 3.3%.
“Over the longer term, Yale seeks to allocate approximately one-half of the portfolio to the illiquid asset classes of leveraged buyouts, venture capital, real estate, and natural resources, said Yale. “The endowment has made significant progress in reducing illiquidity in the years since the financial crisis.”
The only category Yale’s asset allocation remotely resembles other university endowments is in natural resources, where it has 7% of its funds invested compared to the average allocation of 8.2%.
In addition to having vastly different allocations than the average endowment, Yale’s portfolio doesn’t remain static, as it regularly adjusts its allocations over time. Between 2014 and 2018, it boosted its absolute return investment from its third-largest allocation at 17.4% to its largest at 26.1%. It also increased its allocation to foreign equity by nearly one-third to 15.3% from 11.5%, and raised its venture capital allocation by almost 40% to 19% from 13.7% during that time. Meanwhile, Yale slashed its cash holdings from 3.5% of its portfolio in 2014 to 0.5% in 2018.
“Over the past three decades, Yale dramatically reduced the endowment’s dependence on domestic marketable securities by reallocating assets to nontraditional asset classes,” said Yale, adding that in 1988, 65% of the endowment was targeted to US stocks and bonds.