Yale University has posted superb returns over the past 15 years on its $7.2 billion endowment, thanks to a contrarian investment strategy based on diversification of assets, The Economist reports.
Only 15 percent of Yale’s portfolio is in publicly traded stock, down from nearly three-fourths 10 years ago – and compared to an average of 53 percent for university endowments generally.
Yet Yale has enjoyed an annual return of 17.3 percent on its investment over the past 15 years – even though any institution that had invested entirely in U.S. equities would have outperformed 99 percrnt of all other institutions over the same period, the Economist says.
David Swensen, a former Wall Street bond trader who manages Yale’s endowment, says in a new book that diversification is more effective than liquidity at controlling risk.
As a result, no single type of investment amounts to as much as one-fourth of the total value of Yale’s endowment.
The biggest portion, 23 percent, is in private venture-capital and leveraged buyout partnerships. The venture-capital portion alone has soared in the past 15 months to $1.5 billion.
The second-biggest category of investment, 22 percent, consists of “absolute return” investing that is not tied to a broader market move.
A third category, 18 percent, is in real assets such as timber, oil and gas, while 11 percent more is in foreign shares.
With the endowment providing one-fifth of Yale’s operating budget, heavy losses would be devastating, the Economist says.
Yet Swensen believes that, in the event of a stock market collapse, half of the endowment would remain relatively healthy.
His book, “Pioneering Portfolio Management,” is published by Free Press.