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.
Tags: Yale University Investments Office, Yale University investments office August 2006, Case Study of Yale University Investment office
[...] 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. [...]
[...] This gives Yale a reason to reconsider their investments in private equity, particularly their allocation of venture capital in their private equity portfolio. Since Yale has considerable knowledge of the private equity practice, it would be a terrible waste of their built knowledge to slowly back out of this strategy. Most of the risks that they take were being hedged in the first place so a position to mitigate their risk should be kept intact. Additionally, the relationship that the investment office has built with their external managers provides them a superior performance even in a difficult time for private equity. [...]
[...] Shifting Strategies Although the growth of their endowment to over $18 billion was unquestionably positive, it is becoming more difficult to explore investments that will give meaningful return to their growing portfolio. It became necessary to allocate more into their higher return, higher risk investments to sustain the growth that they have become accustomed to. As the investment office adapt into the new environment while staying true to their core beliefs, a shift in strategy has become necessary. The graph below shows how their allocation strategy has shifted in the past two decades: The shift in strategy, particularly in the allocation of the portfolio, brings up a growing concern of liquidity. [...]
[...] Approach to Private Equity As in other asset classes what appealed to Yale was the inefficiency of private equity markets. Private equity, though risky, provided an opportunity to earn attractive returns at a time when other endowments pursued safer, more efficient asset classes such as bonds with lower, more predictable returns. What differentiated Yale from other endowments was that they were willing to take the “risk of being different when it seemed appropriate and potentially rewarding.” Yale's approach to private equity was consistent with their overall investment philosophy. [...]
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