Yale Investment Office

Case 1

The Yale Investment Office manages the university’s endowments, growing it at a 15.4 annualized rate over the last 20 years. The Investments Office is responsible for managing the endowment’s fixed income assets, setting the investment philosophy and strategies, determine the target asset allocation mix for future investment periods, and many more duties. Yale’s Investment Office’s target allocation is unconventional for a university endowment. The asset allocation itself focused on unconventional assets such as international private equity funds, equity funds, and domestic venture Capital Funds, Buyout funds, and real estate funds. According to Swensen’s investment philosophy, equities outperform fixed income assets. Fixed income assets not only give lower returns but are also affected by rising inflation. Yale’s Investment office wanted to hold a diversified portfolio with a strong disciplined approach to investing. The inclusion of emerging markets in foreign equities provided diversification and had the potential of high returns due to the rapid growth in the markets. By seeking opportunities in less efficient markets, Swensen was able to determine that there was a bigger spread in returns between the fund managers in the 25th and the 75th percentile compared to those in the stock and bond market. This led to Yale using mostly external managers to manage most of the university’s endowment. This would make sure expert knowledge is used to build the investment decisions.

When deciding when to make private equity investments, a key principle for the Investment Office was to select organizations in which the incentives were properly aligned. Yale for example was reluctant to invest in an organization affiliated with larger financial institutions where a potential conflict of interest or lack of incentive could exist. The Office also uses a different strategy with its private equity manager than it does with other asset classes. For private equity, the...