Time to Ditch the Yale Model?

After a bad run of performance, is it time to scrap the alternative asset-heavy “Yale model” made popular by David Swensen? Yes and no, writes the Financial Times’ John Authers.

“Mr Swensen argued that he was most likely to find value away from the public markets,” writes Authers. “Private markets were more likely to be inefficiently priced, and therefore offer bargains. He moved out of bonds and cash, and into hedge funds, private equity and real assets such as forestry. Yale now holds about 6 per cent of its assets in US equities. This reaped impressive returns for decades, and many endowments imitated it.”

But Yale and other endowments lost a lot of money in the 2007-09 bear market like just about everyone else, Authers notes, and they have lagged since then because of their underinvestment in stocks.

Swensen himself has been lightening up on some of his alternative asset holdings, Authers says, but that doesn’t mean the Yale model should be scrapped. Authers talks about how the process used by Swensen to find inefficiently priced assets that are not highly correlated with equities is still a good one, though the exact areas into which Swensen and Yale had first started diversifying years ago may not be attractive anymore. To read the full article, click here.