Yale Endowment Problems Analysis

Executive Summary:

The Yale University Investments Office: August 2006 case presents the unique and successful Yale endowment model, which develops by Chief Investment Officer David Swensen. Swensen managed the Yale endowment since 1985, and established a successful model based on its own investment philosophy. He dares to “take ‘the risk of being different’ when it seemed appropriate a potentially rewarding”. He develops the principle by specially emphasizing equity investment, diversifying portfolio, seeking opportunities in less efficient market, recruiting external investment managers and solving the typical client-manager problems.

Problems Analysis:

The recent performance of the Endowment is extraordinary good compared to other universities as well as other Index. The asset allocation of Yale Endowment can be classified into 3 categories: marketable securities, private equity and real assets. These three investment aspects show two unique features compare to others’ investment portfolio. First, it tends to seek opportunities in less efficient markets, such as oversea emerging market and real estate market. Because Swensen believes in less efficient market, there is much more opportunities to find undervalued securities to exploit abnormal return. Second, it emphasize investing in public traded, private equities and real asset, because he thinks equities are a claim on real stream of income, its return could protected from inflation compared to bonds. Although these two features contribute a lot to the success of Yale Endowment model, it also brings potential challenges to the future, which are the illiquidity problem and inefficient market problem.

The first problem brought by Yale asset allocation is that it allocates too much in private equity, real assets and absolute return investment, which