Yale University Investments Office

1. Yale UniversityInvestments Office

2. History of Yale Investments • In 1930, equities represented 42 percent of the Yale endowment; the average university had only 11 percent • In the mid-and late 1960s, in response, the endowment´s trustees decided upon two substancial policy shifts: • Increase the exposure to equity investments • Yale decided to contract out much of the portfolio management function to an external adviser. The school helped to found a new Boston-based money manager, Endowment Management and Research Corporation (EM&R), whose principals were well-known successful growth stock investors recruited from other Boston money management firms.

3. History of Yale Investments • Between 1969 and 1979, the inflation-adjusted value of Yale’s Endowment declined by 46 percent. Yale terminated its relationship with EM&R. • In 1985, Swensen (Ph.D in Economics at Yale) was hired to head the Investments Office. He pointed out that equities are a claim on a real stream of income, as opposed to a contractual sequence of nominal cash flows (such as bonds).

4. Operative behavior since 1985 Structure flow: Investment Office President Investment Committee Investment Philosophy: 1 2 3 4 5 Believe in Equities Diversify portfolio Less efficient markets Outside Managers Incentives

5. Private Equity Management Investment Philosophy: • The Inv. Office place a premium on building Long Term relationships. • Value-added approach: seek firms that build better business instead of just managing the endowment. • Organizations which incentives were aligned. • Yale was more interested in LBO than in Venture Capitals. 1 2 3 4 5 Believe in Equities Diversify portfolio Less efficient markets Outside Managers Incentives Some rules from the Investment Office:

6. Private Equity Management Investment Philosophy: • Risk reduced by limiting aggregate exposure to any single asset class rather than by attempting to time markets. • Look opportunities of higher return in emerging market – Undervalue d securietes – Excess Returns • Approached Bond with skepticism. 4% as a disaster reserve.-HEDGE for severe drop in asset value and or deflation. • Investments in Real Assets ( Real State- Oil and Gas and Timberland Investments). Uncorrelated with those from Marketable common Stock. Returns protected from inflation. 1 2 3 4 5 Believe in Equities Diversify portfolio Less efficient markets Outside Managers Incentives Some rules from the Investment Office: Strategy: PrivateEquity-Real Assets-AbsoluteReturnsClasess

7. Asset allocation • Did not rely on Historical data. • The investment office imposed limits on the amount that could be invested in each asset class. • During the last decade, Yale´s asset class returns annualized differences were: • 0.2% in the most efficient priced asset class • 12.2% in least efficient market, private equity

8. Internal Bonds Managment • They saw a minimum spread between their management and an external management of this assets. Did they underestimate the opportunities?

9. Principles • No bonds….but, ¿why?

10. Private Equity Management Investment Philosophy: • 25,337 companies were listed on emerging stock market exchanges. (51% of all companies in the world) • The economies of emerging markets amounted more than 30% of non-US GDP in dollar terms. Twice that amount in real terms. • Emerging markets grow rapidly, at nearly twice the rate of developed countries. 1 2 3 4 5 Believe in Equities Diversify portfolio Less efficient markets Outside Managers Incentives Some rules from the Investment Office:

11. Emerging Market • Takahashi found the emerging equity markets in Asia, LataM and Eastern Europe: There were under-valuated securities in these less efficient markets. • Moreover, EM provides an interesting Diversification: low correlation with US. • Managers search not easy at all. • Annualize returns of 12.8% vs. previous decade; 6.2% vs. benchmark. • Even though they knew this will not be forever, EM will continue to be more profitable than develop markets.

12. Private Equity Management Investment Philosophy: • External investment advisor should be given considerably autonomy to implement their strategies. (Litlle interference from Yale) • Developing close and mutually beneficial relationships. • “New Manager. First Client” • Ability to find superior Managers: (Disciplined fundamentals-based approaches, when intelligently applied, could generate superior and long-run performance. • Hiring number of overseas investment managers was one of the near-term bright spots in the portfolio. 1 2 3 4 5 Believe in Equities Diversify portfolio Less efficient markets Outside Managers Incentives Some rules from the Investment Office:

13. Private Equity Management Investment Philosophy: • Yale preferred Managers willing to coinvest and to be compensated with their investment performance. • Avoid that Managers emphasize growth in assets at expense of performance. • Transferred model for successful domestic equity investment to foreign countries was challenging. • Relationship with key Managers served as a competitive advantage. 1 2 3 4 5 Believe in Equities Diversify portfolio Less efficient markets Outside Managers Incentives Some rules from the Investment Office:

14. Leveraging their own structure • Yale obtained the highest rating (AAA or Aaa) to leverage their structure and, from a politic perspective, keep being attractive for new investors.

15. Questions 1/2 • What should be the mix between new groups and established organizations? Should Yale expand its international program to include a greater emphasis on Asia and other Emerging Markets? • Depends on the risk management policy. • Attention to changes in regulations. • Volatile markets. • Illiquidity

16. Comparison between Yale Portfolio and average hedge fund structure Rise the weight of the emerging market in the endowment

17. Question 2/2 • Could a strategy that worked so well for Yale when it was a billon-dollar fund continue prosper as the pool of asset grew? Knowledge Networking