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The Endowment Model Still Works

30th October 2015

Yale’s investment office, the progenitor of the formerly ballyhooed and more recently maligned “endowment model,” recently released results for their fiscal year 2015, which ended on 30th June. Their portfolio earned an 11.5% net return for the period, outperforming the S&P 500 Index (“S&P”), which returned 7.4%, and the Barclays Capital US Aggregate Bond Index, which returned 1.9%. Yale’s annualised returns over the last three and five years have been a robust 14.7% and 14.0%, although they have underperformed the S&P’s returns of 17.3% over both time frames. However, over the last 10 years, which includes the financial crisis, Yale’s annualised return has been 10.0%, versus 7.9% for the S&P (all annualised figures are July through June). That is significant long-term outperformance.

Yale’s philosophy has been a proxy for Gatemore’s since the firm’s inception in 2005: remain diversified and focus on picking top managers in high dispersion asset classes. We bring these figures to your attention to highlight the fact that the endowment model still works. While risk parity and fancy models have garnered headlines both good and bad of late, we believe that when it comes to investing for the long-term, it’s all about the fundamentals: good-old-fashioned diversification across uncorrelated asset classes, copious elbow grease in investment sourcing, and rigorous due diligence and portfolio monitoring.

Postscript: Yale’s Asset Allocation Targets for Fiscal 2016 (from Yale News)
Absolute Return: 21.5%
Leveraged Buyouts: 16.0%
Foreign Equity: 14.5%
Venture Capital: 14.0%
Real Estate: 13.0%
Natural Resources: 8.5%
Bonds and Cash: 8.5%
Domestic Equity: 4.0%