The Yale Endowment Fund Asset Allocation

I find that I am talking a lot about asset allocations these days – the reason is simple. Asset allocation is how investors can manage risk, reduce the volatility in their portfolios, and above all else, is what drives the majority of the returns in a portfolio. Consider the following statement from the folks over at Merriman Berkman Next (Sound Investing Podcast):

Dimensional Fund Advisors studied the returns of 44 institutional pension funds with about $450 billion in assets over various time periods averaging nine years. The study concluded that more than 96 percent of the variation in returns could be attributed to the kinds of assets in the portfolios. Most of the remaining 4 percent was attributable to stock picking and the timing of purchases and sales.

Read that again if it didn’t sink in. 96% of the variation in returns could be attributed to the kinks of assets in your portfolio. In other words, it is not about the individual stocks or funds you hold in your portfolio. It is primarily about the structure of that portfolio and the combination of assets you hold. Like last weeks article which looked at asset allocation of pension funds I had a look at some other big-time money managers for how they structured their asset allocations. This lead me to do some research on what the asset allocations of one of the most successful investment funds of our time – The Yale Endowment Fund. The Yale fund has boasted an annualized return of 17.2% during the last 10 years (source)! With returns like that I think it is wise to see how they did it.

It came down to their asset allocation. The asset allocation used by the fund was simple, yet very effective. Here is how it broke down:

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To fully describe what each of these asset classes entail within the fund, I would need about 10 pages and I would also bore you to death. However, I do truly believe that if you are managing your own portfolio you need to read the annual report from the fund to read about each of these classes. I found that I learned a lot in doing so.