David Swensen Insight

Archive for September 2008

Wall Street Journal headline: “Harvard Endowment Returned 8.6%”

In light of the events of the last few weeks when financial companies collapsed in rapid succession, an all-weather portfolio is what all of us need. Yale and Harvard University endowments have portfolios that do well in both good and bad times. You’d expect these smart people to know what they are doing. They do!

In any one fiscal year (ending in June) since 2000, The Yale Endowment has never had a loss. Don’t you wish you had a portfolio that could do so well? Sadly, your record is likely to be worse than that of S&P 500. Harvard’s endowment portfolio had only two years with small losses. The worst was in 2001. That was when it suffered a loss of 2.7%. Here are the details:

Table 1: Comparison of returns for Yale, Harvard, and the S&P 500

    Year Economic Cycle Yale Harvard S&P 500
    2000 Tech bubble 41% 32% 7%
    2001 Tech bubble bust 9.2% -2.7% -14.83%
    2002 Tech bubble bust 0.7% -0.5% -17.99%
    2003 8.8% 12.5% 0.25%
    2004 19.4% 21.1% 19.11%
    2005 RE bubble 22.3% 19.2% 6.32%
    2006 RE bubble 22.9% 16.7% 8.63%
    2007 RE bubble bust 28% 23% 21%
    2008 RE bubble bust 4% 8.6% -14.8%
    Average Return 17.8% 14.4% 1.6%
    Volatility 12.4% 11.3% 14.6%

How did Yale and Harvard achieve such return stability through two major cycles of boom and bust?

The answer lies in their unconventional asset allocation. The typical US investor allocates 60% to domestic equity, primarily in large-cap growth stocks, and 40% to fixed income assets. In contrast, the endowments allocate to six non-cash asset classes that have low correlation with each other. In particular, domestic equity and fixed income make up only a small percentage of the overall portfolio: see Table 2 below. This broad diversification across weakly correlated asset classes is the primary reason why the endowment portfolios did well in both boom and bust times. (I will discuss secondary reasons in the future.)

Table 2: Asset allocations of Yale and Harvard endowments

Asset Classes Domestic Equity Absolute Return Foreign Equity Private Equity Real Assets Fixed Income Cash
Yale 11% 23.3% 14.1% 18.7% 27.1% 4% 1.9%
Harvard 12% 18% 22.% 11% 26% 16% -5%

Both endowments allocate over 25% to real assets, such as real estate and basic materials. This allocation seeks to protect against the double threat of a weak dollar and inflation.

Chart: Evolution of Yale Endowment asset allocation

As the chart above shows, Yale Endowment significantly increased its exposure to real assets in the last three years. Average investors like you and me would be well-served to heed the unspoken message of these intelligently-managed endowments. And now for your take-home lesson:

1. Broadly diversify

2. Hedge against inflation and the weak dollar.


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