There’s a lot to learn from college endowments but very little to directly copy. The Yale Endowment posted its results and its asset allocation. It said the return was 12.3% for the year ending June 30th, 2018 which is almost identical to the return of the S&P 500 but the endowment’s allocation looks nothing like 100% in that index. The reported allocation as follows;
Absolute Return: 26.0%
Venture Capital: 18.0%
Foreign Equity: 15.5%
Leveraged Buyouts: 15.0%
Real Estate: 9.5%
Bonds and Cash: 6.5%
Natural Resources: 6.5%
Domestic Equity: 3.0%
The asset classes are a mix of exposures that are or are not accessible to individual investors. Venture capital is an example of something that isn’t really available. There have been funds or other types of holdings that go down the road toward venture capital (or similarly private equity) but they don’t typically capture the true effect.
Absolute return, the largest weighting is accessible but it requires a discerning eye because there are a lot of funds that seek some sort of absolute return but don’t do a great job at it. Absolute return targets a steady return no matter what is going on with the market cycle like the rate of inflation plus X% or something simpler like 3%. Yale disclosed the performance of its absolute return allocation at 4.8% which I think is a strong result. Such a good result could be attributable to the manager being very good or maybe having too much equity exposure. While we’re talking about Yale I would lean to the former. If you are looking at an absolute return fund to buy in a brokerage account I would suspect the latter. Yale or any of the other endowments have access to better managers than you or I will at a brokerage. That doesn’t have to be a bad thing; that’s just how it is and if you realize that then you can make a more informed decision if you want absolute return in your portfolio.
I am a huge believer in absolute return and include it in client portfolios for two purposes, managing equity volatility and as a fixed income proxy (fixed income proxy as a way to manage interest rate risk). Yale’s willingness to use absolute return is something to learn from but a 26% allocation is probably too much for someone relying on long term “normal” stock market appreciation, it won’t keep up. If it does keep up, it probably isn’t really absolute return.
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