The Yale Model Post-Crisis
Manager skill or risk exposure?
August 24, 2010
A new article in the Journal of Wealth Management takes a close look at the factors driving two decades of stellar returns at the Yale University Endowment. The paper, “Yale’s Endowment Returns: Manager Skill or Risk Exposure?”, is by Peter Mladina , Jeffery Coyle. The authors examine the underpinnings of the legendary Yale Model and conclude that, despite the push to alternatives, there was still heavy exposure to common equity risk factors and a lack of manager skill on the private equity front – these factors took a heavy toll on the fund during the credit crisis.
In this article, the authors examine the underlying factors that drove the outsized performance of the Yale University Endowment over the past two decades. With the aid of the Endowment’s published asset allocation targets and their own “Proxy Portfolios” designed to replicate the Endowment’s exposure to common risk factors, they were able to delve fairly deeply into the drivers of the Endowment’s returns. As the authors observed the Endowment’s gradual transition from a conventional public markets strategy to one capitalizing on alternative investments—notably private equity, real assets, and hedge funds—it became apparent that much of the putative case for the Endowment’s performance, the skill of its active managers, was not entirely correct. This article suggests that heavy exposure to common equity risk factors and manager skill in private equity drove the Endowment’s sizable returns. These key findings have significant implications for investors who are seeking manager skill across asset classes.