Last week we took a look at how the Yale fund has done post the release of the results to 30 June 2008, and at the asset allocation of the endowment and how it has changed over the past 5 years. Today we’ll have a closer look at the specific asset classes that make up the endowment fund.

Superior performance has been achieved over time through allocating capital to cheap assets and selling assets that become overpriced. By looking at asset class expected returns, covariance’s of the various asset classes (a measure of the extent to which the returns on the various asset classes move together), and other techniques the committee come up with an ideal asset allocation, the will both protect capital to a certain extent but also grow in real terms over time.

Over the last few days Ian has been looking at the pricing of various asset classes, in attempt to find where the value lies. Yale will employ a similar process across a broad spread of asset classes.

While the committee’s asset allocation abilities are well known they also have been able to consistently beat their respective asset class benchmarks (i.e. their stock portfolio outperforming the benchmark index). In the management of the portfolio both qualitative and quantitative methods are used in an attempt to produce enhanced returns. Some techniques used for the various asset classes include.

Absolute Return Funds
Aligning interests between managers and Yale through implementing performance fees, with hurdles and claw-back provisions. They also ensure that the manager invests significantly alongside Yale.

US Equity
The University favours managers with strong bottom up fundamental research capabilities, and prefer those managers that follow a value approach to investing. Integrity, stable corporate environments, and sound philosophies are some of the qualitative aspects that are required.

Fixed Income
This is an asset class that Yale isn’t very attracted to due to its low expected real return (2%pa). Owing to the highly efficient nature of the bond market, Yale manages this asset class in house.

Foreign Equity
Here managers with similar traits to US equity managers are selected. Yale actively manages the allocation between developed and emerging markets, and also between the various countries, sectors, and styles.

Private Equity
Yale has been able to grow a stable of managers that are able to exploit market inefficiencies. Key traits of these managers are that they work closely with the companies in their portfolios in order to create fundamentally more value. Of secondary importance is financial engineering to enhance returns.

Real Assets
High transaction costs and the illiquid nature of real assets enable astute managers the opportunity to add significant value to the portfolios that they manage. Yale has created strong long term relationships with these managers to enhance value further.

The result of these methods can be seen in the graphic below:

At Seed we take notice of the methods used by successful managers. These methods are adapted to suit our clients’ needs. The process constantly evolves and is refined as improved techniques become recognised.

Take care,

Mike Browne
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966