YALE ENDOWMENT.docx

YALE ENDOWMENT.docx

《YALE ENDOWMENT.docx》由会员分享，可在线阅读，更多相关《YALE ENDOWMENT.docx（8页珍藏版）》请在冰点文库上搜索。

YALEENDOWMENT

YALEeNDOWMENT

BUFN755GroupCase1

RuiJian

112542931

ManlinGong

112709921

YijiaoLi

112518998

Summary

Forthepast20years,Yaleendowmenthadprovedagreatsuccessofitsassetallocationmodel,whichhadasignificantinvestmentinlessefficientassets.However,duringtherecentfinancialcrisisYalesufferedabiglossof24.6%in2009,andbothabsolutelyandrelativelyitwasbeatenbyitscollegepeers.Itisbecomingincreasinglyconcernedwhethertoreduceitsexposuretoilliquidassets,howtoadjustthepositionofotherassets,andwhattheaftermathisofcontinueinvestingininefficientassets.

Inthiscase,wereachedthefollowingconclusion.

First,Yaleshouldmaintaintherelativelyhighexposureinilliquidassets,butreallocateitspositionswithineachilliquidclasses.Thoughhigherriskitbrings,illiquidassetssatisfiedthehighreturncollegespendingrequires.Collegeendowmenthadalong-terminvestmenthorizontalanditsinvestmentstrategyneedtofocusonthevalueassetsinsteadoftimingthemarket.ButcomparedtoLBO,VCandrealestateindicatedalowerreturn-to-riskinthelong-term,itissuggestedtorelocatethepositionofthesetwosectionswiththereasondiscussedbelowinQ1.

Second,wecarefullycomparedtheeachassetclassindifferentcategoriesandreachedthefollowingopinions:

inrealassetscategories,weprefernaturalresourcesthanrealestate;inprivateequitycategory,wefavorLBOoverVCandkeepaconservativeviewoninternationalPE;inmarketablesecurities,wesuggestSwensenconsidermoreofforeignequityandabsolutereturn.RelativedetailevidencesareprovidedinQ2.

Finally,benefitsofinvestingmoredeeplyininefficientassetsarediscussed,includingtakingtheadvantageofmispricedassetsandpurchasingmorewhenpriceislow,anddeployingthelong-terminvestmentandsqueezingoutinvestorswithfinancing-orientedortiming-orientedstrategies.RefertotheQ3.

Question1.

Yaleshouldmaintaintherelativelyhighexposureinilliquidassets,butshouldreallocateitspositionswithineachilliquidclasses.

Forthepast20years,Yaleharvestedheavilyformitsallocationphilosophy,alargeexposuretoilliquidassets,andhadproducedanannualizedreturnof13.1%,exceedingthereturnofallcollegesanduniversities.Exhibit1showsthelongtermperformancesofalluniversityendowment,Yaleendowmentandbenchmarkindexes,indicatingthateventhoughYalewasconfrontedwithlargeriskinilliquidassets,itstillhadthehighestriskadjustedreturn.

Also,maintainingahighpercentageofilliquidassetswasinlinewithYale’slong-terminvestmenthorizontal.It’sagoodopportunitytopurchaseundervaluedassets,particularlyintimesofmarketstress.Ontheotherside,thepartnershipwiththetop-flightfirmswouldbeharmed,ifYalestoppedcooperatingwiththemjustforashort-termdownturn.

ItwasnotnecessaryforYaletodecreaseitsilliquidallocationrapidlyjusttoensuretheliquidity.Yalehadalotofotherways,suchascommercialpaperandreverserepoagreement,toensureitsliquidity.Astheredemptionneedsdecreased,theliquiditywouldnotbecomeabigissueinthefuture.

ItwouldbemorereasonableforYaletoadjustilliquidassetsallocationwithineachclass.ThefinancialcrisishadpummeledYale’sreturnfor2009,andthereturnin2010laggedbothinabsolutetermsandinrelativetoitspeergroup.MuchofthiswasduetoYale’sallocationtowardprivateequitysectionandtherealestatesection.Therefore,anadjustmentofpercentagewasnecessaryintheseassetclasses.

ForPEinvestments,certainchangeswithintheindustryhadinfluencedthereturnsandtheriskofYale’sinvestment:

largerinvestmentscalewhichmightcomprisewithloweroverallreturns,moreinvestorswhomightcongestthereturns,thetrendofVCsintolater-stageinvestmentwhichloweredthereturnmultiples.ThePEsectioncontributedalotofreturns,buttheperformanceofventurecapitalsraisedincreasingconcerns,requiringanadjustmentwithinthesectionitself.

Exhibit2showsthatVChadabetterlong-termperformancethanLBOandinternationalPE,however,afterconsideringthehighrisk,venturecapitalhadamuchlowerreturntoriskthanothertwo.Exhibit3isthemed-termperformanceofPEsection,whichalsosupportsthesameindicationthatpercentageamongprivateequityclassneedtoshiftmoretoLBO.Becauseofalackofinformationininternationalprivateequitymarket,especiallyindevelopingcountries,andalsootheruncertainness,itwouldbemoreprudenttoholdthecurrentpositioninthisassetclass.

Fortherealassetssection,especiallytherealestateinvestment,itwassufferingfromthefinancialcrisis,generatingnegativereturnstothewholegroupwhileincreasingthevolatilityoftheportfolio.AsExhibit4shows,HousingMarketIndexplummetedcontinuallyaftercrisis,itwashardtotelltherighttimetopurchaselow.Atthesametime,theinformationasymmetryofrealestateindustrymadeitmoredifficulttofindapartnershipwithalignedinterests.Therefore,lowertheinvestmentallocationinrealestatesectionisrecommended.

Thethreeevidencesaboveshowthattheilliquidassets,consistingoftheprivateequitysectionandtherealassetssectionshouldbereallocated.

Question2.

1）RealAssets

Realestateandnaturalsourcesaretwogroupsinrealassets.Wewouldprefernaturalresourcesthanrealestate.

Asmentionedabove,therealestatemarketshowsalargeuncertaintyinashorttime,andcontinueinvestingmayincreasetheriskofthetotalendowmentasset.Onthecontrary,Yale’sallocationstrategyonnaturalsources,especiallyonoilandgas,performedverywell.The10-yearannualizedreturnshowsthatYalegeneratedareturnof17.5%innaturalsources,muchhigherthanthatofentirerealassetclass10.9%.Alsothe“hedgeagainstinflation”functionmakesnatureresourcesmoreimportantwhenpricerising.

2）PrivateEquity

TherearethreeclassesinPE,venturecapital,LBOandinternationalPE.WefavorLBOoverVCandkeepaconservativeviewoninternationalPE.

AsmentionedinQuestion1,thereturnofventurecapitalisnotsowellcomparedwithLBOwhenwetakeriskintoconsideration.WecalculatedriskadjustedreturnofventurecapitalandLBOsinceinception.ItisobviousthattheriskadjustedreturnofLBO95.85%ismuchhigherthanthatofventurecapital33.92%.Inaddition,the2010riskadjustedreturnofventurecapitalismuchlowerthanthatofLBO.

Itismuchhardertofindaventurecapitalfirm,whichstillperuseshigherreturnthantofindaLBOfirm.Fromincase（Ex.9）,wecanfindthattotalfundraisedbyVCisabout50billionin2010,whilethesizeofLBOisabout230billion.

AlthoughaveragereturnsinceinceptionofVCishigherthanLBO,itisbelievedthatduetosomeextraordinarysuccess（e.g.700%returnin2000）,whichcanhardlybeduplicated.Werecalculatedmulti-annualreturnusinggeometricmeantoseetheinfluenceoftheseextraordinarysuccesses.AfterremovingtheinfluenceofextraordinaryreturnthedifferencebetweenVCandLBObecomessmaller.（RefertoExhibit5.）

AlthoughrecentperformanceofinternationalPEisgood,itisstillveryriskytobeinvestedin.ItisdifficultforYaletoevaluateforeignprivateequityfirmssincetheylackedastrongnetwork.YaleshouldbecarefultoinvestininternationalPEmarket,especiallyinemergingmarket.Inemergingmarket,Yalewillfaceahighbar,lackoftransparency,lessethicalstandardsandhigherreturnvolatility.WebelieveYaleshouldpaymoreattentiononlocalmarket.

3）MarketableSecurities

Therearefourassetclassesunderthiscategory:

bond,domesticequity,foreignequityandabsolutereturn.WerecommendYaleconsidermoreofforeignequityandabsolutereturn.

Theyhavehigherreturnsthanotherclasses.Asitisshowedincasematerial（Ex.7）,the10-yearannualizedreturnofforeignequityandabsolutereturnis13.8%and11.1%respectively,whicharemuchhigherthanthatofbondanddomesticequity.

Byinvestinginforeignmarketandabsolutereturn,Yalewilldiversifyitsportfolioandreducetherisk.Foreignmarketandabsolutereturnarealllesseffectivemarkets.Thisstrategymeetsthethirdprinciple-seekopportunitiesinlesseffectivemarketsandworksverywell.Ex.7incasematerialshowedthatthereturnsofforeignmarketandabsolutereturnnotonlyoutperformedthatofbondanddomesticequitybutalsooutperformedreturnsoftargetbenchmarks.ThusYaleshouldsticktoitsstrategytoinvestinforeignmarketandabsolutereturn.

Question3.

AlthoughwesuggestDavidSwensentokeepthecurrentexposuretoilliquidassets,theredoexistsomebenefitsofdeeplyinvestingratherthanpullingback.

Yalehadbeenfocusingonvalue-addedinvestmentsforyearsandhadbenefitedfromthisstrategyinbothitsassetallocationtargetanditsspecificinvestmentwithineachclass.ThehistoricalsuccesssuggestedthatYalenotbedistractedbytheshort-termfluctuations,andinthelongrun,theilliquidassetsaremorelikelytoaddvalues,therebygeneratinghigherreturns.

TherewerealotofbenefitsforYaletoinvestininefficientmarkets.Althoughpullingbackandinvestingmoreincashandotherhighlyliquidassetscouldensurethattheseassetswereefficientlypricedandthereforeensurenonegativereturnsduringthedownfall,theinefficiencyinsomeothermarketslikePEandrealestatemadeitpossiblethatduringcrisistheassetsweremispriced.Inthiscase,notpullingbackduringdownturnandactivelylookingforinvestmentopportunitiesintheilliquidassetsclasswouldbeagoodchoice.

W