The celebrated “Yale Model” of endowment management is based on sound fundamental principles that are appropriate for long-term investors, according to Dean Takahashi YC ’80, ’83, senior director in the Yale Investments Office.
“In the mid-2000s, the press started using this ‘Yale Model’ reference,” Takahashi told an audience at the Yale School of Management on February 4. Although Yale’s underlying investment principles are broadly applicable, the university’s portfolio is inappropriate for most investors. “We have a portfolio that is right for us, but it isn’t designed to be a model for all investors,” Takahashi said.
Takahashi spoke as part of the Convening Yale lecture series, which brings scholars and practitioners from across the Yale campus to share their research with SOM students.
Yale is widely known in higher education circles for its top-ranked long-term endowment investment performance. Led by Chief Investment Officer David F. Swensen PhD ’80, the Yale Investments Office manages the university’s endowment, which totaled $23.9 billion on June 30, 2014.
Takahashi joined the office in 1986. Back then, he said, the endowment totaled $1.5 billion and had endured a decade or more of mediocre performance. “In the mid-’80s, Yale was not a paragon in the investment world,” Takahashi said.
At the time, the university had more than 60% of its funds invested in U.S. stocks, Takahashi said. The new investing strategy that he helped launch emphasized diversification and increased the endowment’s commitments to venture capital, foreign equity, private equity, real estate and natural resources. In addition to reducing its exposure to domestic marketable equity, the university decreased its allocations to bonds and cash. “Yale needs to be equity-oriented in order to generate high returns,” Takahashi said.
The results have been dramatic. During the past 20 years, the endowment has had the best performance of any endowment or institutional investor with an average annual return of 13.9%.
A crucial component of this success has been Yale’s ability to work with the world’s best fund managers in stable, long-term partnerships, Takahashi said. “We really want to be a manager’s first call when they have a question about what they should do, or if there’s a great opportunity to invest,” he said.
Swensen’s “extraordinary leadership” and the team that he has built have also been critical to Yale’s success, Takahashi said. The office has a strong recruiting and training program, frequently hiring Yale alumni (Takahashi is one of three Yale SOM graduates on the staff).
When we recruit, we look for people who care about Yale and who care about investing, who care about more than just making money.
The office maintains strong relationships around the Yale campus, Takahashi said. The office has a student internship program, and some staff members teach, including Takahashi, who teaches an economics seminar at Yale College and a course on endowment management at SOM.
“We really feel like a part of the university,” he said. “When we recruit, we look for people who care about Yale and who care about investing, who care about more than just making money.”
Takahashi added that while mimicking Yale’s portfolio is not possible for most organizations, following the same investment principles is. “Maintain an equity orientation to generate high returns and diversify to control risk,” he said. “Most investors should control costs and invest passively. Yale’s continued success depends on the Investment staff working hard to find and partner with great investors. That’s what we try to do every day.”
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