The investment results of the Yale University Endowment Fund have been very good over the last 10 years, especially when you compare it to what else was happening in the investment world during these 10 years.
This private fund returned 11.81% on average each year between 2000 and 2010. For comparison, the Vanguard S&P 500 Index averaged -2.29% per year over that same time. When people read about the Yale Endowment Fund, many will say “I’ll have some of what they’re having.” (Note: do you know the movie from which this line is taken? Hint: Rob Reiner’s mother said it.)
While the Yale Fund averages 11.81% a year return, it’s not without its ups and downs either. In 2002, it returned .70%, in 2008 it earned a 4.50% return and in 2009, it lost 24.60%.
This fund has such positive results largely through its diversified holdings, many of which are not available to the public. For example, the Yale Fund usually maintains a 15% to 25% allocation to U.S. and non-U.S. private equity in its portfolio.
But before you despair that you can’t have what the Yale Fund is having, it turns out that you too can achieve good returns with readily available ETFs. Craig L. Israelsen, a professor at BYU and a principal of Target Date Analytics, shows us how.
In a March 2010 article in Financial Planning magazine, Mr. Israelsen reported that a multi-asset portfolio made up of 12 retail ETFs returned 6.29% on average between 2000 and 2010. This isn’t a “knock your socks off” return like the 11.81% average annual return of the Yale Endowment Fund, but it’s not chopped liver either. If you had invested $10,000 in the diversified ETF portfolio in 2000, it would have been worth $18,412 at the end of 2009. Investing $10,000 in the Vanguard S&P 500 Index over the same time would have left you with $7,930.
Mr. Israelsen writes: “Both the Yale Endowment Fund and multi-asset portfolio view alternative assets as critically important components of a well-diversified portfolio. Why? Because including nontraditional assets enhances performance and reduces risk.”
He goes on to write, “So while alternative investments usually zig when traditional equities zag, a portfolio can be vulnerable when they zag together. Fortunately, we haven’t seen that very often.”
If you would like to read the full article, send me an email and I’ll share it with you.