To significantly grow wealth, it doesn’t hurt to learn from those who are good at it, more specifically looking at the investing habits of those with a good track record of growing their wealth. And university endowments have been some of the most successful investors at growing wealth. And ranked among the wealthiest and most successful of university endowments is the Yale University Endowment.
As of October 11, 2017, Yale reported a return of 11.3% for the fiscal year ended June 30, bringing the total value to $27.2 billion. Yale is known as a trend-setter and pioneer in university endowment investing. Yale’s investment philosophy is enlightening in many ways and can provide a valuable road map for novices as well as seasoned investors. This is Yale’s investment philosophy in its own words:
“OVER THE PAST 25 YEARS, YALE DRAMATICALLY REDUCED THE ENDOWMENT’S DEPENDENCE ON DOMESTIC MARKETABLE SECURITIES BY REALLOCATING ASSETS TO NONTRADITIONAL ASSET CLASSES. IN 1990, OVER SEVEN-TENTHS OF THE ENDOWMENT WAS COMMITTED TO U.S. STOCKS, BONDS, AND CASH. TODAY, DOMESTIC MARKETABLE SECURITIES ACCOUNT FOR APPROXIMATELY ONE-TENTH OF THE PORTFOLIO, WHILE FOREIGN EQUITY, PRIVATE EQUITY, ABSOLUTE RETURN STRATEGIES, AND REAL ASSETS REPRESENT NEARLY NINE-TENTHS OF THE ENDOWMENT.
THE HEAVY ALLOCATION TO NON-TRADITIONAL ASSET CLASSES STEMS FROM THEIR RETURN POTENTIAL AND DIVERSIFYING POWER. TODAY’S ACTUAL AND TARGET PORTFOLIOS HAVE SIGNIFICANTLY HIGHER EXPECTED RETURNS AND LOWER VOLATILITY THAN THE 1990 PORTFOLIO. ALTERNATIVE ASSETS, BY THEIR VERY NATURE, TEND TO BE LESS EFFICIENTLY PRICED THAN TRADITIONAL MARKETABLE SECURITIES, PROVIDING AN OPPORTUNITY TO EXPLOIT MARKET INEFFICIENCIES THROUGH ACTIVE MANAGEMENT.“ HTTP://INVESTMENTS.YALE.EDU/OUR-STRATEGY-2/
Yale’s investing philosophy is enlightening as well as fascinating. One of the stand-out points gleaned from Yale’s statement is its reduction on its dependence on Wall Street. In 1990, Yale allocated 70% of its assets to Wall Street marketable securities. Today, Wall Street only accounts for 10% of Yale’s holdings. So where has Yale reallocated its investment assets away from Wall Street offerings?
The answer is non-traditional (i.e., alternative) assets, with real estate constituting a large segment of those investments. In fact, Yale is widely considered a pioneer among university endowments for its commitment to real estate, consistently investing 20% of its portfolio to the sector. So, why the appeal of real estate and other alternative assets?
Because, according to Yale, alternative assets provide greater opportunities for profit from market inefficiencies through active management. This principle has always held true for real estate. That’s why so many investors have made their fortunes in real estate and why Yale devotes so much of its resources to real estate. It’s an asset where bargains can still be found because of market inefficiencies and if actively managed right can provide consistent above-market returns.
SO, WHAT IS THE RESULT OF YALE’S INVESTMENT STRATEGY OF STEERING AWAY FROM WALL STREET AND GRAVITATING MORE TOWARDS ALTERNATIVE ASSETS LIKE REAL ESTATE IN THE PAST 25 YEARS? THE ANSWER IS “HIGHER EXPECTED RETURNS AND LOWER VOLATILITY.”
Following the investment strategy of a university endowment like the Yale University Endowment is far more valuable than following the habits of private hedge funds because university endowment administrators have one objective and one objective only and that’s to make money and grow the Endowment; whereas a hedge fund manager gets paid from fees whether the fund makes money or not. University endowment administrators invest solely for the interest of the university. In addition to investing on behalf of its clients, hedge fund managers also act out of self-interest.
According to Barclay Hedge, Ltd., the projected average hedge fund return for 2017 is 9.85. Compare that to Yale’s return of 11.3% for fiscal year 2017 and the conclusion follows that Yale must be doing something right. And that something is investing in alternatives with a heavy emphasis on real estate. Following Yale’s investment strategy of allocating outsized resources to alternative assets and only a fraction to Wall Street could be a winning strategy for minimizing volatility and maximizing returns. It’s a strategy any of us could follow with the right amount of discipline and research.
Like the Yale University Endowment, here at Four Peak Capital Partners, we wholly embrace alternative investments, both as a shield against Wall Street volatility and for generating wealth. In our own experience, we’ve learned that the particular segment of alternative investments we prefer, mobile home parks, has historically been uncorrelated to the broader economy and has proven to be recession-proof. So, while other sectors of the economy suffer in a downturn, mobile home parks continue to generate income without a glitch.
In addition, for building wealth, we wholeheartedly embrace a multiplying principle much like the one Yale adopts. Because they have the primary purpose to grow the endowment, Yale continually reinvests its profits. Profits from current alternative investments are reinvested in the same or other alternative investments.
Because alternative investments have intrinsic value, that along with anticipated appreciation, leads to a multiplier effect that grows income with velocity in this investment class. Profits from our mobile home parks are reinvested for acquiring other mobile home parks or for improving the assets we already own to improve cash flow. We believe that by adding our offering to your portfolio and committing to multiplying your earnings by reinvesting the passive income from our regular income distributions, you too can put yourself on the path to wealth.
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