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Yale University Investment Office
University Name
Yale University Investment Office
The objective of the paper is to propose the best course of action the Yale University
should take in the future so that maximum return could be generated from its portfolio. The
investment philosophy of the organization is to provide a high inflation-adjusted return to
support the present and future needs of the organization. As the university is not able to meet
the expenditure from the fees provided by the student, therefore investment in a portfolio
which can generate a higher return is a good option.
Yale University has an investment policy which is built on five key points;
a. Preference for investment in equity
b. Diversified Portfolio
c. Investment in less efficient markets
d. Using outside managers for making investment decision
e. Importance is given to explicit and implicit incentive for outside managers
. The five principles of investment philosophy have been successful in generating a
high return for the organization. Yale’s portfolio is structured using a combination of academic
theory and informed market judgment (“Yale’s Strategy — Yale Investments Office,” n. d.).
The theoretical approach is based on the mean-variance analysis which was developed by
Nobel laureates James Tobin and Harry Markowitz. This appropriate combination resulted in
the generation of 22.9% return in the year 2006.It was higher than the average return (19.3%)
of its large peers. Further, the annualized return was found to be 15.4% which exceeded the
return of all universities and colleges.
Possible course of Action
Based on the case study, I found that Yale University can take the below possible course of
a. Continue with the present strategy of investment by reducing the Endowment’s
dependence on domestic market securities by reallocating assets to non-traditional
asset classes.
b. Emphasize on investing in bonds compared to equity.
Continue with the Present Strategy
When continuing with the present course of action, it is expected that the organization
will generate an overall positive return from the portfolio. This is evident from its past
performance beginning from the year 1985 till 2006.In fact, the performance of the equity has
been impressive. The strategy would be to reduce the dependence on the marketable domestic
securities further and giving priority to investment in foreign equity, private equity, absolute
return strategies, and real assets. Based on this strategy, the university should try to lower the
percentage of allocation of the portfolio in fixed income securities. The 2006 return has been
negative (-1.5%). The return for other asset classes for the year 2006 include; Domestic
equity (16.4%), foreign equity (35%), real assets (31.6%), private equity (32.2%), absolute
return (32.2%).
An important limitation of the present strategy is that the portfolio is quite risky. It is
evident from the high standard deviation of the return. From the case study, although the
return from private equity was found to be higher than the real return from the US equities,
however, the standard deviation of the return from private equity was found to be 38% higher
than the return from the US equity. Thus, it is associated with high risk and hence more
volatile compared to investment in bonds or fixed income securities. Another limitation of
following the present method is that if any economic depression or slowdown occurs in the
future, the return of the portfolio will be severely affected because of allocation of larger
percentage in an illiquid asset. During the recession, the return from the illiquid asset will be
even lower compared to that of return from fixed income securities. It already occurred
during the year 1998, when many hedge funds suffered in the “flight to the liquidity” that
followed Russia’s August 1998 default on its debt obligations.
Emphasize on Investment in Fixed Income Securities
An important advantage of investment in fixed income securities is that the risk of
making an investment in bond is low compared to equity. It brings peace to mind because of
the formation of a stable portfolio balance and capital preservation. When the fixed income
securities are highly rated, as in the case with U.S. government bonds, there is less risk that
the entity offering the fixed income security will be unable to repay the investors in full when
the investment matures.
Another important advantage of making an investment in fixed income securities is
the steady source of income that is generated from the portfolio’s balance. Further, fixed
income securities benefit from their position in the capital structure of an entity that issues
both equity and debt instruments (Brealey, Myers & Allen,2006). Thus, Yale University can
think of steady income source which will make the portfolio less risk which would further
allow in running the university smoothly.
The disadvantage is the lower return which is generated from the fixed income
securities. Further, research studies have shown that when investment is made for the long
term, return from the equity is higher than making an investment in fixed income securities.
Further, evidence suggests that the portfolio of Yale University has witnessed a negative
return of -1.5% from fixed income securities. The overall return would be even higher if the
management team has invested in other assets such as real assets and private equity.
In conclusion, I would recommend the organization to continue with the present
strategy of giving priority to equity compared to bonds. However, the organization should
make a limit on the percentage of the total assets to be allocated to the high volatile assets.
For example, a fixed allocation of 50% can be given to investment in foreign equity, real
asset, private equity, and absolute return. It would help in minimizing the risk associated with
the high volatility of illiquid assets. Further, the university can also consider making an
investment in emerging markets such as Asia and Africa which has a very high potential for
Brealey, R., Myers, S., & Allen, F. (2006). Corporate finance. Boston, Mass.: McGrawHill/Irwin.
Yale’s Strategy — Yale Investments Office. Retrieved from

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