Why the Yale model of investment teaches us the wrong lessons

The “Yale model” of investment sparked a boom in alternative assets, yet its mastermind gave very different investing advice.

The Yale Endowment – portfolio allocation by asset class
The Yale Endowment – portfolio allocation by asset class
(Image credit: The Yale Endowment – portfolio allocation by asset class)

The lesson that many investors take from the success of David Swensen (see below) is that they can improve their returns by ditching traditional stocks and bonds for alternative investments (see bottom). Nothing is further from the truth. Plenty of endowments, pension funds and other institutions have failed in their attempt to emulate the Yale model, and most private investors are likely to do even worse if they try to copy Swensen’s approach.

The main reason hides in plain sight in Yale’s own analysis of its returns. Only 40% of its outperformance is due to asset allocation; the rest is due to the manager’s selection. Yale has a skilled team and a rigorous process dedicated to finding the best managers – an edge that is much harder to duplicate than simply copying its current asset allocation (see chart). What’s more, Yale’s clout and network gives it access to high-performing funds that aren’t available to many institutions, let alone individuals.

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Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.