The Investment Scientist

Yale Endowment asset classes

Posted on: February 6, 2009

Once upon a time, the Yale University Endowment invested like the rest of us, in just two asset classes: US equity and fixed income. After taking over the reins in 1987, David Swensen, the chief investment officer of Yale Endowment, moved aggressively into non-traditional and often illiquid asset classes like foreign equity, absolute return, real assets and private equity.

Chart: The Yale Model asset allocation
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Picture credit:

His unconventional approach produced a 20-year unbroken record of positive returns, resulting in stellar growth of the endowment from $1b to $17b. No wonder rival school Harvard University studies him closely. Other institutional money managers trip over themselves trying to mimic him.

Yale’s six asset classes are defined by their different expected response to economic conditions, such as inflation, growth and interest rate. Here is my own simplified explanation and cautionary note about these asset classes in relation to us as individual investors.

Absolute Return is a class of investment that seeks to generate long-term returns not correlated with the market.It does this by exploiting market inefficiencies. There are two basic strategies: event-driven and value driven. Event driven strategies rely on specific corporate events such as mergers, spin-offs or bankruptcy restructuring. Value driven strategies rely on buying under-valued assets while at the same time short-selling over-value assets. Don’t try this at home! You might just be the inefficiency being exploited.

Private Equity is a class of investment that participates in leverage-buyout (“LBO”) and venture capital. Venture capital is money that funded Google. However, it also funded thousands of failed ventures. LBO partnerships engage in the exercise of buying badly run businesses, reforming them, and then reselling them for a profit. Good private equity funds are generally close to individual investors. However, many below-average funds (often with exorbitant fees) are being aggressively marketed by Merrill Lynch and the like to unsuspecting high-net-worth individuals.

Real Assets include real estate and commodities. They are tangible (as opposed to paper assets) and they’re a good hedge to inflationary forces. This asset class is accessible to individual investors through Exchange Traded Funds (ETFs) and physical property such as the houses they live in.

Fixed Income is an asset class that produces a stable flow of income. It provides greater certainty than other asset classes. Fixed-income investments will perform badly in an inflationary environment, with the exception of treasury inflation protected bonds or TIPS. This asset class is readily accessible to individual investors.

Foreign Equity includes both matured market equity and emerging market equity. With US economy becoming an ever smaller slice of the global pie. This asset class provides a great way to participate in foreign growth. However, their diversification benefit is over-rated. With the exception of China, foreign stock markets highly correlate with the US market. Foreign equity is very accessible to individual investors.

Domestic Equity needs no additional explanation.

By all mean let David Swensen enlighten you, but don’t fall all over yourself trying to mimic him. What is good for Yale is not necessarily good for you. This is an advice coming from none other than Swensen himself.

Many investors are puzzled by the underperformance of small cap value since May of this year. They ask: “Is it worth being in an asset class that can’t do well in bad times?

To answer their question, I did a 10-year rolling return comparison between the Fama/French Small Cap Value (SCV) and the S&P 500 index using data from 1931 to 2010. The first 10-year period is 1931 to 1940, the second is 1932 to 1941, and the last is 2001 to 2010. Here is the rolling return chart I got.

Here are the summary statistics:

Small Cap Value S&P 500
Best 10-yr annualized return 33.1%  (1975 – 1984) 19.7%  (1950 – 1959)
Worst 10-yr annualized return 5.9%  (1931 – 1940) -1.8%  (2000 – 2009)
Frequency of outperformance 63 out of 70 ten-year periods 7 out of 70 ten-year periods

If you just look at the chart and the statistics, what is there not to like about small cap value? It outperformed the S&P 500 nine out of every ten 10-year periods, usually by a huge margin, and even when it didn’t, it didn’t by a tiny bit.

But alas, small cap value is not for the faint of heart.  In a bear market, it usually falls quicker and harder than large cap.

Think about it, the market is ultimately fair; those investors who can endure more pain in a down market will reap the reward of higher long-term returns.

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9 Responses to "Yale Endowment asset classes"


Great post. Also, thank you for constantly delivering great content . I enjoy linking to your blog in my nightly investment links. Have a great weekend & take care.

Best Regards,

Miguel Barbosa
Founder of

I am searching all theories and cases about asset allocation.
Iam a owner of financial advisor ofiice in Brasil.
Thank you for the material.
Claudia Kodja PHD


It’s my pleasure. Feel free to contact me if you have any questions:

I have heard Yale & Harvard own oil and gas royalties in their endowments, can you verify ?


I will see if I can.


We are trying to use the Yale Endowment data in a white paper we are writing. You state that the Yale Endowment grewt from $1b to $17b. Do you know how much of that was due to donor contributions and how much can be atrributed to investment performance?


I don’t have the number, but if you go read their annual reports, you maybe able to find out.

[…] domestic equity, primarily in large-cap growth stocks, and 40% to fixed income assets. In contrast, the endowments allocate to six non-cash asset classes that have low correlation with each other. In particular, domestic equity and fixed income make up […]

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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