Are the good times over for the Yale endowment model?

Are the good times over for the Yale endowment model?

Large endowment funds have underperformed of late, hit by a downturn in private assets. But our forecasts suggest that large funds will excel over the long term.

With its large allocations to alternative assets in pursuit of higher long-term returns, the approach of Yale University’s endowment fund has proved highly successful since it was first put to work in 1985. Many university endowments, particularly those with over USD 1 bn in assets under management (AUM), have followed Yale’s lead and increased their allocations to alternative assets over time.

The composition of Yale’s endowment fund has shifted from bonds to stocks and alternative assets over the years while remaining aligned with the university’s objectives of generating returns to support its budget and maintaining purchasing power for future generations. Given its long-term investment horizon, Yale’s endowment fund, like large university endowments in general, have a size advantage over smaller funds that enable them to withstand short-term volatility and accept the illiquidity that comes with investing in alternative assets.

In fiscal year 2023, which ended on 30 June 2023, endowments made a significant recovery from the 2022 downturn, delivering an average return of 7.7%. But larger funds (those with AUMs of over USD1 BN) underperformed smaller ones due to their higher exposure to private and real assets, which lagged the strong rebound of public equities. Smaller funds are expected to continue to outperform in fiscal year 2024 since private asses such as private equity, venture capital and real estate still need to recover from the rapid rise in interest rates since 2022. 

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