All Hail the Yale Model

What really jumps out when reading the article, “How the Yale Model ate endowments — and everything else” is how many endowments and foundations have tried, and are still trying, to replicate the Yale Model that was introduced to the market by David Swensen. Yet, the word replicate itself is a bit of an oxymoron of what the model actually stood for.

First, The Yale model was successful because it was new, unconventional, something that had never been done. Second, the Yale model was designed for Yale. Endowments are not about fitting into a standard model, and one cannot be treated like another. Each has very different objectives. Policies, fee structures and the strategy that supports the individual endowment or foundation’s purpose and charter are so important to get right. And third, David Swensen’s asset allocation mix introduced a host of operational challenges that the market was not prepared to meet. So, to try to mirror Yale’s outcome by copying their model would potentially lead any organization into a disastrous result.

Sure, there are the fortunate ones that may have been able to withstand the added talent, infrastructure and technology costs associated with such an actively managed, alternative heavy, copy-cat approach, but as Ana Marshall so eloquently pointed out in the article, it was the taking of David’s principles and teachings on all aspects of investing, and applying them to what she was trying to solve for at Hewlett that was key to hers, and others’ success. So, rather than calling it replication, let’s go with innovation.

That said, innovation will always require a certain level of risk and elements of the unknown.  The important takeaway here is that regardless of the asset allocation mix that’s right for your organization, be prepared to stay disciplined to the mission and ensure the tools utilized offer the flexibility and broadness of scope to support it. This includes both from a servicing and technology perspective. While Swensen’s model may have created a flurry of private equity inflows, the more saturated this sub-asset class becomes, the less valuable it will be from a return generation perspective.

Right now, an endowment or foundation manager may feel pressured to up their allocations in order to compete with those placing high targets on private equity, but true innovation is not about doing what everyone else is doing, it is finding alternatives to the norm in order to outperform it.  Today, it’s private equity, real estate, venture or perhaps hedge funds. When existing alternatives are no longer doing the job, new products will be requested and brought to market, and the industry constituents will be left holding the execution ball.

Though clearly the foundation of success, the Swensen followers will need more than the idea and the plan. They’ll need a full-service platform that can help bring it to life, now and into the future. Investment and investment operations teams can have the best and most costly resources available in the industry, but without the ability to have a simplified view on what’s happening across their book in its entirety, regardless of complexity, they will continually be limited by the inadequacies that are beyond their control. This article certainly instills a sense of awe and respect for David Swensen that no one can dispute, but if there’s one aligned trend that didn’t get its honorable mention within, it’s the emergence of a platform that can go toe to toe with the Swensen’s of the world in keeping the industry bar as high as this revolutionary investor has set it.

To find out more about how comprehensive data aggregation and true multi-asset class portfolio analysis can inform your asset allocation and management decisions and give you the framework for enabling true innovation, explore the Solovis platform.

Endowments and foundations looking to investigate tools for better managing portfolio operations and gaining clearer insight across a multi-asset class portfolio should check out Solovis’ Get Lean resource center.