Fri, Jul 25 2014 By TRANG HO, FOR INVESTOR’S BUSINESS DAILY
The ivory tower wizards running one of the U.S.’s largest university endowments have woefully lagged the stock market recently.
Over the past three years, Yale’s endowment returned 12.8% annually, while the S&P 500 climbed 18.5%, Money magazine reported.
The naysayers gloss over the fact that all investment strategies suffer spans of underperformance.
The Yale endowment returned 12.5% in its fiscal year ended June 30, 2013. The $21 billion entity — second only to Harvard University’s — gained an average of 11% a year over the past decade and 13.5% annually the past 20 years, according to Yale.
The SPDR S&P 500 (ARCA:SPY) returned 20.44%, 7.2% and 8.53% over the same periods.
Yale’s investment policy calls for diversifying across seven asset classes that zig and zag differently in response to the economy, interest rates and other catalysts.
About half of the assets are in illiquid investments: private equity, real estate and natural resources. The pool tries to put about
· one-fifth of its assets into an absolute return strategy,
· 11% into foreign equities,
· 6% into domestic stocks and
· 5% into fixed income.
The absolute return strategy aims for returns with very low correlation to the stock market. It takes advantage of special situations such as mergers, acquisitions, spin-offs, bankruptcy restructurings, and hedges positions that stray from their underlying value.
Limited Access
Individual investors may not have access to the special situations, private equity and hard assets that Yale has, but they could mimic its equity investments. SEC filings show Yale boosted its stake in Vanguard FTSE Emerging Markets (ARCA:VWO) to $127.8 million in the first quarter, from about $28 million in Q4 2013. It’s the endowment’s biggest ETF bet.
Its position in VWO stands nearly three times as large as its $44 million stake in iShares MSCI EAFE Index (ARCA:EFA), tracking developed foreign markets, according to WhaleWisdom.com. The website tracks portfolio holdings of the largest institutional investors.
"Yale attempts to exploit compelling undervaluations in countries, sectors and styles by allocating capital to the most compelling opportunities," the Yale Endowment stated in its 2013 report. "The 20-year return of Yale’s foreign equity portfolio is 14.1% per year."
Emerging markets sport mouth-watering valuations vs. foreign developed and the U.S. markets. VWO trades at only 12 times prospective earnings and 1.5 times book value, while yielding 2.89%, according to Morningstar Inc.
In contrast EFA trades at 15 times forward earnings and 1.54 times book value, yielding 2.83%. SPY carries a P-E ratio of 17, price-book of 2.4 and a dividend yield of 2.29%.
VWO lagged the U.S. and foreign developed markets last year by a lot. It lost 5% while the EFA rallied 21% and SPY vaulted 32%.
VWO has regained all of its loss, climbing 10.4% this year. It’s outperforming EFA’s 3.95% and SPY’s 8.55%. VWO is on track to meet the Yale investment committee’s expected returns of 7.5%.
VWO’s annual fee is 0.15%. It holds nearly 1,000 stocks, with greatest exposure to China at 21% of assets, Taiwan 14%, Brazil 13%, India 11% and South Africa 10%.