Yale Case Solution - Investment Management

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1. How is Yale’s investment philosophy reflected in its strategic asset allocation? Yale’s investment philosophy is one of the critical factors that played into the success of the fund’s performance in the past years. The philosophy is based on 5 principles: focus on equity, diversification, opportunities in inefficient markets, outside managers and alignment of manager’s incentives with Yale’s interests. In the paragraphs below I will discuss how each of these principles is reflected in the endowment’s asset allocation, as shown from Exhibit 1. Yale’s belief in equities is reflected through the endowment’s heavy allocation in equity from 1985-2010. The weight allocation, however, is heavier in the earlier years (1985-1999) than in later…show more content…
As asset allocation has reached the efficient frontier, the role of having superior fund manager is becoming more critical. Manager’s selection is a factor that differentiates Yale from other endowments. 3. What are the factors underlying Yale’s investment philosophy and process which account for its successful investment performance? [In other words, in business jargon, what are the "value drivers" of the so-called "Yale model"?] The combination of five factors in Yale’s investment philosophy plays an important role to Yale’s successful investment performance. However, among the five factors, the most critical and non-replicable factors are Yale’s ability to identify and invest in inefficient markets and to hire superior managers with aligned incentives; all of which came from expertise and years of experience in the industry. David Swansen’s expertise, in particular, plays a big role. The success of the model is attributed to Yale’s ability to combine both quantitative analysis (mean-variance analysis) with market judgments to structure its portfolio. In addition, Yale also uses statistical analysis to actively test their models with factors affecting the market, therefore
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