The ivory tower wizards running one of the U.S.'s largest
university endowments have woefully lagged the stock market
Over the past three years, Yale's endowment returned 12.8%
annually, while the S&P 500 climbed 18.5%, Money magazine
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
SPDR S&P 500
) 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
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
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 inVanguard
FTSE Emerging Markets (
) 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
MSCI EAFE Index (
), 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
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
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%.