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ASSET ALLOCATION


Asset allocation strategies of family offices and endowments


Family offices and university endowments share similar investment objectives. Both make long-term investments for the financial wellbeing of generations to come while making frequent (usually annual) distributions for the spending needs of their constituents (family members or the university and its scholars respectively).


Yale


Asset class


Absolute Return


Domestic (US) Equity Foreign Equity Private Equity Fixed Income Real Assets Cash


% allocation 2010 21


7.0 9.9


30.3 4.0


27.5 0.4


100* The Yale Endowment 2010. *Rounding error to 100%


% allocation 2006 23.3


11.6 14.6 16.4 3.8


27.8 2.5


100 A Harvard


Asset class


Absolute Return


Domestic (US) Equity Foreign Equity


Emerging Market Equity Private Equity


Fixed Income (Domestic Bonds) Fixed Income (Foreign Bonds) High Yield Bond


Inflation Indexed Bonds Real Estate Commodities Cash


Harvard Management Company. Sept 2010


% allocation 2010 16


11 11 11 13 4 2 2 5 9


14 2


100


% allocation 2005 12


15 10 5


13 11 5 5 6


10 13 -5


100


s private entities, family offices do not publicly disclose their asset allocation strategies. Fortunately, US university endowments are willing to reveal their investment strategies – strategies that new family offices may want to


consider adopting. The most surprising insight is that the most well-known US


endowments – Harvard at $US27.4 billion and Yale at $16.6 billion – have less than 11 per cent of their assets in US equities. This certainly hasn’t hurt their performance. In the 10 years to June 2010 (latest available figures), Yale returned an annualized 8.9 per cent while Harvard earned 7.0 per cent. This compares to a TUCS (Trust Universe Comparison Service as compiled by Wilshire Associates) median return of 3.4 per cent. Over 20 years, Yale has returned 13.1 per cent, Harvard 11.9 per cent and TUCS 8.2 per cent.


Asset allocation of Yale and Harvard endowments The striking difference between these endowments and most other institutional investors is the heavy weighting to absolute return, private equity and real assets, as the table shows. The rationale for their asset allocation policy can be summarized


as factoring in their long-term investment horizon versus liquidity risk; gaining an illiquidity return premium; benefits of global diversification that can raise returns while lowering volatility; and accounting for inflation risks. Importantly, while these endowments’ allocation to US equities


may be low, they are still biased towards equity. As Yale Endowment puts it, “The need to ... preserve purchasing power of assets dictates investing for high returns, causing the endowment to be biased towards equity. In addition, the university’s vulnerability to inflation further directs the endowment away from fixed income and towards equity instruments. Hence, more than 95 per cent of the endowment is targeted towards investment in assets expected to produce equity-like returns.” It should be noted that absolute return strategies (investment


strategies designed to perform in both up and down markets by exploiting market inefficiencies) are also in the main invested in equity markets.


66 FAMILY OFFICE: ASIA TOMORROW


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