ASSET ALLOCATION USING THE HARVARD, PRINCETON AND YALE STRATEGY

What is Asset Allocation?

Asset allocation simply means segregating different asset types such as stocks, bonds, and cash
in an investment portfolio. If you have a billion dollars that you want to invest, you surely
wouldn’t want to risk putting all of it into one type of investment because if the investment
fails, chances are, you will not only lose profit but also the rest of the money you initially
invested. There are different ways to cut a billion-dollar pie, so to speak, and the process of
slicing it according to different investments where you want to allocate it is the essence of asset
allocation. This also means that the choice of mix of assets to own in your portfolio requires a
personal decision that would depend largely on your time horizon – like how long you would
expect and are willing to wait to realize your investment’s financial goals – and your ability to
accept risks – how willing are you to lose some of your money in order to realize greater
potential profits.

There are many ways of doing asset allocation, and most investors seek professional help from
financial advisors on what kinds of investments to get into and by what percentage of their
total financial powers should be invested into each type of investment. Advisors and investors
are increasingly allocating larger and larger portions of their investments away from traditional
investment strategies like stocks and bonds and more and more towards alternative investment
strategies. Some of the popular alternative investment strategies nowadays include hedge
funds, commodities, managed futures, et cetera.

While conventional investment strategies are widely known and accepted by people who are
new to investments, you will realize in this article that alternative investment strategies are
actually being used for more than two decades by reputable institutions like Harvard University,
Princeton University, and Yale University. By allocating a large percentage of their assets – what
they call “university endowments” – into alternative investments, they were able to enjoy
returns that are higher than what conventional investment strategies could offer.

How the Big Universities Allocated Their Assets

The strategy employed by Harvard University, Princeton University, and Yale University is also
called the University Endowment Investment Model. Since its inception in the 80s, it remains
one of the most powerful investment strategies used before the 2008 financial crisis and even
after. In simple terms, the model shows that major educational institutions have allocated a
major portion of their university endowments into alternative assets. This means that
universities like Harvard and Yale were using two strategies in investments: traditional in one
side and alternative investment in the other. This is best illustrated by a research conducted by
the National Association of College and University Business Officers (NACUBO, 2007).

The research aimed to look at the average asset allocation of several universities in the United
States. These universities have more than $1 billion in assets and included prestigious
educational institutions such as Yale, Princeton, Stanford, and Harvard. According to the
research’s findings, the average asset allocation of 62 such universities can be broken down
into the following:

Traditional Investments
Equities (stocks) = 44.9%
Cash = 1.7%__
TOTAL = 46.6%

Others
Fixed Income = 12.5%
Others = 0.5%__
TOTAL = 13.0%

Alternative Investments
Hedge Funds = 22.4%
Real Estate = 4.4%
Venture Capital = 3.5%
Private Equity = 5.9%
Natural Resources = 4.2%__
TOTAL = 40.4%

As can be seen from the table above, the investments poured into alternative assets make up
40.4% of the total university endowment fund. This is an average figure and sums can vary per
university. The point being driven here is that respectable institutions have been profiting for
more than 20 years on an investment strategy that relied as much on conventional investment
strategy like stocks as it did on alternative investment strategy such as real estate.

To understand how powerful this strategy works, let’s look at NACUBO’s findings in 2007
following its ten-year observation of the behavior of university endowment investments.
According to NACUBO, for the 10 years ending 2007, the annualized returns for Harvard and
Yale are 15.0% and 17.8% respectively, which are considerably greater than those of their peers
whose investments were solely traditional in nature. Traditional investments of their peers for
the same ten-year period only reached 6.6% to 8.6%. Harvard’s university endowment fund has
been the largest in the United States at $34.9 billion, with Yale trailing close behind at $22.5
billion.

The University Endowment Investment Model clearly shows two basic principles of investment
at work. First is asset allocation – how to spend their endowments wisely by putting the eggs in
separate baskets, so to speak, which leads to the second important principle of sound
investment: diversification. By allocating their resources into separate kinds of investments,
these universities were able to buffer themselves against risky investment moves. One
investment can work stronger than another during a two-year period, but this strong
investment may nosedive following a major economic change and so change the tides; in cases
like these (which is not wildly farfetched), multiple investments means security that the
universities can still stay afloat by relying on other investments and incomes, even if one
investment turns afoul for a certain period. This also illustrates the power of using alternative
assets and diversification. Alternative investments are growing in popularity because it
diversifies the investor’s portfolio, thus reducing the risk of, and buffering the investor against,
total loss.

If the model has worked for universities, it can surely work for individual investors as well. Now
is the time for you to consider using the asset allocation of these respected institutions.
Incorporate alternative investments into your portfolio now and start realizing double-digit
percentage returns on your investment.-