Robin Wigglesworth’s “The death of the Yale Model” (Alphaville, April 1) outlines the tough maths faced by foundations, endowments and other practitioners of a multi-asset class, management-heavy approach.
The article suggests that the Yale model’s high fees, high illiquidity and complexity make it hard for it to outperform simpler equity-bond portfolios. These challenges are not new. Yet pivoting back to simpler equity-bond portfolios is the wrong answer. Simple equity-bond portfolios are not resilient — for example, over the past 120 years there have been six periods of seven years or more when they have delivered negative real returns.
Instead, the solution lies in advancing the application of the endowment model to deliver outperformance while also enhancing the resilience offered by a truly diversified multi-asset class approach.
Let me start with returns. The explosion of capital in private markets has made delivering outperformance harder. But the opportunities remain rife in several niches and accessing these through cost-effective partnerships with managers can achieve significant returns.
For example, private companies have grown earnings 3 percentage points faster than public companies since 2008. To stay on the right side of this, one needs exposure to these companies through private equity managers who can help drive earnings growth, most notably through operational improvements.
Likewise in private credit there are exceptional opportunities available in asset-backed lending which is following a similar path to senior direct lending in the wake of the 2008 financial crisis, with banks pulling such assets off their balance sheets due to stricter regulatory requirements.
Next, look at resilience. In a world of increasing uncertainty, the key to a resilient portfolio is to have a good proportion of assets in uncorrelated or lowly correlated strategies. While the average hedge fund represents high fees with no outperformance, when packaged together carefully, chosen absolute return strategies can deliver 3 to 5 per cent returns over short-term bonds with very low correlation to broad equity and bond markets. This offers real resilience during periods of significant market distress (for example in 2022 when both stocks and bonds declined).
In sum, while simple equity-bond portfolios may have performed well over the past decade, the endowment model, advanced and adapted appropriately, is a far better approach to take in a highly uncertain world.
Arjun Raghavan
Global CEO, Partners Capital Investment Group, London W8, UK
