Page 35 - DIY Investor Magazine | Issue 30

ARC PRIVATE CLIENT INDICES ALLOCATIONS
Cautious
Balanced Asset
Steady Growth
Equity Risk
Source: ARC Reaearch Ltd
Equity (%)
23
44
63
80
Fixed income (%)
38
30
22
15
Other (%)
18
15
11
4
Cash (%)
21
11
4
0
Overall, Yale’s exposure to equity is roughly similar as the
‘equity risk’ allocation of private client portfolios; the real difference is where Yale gets its equity exposure.
YALE ENDOWMENT ALLOCATIONS
This chart shows Yale’s very high exposures to Venture Capital, Absolute Return and Leveraged Buyouts (60% of exposure)
- perhaps ten times the exposure that private client or retail portfolios typically have.
‘THE TRUST STRUCTURE GIVES MANAGERS A HIGHER CHANCE OF PERFORMING TO THE BEST OF THEIR ABILITY’
FOLLOWER OF FASHION
Yale’s success prompted many smaller endowments to follow its example by adopting a similar asset allocation.
Swenson regularly warned against a blanket application of the model, and the results of smaller endowments that adopted Yale’s model have generally been mediocre.
We don’t believe the reasons given for underperformance apply to a retail investor; investment trusts are by definition pretty much closed to new investment. The secondary market is the entry point, so for small investors, all trusts are open for business during LSE trading hours for subscriptions and redemptions. Manager selection is a significant hurdle to achieving returns as strong as Yale’s but we believe the investment trust universe represents a ‘premier league’ for investment management talent.
Firstly, there are a limited number of trusts, so demonstrable skill is required to be awarded a mandate. Secondly, an independent board continually monitors performance, taking action if it is not maintained. Thirdly, the trust structure gives managers a higher chance of performing to the best of their ability away from the pressures of inflows and redemptions and liquidity concerns of underlying stocks. We contend that the investment trust universe provides a good source of talent to populate a long term, Yale model allocation.
Why Yale has maintained its performance lead remains hard to pin down; most explanations centre around having first mover advantage (with many managers now closed to new investors), the resource and skill the Yale team bring to manager selection, and the practical difficulties of putting capital to work in less liquid, private markets.
35 DIY Investor Magazine | Sept 2021