Page 36 - DIY Investor Magazine | Issue 30

USING INVESTMENT TRUSTS TO TAKE THE YALE ROAD
An analysis of the long term returns from Yale’s asset class buckets and those of listed funds show that broadly similar returns are achievable. Investors with long investment horizons, such as SIPPs or JISAs could adopt Yale’s more adventurous asset allocation framework; the challenge is accepting the risk and illiquidity that comes with private markets investments.
This change for SIPP investors is dramatic, but no more so than the changes made by Yale itself in the 1990s. In 1990, 65% of Yale Endowment was U.S. stocks and bonds. Today, target allocations are 9.75% in US securities and cash, with diversifying assets of foreign equity, absolute return, real estate, natural resources, leveraged buyouts and venture capital representing 90% of the portfolio.
Will investors follow and take the plunge? We believe Yale’s strong performance over the years justifies it and, if history is anything to go by, many investment portfolios will become less dominated by listed equities. We already see a trend towards private market investments, but Yale suggests the trend has a long way to go. Investment trusts deliver an advantage, with
a wide selection of strategies and managers available giving a relatively liquid way of gaining exposure to Yale’s ‘non- traditional asset classes’ where the ‘endowment’s long-time horizon is well suited to exploit illiquid, less efficient markets’.
‘INVESTMENT TRUSTS DELIVER AN ADVANTAGE, WITH A WIDE SELECTION OF STRATEGIES AND MANAGERS AVAILABLE’
SIPP investors with a multi-decade investment horizon could adopt an ‘endowment’ portfolio model. Several of Yale’s buckets are relatively simple to populate from the open-end or investment trust sectors, including domestic equities, foreign equities, cash and bonds, real estate and natural resources.
Those seeking suitable absolute return funds might consider BH Macro, some constituents of the AIC Flexible sector or a plethora of absolute return UCITs funds.
NOTHING VENTURED, NOTHING GAINED
Yale’s real differentiator is its 35% target allocation to venture capital (VC) and leveraged buyouts, but there are relatively few directly comparable avenues for the VC allocation, which Yale targets as 23.5% of its portfolio. Yale’s venture managers target innovative start-ups which is undeniably a high-risk strategy
– it expects long term real returns of 12.3% pa but with risk of 37.8%.
Over 20 years, Yale has achieved 11.2% pa from its portfolio,
a little disappointing given the risks. The AIC’s Growth Capital sector is an obvious avenue to explore, but remember trusts in this area have relatively short track records and it takes time for managers to see the fruits of their labour.
Trusts offering exposure to venture include Third Point Investors (TPOU) where the board recently approved increased allocation to venture and private equity up to 20% of NAV; it
is developing a strong track record in the venture space, with the IPO of one investment, SentinelOne, achieving a first day trading valuation of more than 100 times the price at which Third Point invested in 2015, illustrating the potentially explosive returns achievable. AI-driven lender Upstart is a second high profile IPO from its portfolio which has appreciated more than five times since December 2020.
Venture is a differentiated strategy to private equity, but HarbourVest Global Private Equity (HVPE) has the highest allocation of listed private equity trusts, with 35% of NAV in ‘venture and growth equity’ funds; other trusts with exposure to VC include RIT Capital Partners (8.9%) and Scottish Mortgage.
BUYOUTS
Yale’s leveraged buyout allocation is a similar strategy to the listed private equity (LPE) sector, with a wide range
of approaches to access ‘extremely attractive long-term risk-adjusted returns’ from a strategy that ‘exploit[s] market inefficiencies’.
We believe buyouts represent a lower risk proposition than venture and different in that buyout managers control their companies, set strategy, drive value creation and decide when to crystallise value by selling. Yale’s buyout portfolio expects real returns of 8.6% with risk of 21.1%, and delivered 11.2% p.a. over 20 years.
The LPE sector can offer better access than Yale has, as investors can buy into funds with established portfolios of investments, with most trusts trading at material discounts to NAV.
FIRST STEPS IN A MOVE TOWARDS YALE
Confirming the attraction of private equity, the venerable F&C Investment Trust has long had a commitment to it as part of its global investment approach, now near 10% of NAV. Investors wishing to move towards an endowment model might consider being even bolder, allocating 20% of their portfolio into LPE trusts rather than equity exposure elsewhere - a significant divergence from traditional portfolios with between zero and 5% in LPE trusts.
DIY Investor Magazine | Sept 2021 36