In 36 years, the assets increased 40 times.
The Yale University Endowment Fund Model (referred to as the “Yale Model”) has always outperformed other investment institutions with its excellent performance. As a “revolutionary paradigm” in the investment community, the Yale model has also been imitated by other investment institutions. Many Chinese family offices regard the Yale model as a model.
However, we found in recent research that the Yale model is actually difficult to simply “copy” to Chinese family offices.
The Yale model is hard to copy
Zhang Lei, founder of Hillhouse Capital, once said in the book “Value”, “I began to think about how to build an investment institution that truly implements long-term investment concepts, transcends cycles, is not just about stages, and creates value. Establish such an investment institution. , has become my long-cherished wish.”
But in fact, the Yale model is difficult to be “copied” by domestic family offices. The main reasons are as follows:
First, there is a big difference between China and the United States in terms of the richness of asset classes.
The asset classes allocated by the Yale model are very rich, but it is difficult for domestic family offices to access such rich asset classes.
Second, asset positioning is different.
Most of the assets of the Yale University Endowment Fund are PE/VC with long lock-up periods, and they are funds in different regions, different industries, and different stages. This is also the unique feature of the Yale model. However, many Asian families have not earned high returns after investing in PE/VC and lack liquidity. Therefore, they are more hesitant when re-allocating to the primary market.
Third, many domestic family offices lack the patience to make long-term investments and prefer to “make quick money.”
When Bob, the head of a domestic family office, was talking to an entrepreneur, he discovered that the entrepreneur had only one need: to make a lot of money.
“Many domestic family offices generally lack mid- and long-term allocation planning when investing domestically and overseas.” Amy said, “They care more about liquidity and lack patience.” Fourth, the investment methods of domestic family offices are more flexible
Different from the standardized allocation process of the Yale model, domestic family offices are more willing to believe that they can double their assets through their own abilities, especially because the investment form of New Money (emerging capital) is very flexible.
Fifth, asset allocation capabilities are different.
The Yale University Endowment Fund has a decades-long history and is well known and reputable, and investment managers take the initiative to work with it. Therefore, it can “select the best of the best” and select the best investment managers in the world.
However, most family offices in China are still in their infancy, and they mostly look for investment opportunities in the “circle of acquaintances” centered on family owners, lacking access to high-quality global managers. In addition, even if some family offices come into contact with some fund managers with excellent performance, the other parties have also set certain thresholds for investors.
Sixth, asset scales are different.
Different asset sizes have different allocation logics. Yale University’s endowment fund has exceeded US$30 billion. With such an asset scale, the “comfort level” of allocating any large mainstream fund is relatively high.
Assuming that a family office with only US$300 million in assets wants to invest in a large mainstream GP, it will be difficult to be as “calm” as the Yale University Endowment Fund. Furthermore, if the family office invests in a 30 million yuan project, it faces the risk of too concentrated investment.
In Bob’s view, it is difficult for domestic family offices with smaller assets to have the leverage and ability to select top fund managers and GPs.
Seventh, external constraints and complexity are different.
Theoretically, there is only one owner of the Yale University endowment—Yale University, which has strong external binding force.
However, many family offices in China are similar to the boss’s personal investment company. Especially when the owner of the family office is a generation of the family, there is not much external binding force. In addition, in Amy’s view, domestic families also have their own complexities. They not only own family businesses, but also allocate equity and assets. It is difficult to copy the Yale model.
In addition, whether the owner of the family office has the same long-term influence and judgment on core resources as David Swenson, the creator of the Yale model, is the key to determining the long-term and sustainability of the investment.
Five insights from the Yale model
Of course, there are also many aspects of the Yale model that are worth learning from and learning from domestic home-based businesses, including the following five points.
First, define the investment cycle.
Bob found that European families have become more objective in their views after experiencing different historical cycles. Generally speaking, the longer the history of a family, the longer the cycle of family asset allocation.
Second, think about ways to make money like the Yale model.
However, the “Yale University Endowment Fund Allocation Theory” does not make much sense to family offices. The essence of the Yale model is not diversification and diversification of investments, but an endogenous ability.
Family offices need to think clearly about the purpose of learning the Yale model. Is it to beat inflation, or to provide a stable source of funds for the family? How to define investment cycle? What is the risk tolerance? Between universality and preference, how to establish a position that suits you?
Bob believes that many family offices that study the Yale model are superficial and do not delve into its underlying logic. The core of the Yale model lies in value management and cash flow management. The Yale Fund is a school foundation and must give priority to meeting school operating expenses and scientific research expenses. This is called the cash distribution rate, and the core of cash distribution lies in the cash flow design of the asset portfolio.
Third, learn risk management.
The risk management capabilities of the Yale model include: how to judge risks and diversify risks when building an asset portfolio. For Yale Fund, risk management is not just a skill, but also a cognitive ability and even an “emotional management ability.”
Why “emotion management ability”? For example, most people’s emotions will fluctuate when the market fluctuates. Very few people can be “steady as a mountain”, but the Yale University Endowment Fund can handle it calmly.
Fourth, respect cycles, make reasonable expectations, run quickly in small steps, and correct mistakes in a timely manner.
Generally speaking, cycles have a great impact on the target income expectations of family offices. Jeff suggested that family offices should not imagine building a perfect asset allocation model from the beginning, but should continue to improve their investment portfolios in practice.
“To learn from the Yale model, we should combine organizational culture and rationally define cycle goals and risk management capabilities.” Bob concluded.
Fifth, learn from Yale’s organizational management model.
The Yale University Endowment Fund is an institution with a stable organization, which is also the premise for it to establish various asset allocation models. In particular, the external fund managers and incentive system are a highlight of the Yale model.
Traditionally, university endowments have hired in-house fund managers to carry out the investment process. All investment activities, including asset allocation, stock picking strategies, and even timely entry and exit of the market, are performed by in-house investment managers.
Yale University is different: it chooses to allocate assets to selected external fund managers and entrusts them with stock selection strategies and investment market timing.
Structurally, the Yale Endowment as a whole relies on a smaller number of in-house investment professionals, each of whom oversees a larger number of assets, than a large joint family office that follows a traditional investment approach.
In addition, Svensson is also worth learning from many people on how to select fund managers.
In addition to having very strong analytical and investment skills, the fund managers selected by Yale University will also carefully establish relationships with each external fund manager.
The fund managers hired by Yale do not only value the timing of entering and exiting the market, nor only intuitive investment activities, but also the consistency of their cooperative investment philosophy, and are paid based on performance. The Yale Endowment Office avoids hiring fund managers who focus solely on growing the size of their portfolios rather than on returns and performance.
In other words, Yale only hires fund managers who can create great returns and act aggressively. In addition, Yale University mainly follows the following points when selecting fund managers:
(1) Interest alliance relationship. Optimize fee structure to maximize long-term returns rather than minimize investment; significant internal capital and commitment.
(2) Full autonomy and appropriate incentives. Just be cautious and don’t interfere.
(3) Long-term partners. Establish cooperation, usually lasting at least 10 years or more; close interest relationship, rather than constantly changing its investment portfolio in the short term.
Yale is very cautious when selecting fund managers, and the number of fund managers working with Yale is very limited. Once an investment is made, Yale will intervene as little as possible in the operations of investment managers and give them more autonomy. For many fund managers, Yale is often an extremely important client.
In addition, other important criteria that Yale considers when selecting fund managers include: fund managers who are young, motivated, or employee-owned; single investment strategy; partners with significant co-invested capital; confident, focused, and long-term investors. ; Follow the bottom-up, basic theory research stock investment method; non-short-term trading; values.
Build a sound investment portfolio
In addition to the above experience that can be used for reference, the greatest success of the Yale model lies in constructing a reasonable investment portfolio and effectively diversifying investment risks. Because David Svensson believes that diversification reduces risk. This belief has led to Yale’s investment portfolio being less heavily invested in bonds and real estate and instead diversified into other asset classes.
According to Shinya, managing partner of Xinghua Mulan Capital, this is the most inspiring place for wealthy families in Asia.
In the 1980s, the Japanese economy created incredible growth that surprised the world. Especially from 1985 to 1989, the Nikkei Index more than tripled and hit a record high of 38,957.11 points.
This also created a group of Japanese billionaires. At that time, their wealth accounted for almost 13.6% of the world’s billionaires. Today, this proportion has shrunk to just 1.4%.
What is the reason for the serious shrinkage of the proportion of wealthy people in Japan? The export letter also believes that this is because Japanese billionaires are not good at managing wealth.
When Japanese real estate appreciates, so does the country’s wealth. This extreme and rapid surge in real estate and stock market values has created a huge asset bubble. Between 1990 and 1999, the Nikkei Index plummeted, and Japanese real estate also depreciated.
Until 2004, Tokyo’s housing prices were only 10% of their peak value between 1980 and 1989. At the same time, land prices in Tokyo’s Ginza business district, the most expensive in Japan, fell by 99%. In addition, 20 years after reaching its peak in 1989, the Nikkei Index closed at 7,054.98 points on March 10, 2009, a full 82% drop.
The collapse in real estate values combined with the depreciation of Japanese stocks has caused the fortunes of many Japanese billionaires to plummet.
”If they had not invested all their wealth in real estate and stocks, but invested their wealth in different asset classes, plus annual compound interest, they would have become a world-class wealthy family by now.” The export letter also stated this. express. Sadly, many people are even less wealthy than they were in 1989. While billionaires around the world are getting richer, many Japanese billionaires have seen their wealth stagnate or even suffer serious losses.
Today, many wealthy families in China are experiencing a similar situation. Their wealth is too concentrated in real estate and they are overly dependent on this asset class. Once the real estate crashes in the future, their family wealth will definitely be hit hard.
Therefore, the export letter also suggested that wealthy Asian families could adopt a Yale-style allocation model to diversify risks. Asian families can manage their wealth effectively simply by hiring small teams of investment professionals. Small teams, on the other hand, carefully select external fund managers and make full use of their expertise to effectively manage funds.
”Rome was not built in a day.” For domestic family offices, the Yale model has something to learn from, but it is not advisable to “borrow it” directly. Instead, it should gradually explore and truly establish a mature asset allocation model that suits itself.