Yale lowers RE allocation target again

Yale University’s endowment plans to lower its real estate allocation from 10 percent of its overall portfolio to 9.5 percent in fiscal-year 2019 as part of its long-term strategy to reduce exposure to illiquid assets.

The Ivy League university has continued to lower its allocation to real estate since 2012, when the endowment allocated 21.7 percent to the asset class. If met, the 9.5 percent target would mark more than a 56 percent decrease in real estate investment exposure over seven years.

The gradual decrease in real estate allocation is part of the endowment’s longer-term plan to reduce exposure to illiquid assets such as real estate, natural resources and venture capital. The endowment’s investment committee intends to limit illiquid assets to 50 percent of the portfolio while increasing allocation to market-insensitive assets such as cash, bonds and absolute return to more than 30 percent. Yale declined to comment further on the investment strategy.

Yale reported an overall investment return of 12.3 percent and a total endowment value of $29.4 billion as of June 30. This represents an increase from fiscal year 2017, when the university reported a return of 11.3 percent and a total endowment value of $27.2 billion.

Long-term performance highlighted the endowment’s edge over other universities. Yale reported a return of 11.8 percent per annum over the last 20 years, outpacing the 6.8 percent average return of college and university endowments during the same period.

Real estate generated among the lowest returns for Yale among its asset classes, with returns of just 9 percent over the last 20 years. Out of the various asset classes, venture capital stood out with annualized returns of  165.9 percent over the last 20 years. Foreign equities, natural resources, leveraged buyouts and domestic equities followed with returns of 15.6 percent, 15.2 percent, 12.1 percent and 11.8 percent, respectively, over the same period. The worst-performing asset class was absolute return, with an 8.3 percent annualized return.

Yale’s overall returns beat out Harvard University’s fiscal year 2018 returns of 10 percent. However, it fell short of the 13.5 percent and 12.9 percent endowment returns reported by the Massachusetts Institute of Technology and University of Pennsylvania, respectively.