“Game over”: investors are looking for a new model after years of significant gains


Institutional fund managers grapple with bleak prospects for investing, sending them scouting for the next big ideas decades after the late David Swensen sparked a revolution when he arrived at Yale’s endowment in 1985.

It is an urgent problem. Asset distributors like Swensen – who run large institutional funds like pensions, endowments or sovereign wealth funds – face one of the most difficult investment landscapes in history.

The bullish rally in bonds, which pushed yields lower, means there are few valuable sources of income left in global markets. Even the yields on junk European bonds are now lower than those on 10-year US government debt ten years ago.

The high prices of fixed income assets mean that bonds, usually a ballast in portfolios, are unlikely to offer much protection if stocks tremble again. At the same time, stock markets are now trading at high valuations in many countries, which limits their room for improvement.

“Falling interest rates have been the driving force behind a dual bull market. You couldn’t lose for 40 years. But this game is over now, so what do you do? Said Stan Miranda, president of Capital Partners, which manages $ 40 billion on behalf of foundations, family offices and charities.

This is a question many investors are asking themselves now, and few have good answers. But some think the future may look Canadian, where some large pension plans have pioneered an internal DYI approach to large investments.

Based on historical valuations and returns, AQR, the investment group, now estimates that a traditional 60/40 wallet – split between 60 percent in stocks and 40 percent in bonds – will only earn 2.1 percent a year after accounting for inflation over the next five to ten years. A 60/40 US portfolio will return a stingy 1.4% in the coming years, compared to an average of almost 5% since 1900.

As early as the 1980s, Swensen realized that a 60/40 wallet was a bad idea for institutions like Yale. Investors with longer time horizons and no redemption risk can handle more short-term volatility, don’t need a lot of safe, low-yielding fixed income securities, and can lock their money into investments for long periods of time. years.

Following this premise, Swensen increased Yale’s allocation to bonds in favor of equities and invested billions in more aggressive but diversified investments in private equity, venture capital, hedge funds and even woodlots. . This has enabled Yale to achieve average annual earnings of over 12% over the past three decades.

Yale endowment increased sharply under Swensen's leadership

The challenge is that Swensen’s Yale model has been emulated by many, but successfully replicated by little.

Copying Yale’s asset allocation is in theory straightforward, but part of Swensen’s “secret sauce” was his ability to find fund managers who could consistently outperform and invest early enough that he could keep Yale’s money. with them. But nowadays, many leading hedge funds are closed to new investment, and the best venture capital and private equity firms cap the size of their funds.

What’s more, what was once pioneering is now commonplace. According to the National Association of College and University Business Officers, the average American foundation now has more than half of its money in alternative and “real” assets such as real estate and infrastructure. Twenty years ago it was less than 10%.

Yale Endowment Asset Allocation

This tide shows no signs of slowing down. Most investors are increasing allocations to alternatives to counter the prospect of darkening traditional markets, notes Mohamed El-Erian, former director of endowment at Harvard. “The reason why these vehicles have become so popular is that they allow you to use leverage without showing that you have used leverage because it is found in the vehicle itself,” says -he.

Some industry insiders worry that doubling down in trendy areas at best erodes their yields and at worst turns out to be dangerous and fuel bubbles. Instead, some advocate that the next big evolution of the “Yale model” of institutional investing will have a Canadian flavor.

Ten-year annualized returns bar graph (%).  show that Canadian pension funds have a punch

Several Canadian pension plans have formed large in-house investment teams to buy companies and infrastructure projects directly, either alongside a private equity partner or replacing them altogether. Internal teams can be expensive, but not as expensive as the hefty fees charged by private equity.

The results are favorable. Partners Capital estimates that the five largest Canadian pension plans have achieved average annual returns of almost 10% over the past decade, comparable to Yale and well above the endowment average of 7.3%. Americans.

However, copying Canadians can be as tricky in practice as copying Yale’s model, warns Mark Anson, chief of staff. Common fund, a nonprofit group that manages $ 26 billion on behalf of charities and foundations too small to have their own investment teams.

He stresses that directing investments requires large internal teams and that their compensation must be competitive to attract experienced and quality staff, which can be controversial in some endowment funds or public pension plans. In addition, the bad publicity if an investment goes wrong can be difficult for many institutions to bear.

“When you get into the devilish details, it’s a lot harder to do than people think,” says Anson.


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