MEBISODE: Can We All Invest Like Yale?

Episode Summary

Executive Summary: Meb Faber revisits the Yale endowment model 15 years after The Ivy Portfolio, asking whether investors can realistically “invest like Yale.” The episode compares Yale, average endowments, 60/40, and the S&P 500 across long and short periods, showing Yale’s exceptional long-run record but also how market windows can radically change conclusions. The takeaway: simple public-market portfolios can get close, especially with factor tilts, leverage, and trend-following, but Yale’s access, active management, and illiquid alternatives remain hard to replicate.

Main Topics: The Yale endowment model and David Swenson’s legacy (Priority: 5/5): The episode centers on Yale’s long-standing endowment approach, built around equity bias, diversification, and tax efficiency, and credits David Swenson as an all-time great capital allocator. Long-term performance comparison across benchmarks (Priority: 5/5): Returns, volatility, Sharpe ratios, and drawdowns are compared for Yale, average endowments, 60/40, and the S&P 500 over roughly 40 years and shorter subperiods. The limits of average endowment investing (Priority: 4/5): The discussion argues that most endowments have been only average over time and that fees, illiquidity, and governance constraints likely hurt performance. Replicating Yale with public-market tools (Priority: 5/5): Meb tests whether Swenson’s individual allocation, factor tilts, and leverage can approximate Yale’s results using broadly accessible ETFs and rules-based portfolios. Trend following as a complementary overlay (Priority: 4/5): The episode suggests trend-following or managed futures can improve risk-adjusted outcomes when layered onto a leveraged or diversified core portfolio. Time-period dependence and interpretation risk (Priority: 4/5): A major theme is that performance rankings change dramatically depending on the sample window, making simple comparisons misleading.

Key Arguments: Yale’s long-term outperformance is real and exceptional, but it is not typical of endowments as a group. The average endowment has historically looked much like a competent diversified portfolio rather than a superior active strategy. Recent U.S. stock dominance can make passive 60/40 or equity-heavy portfolios look surprisingly strong on a Sharpe-ratio basis. Swenson’s individual recommended allocation performs solidly, but not enough to match Yale’s actual endowment record. Factor tilts to value, momentum, and shareholder yield can modestly improve results, but only by about 1 percentage point annually in the historical simulation. Leverage can push a public-market portfolio closer to Yale’s return profile, though at the cost of higher volatility and drawdowns. Trend following may preserve much of the upside while reducing volatility and drawdown versus a purely leveraged static allocation. Comparisons are highly sensitive to time window selection, and conclusions can reverse depending on whether one examines 15, 25, or 40 years. Illiquidity and smoothed reporting can make alternative-heavy portfolios appear less volatile than they truly are. For many investors, the practical answer is not to perfectly copy Yale, but to use broadly diversified public markets with thoughtful overlays.

Data Points: Yale endowment annualized return: 13.2% - Approximate 1985 to summer 2024 performance cited in the comparison table Average endowment annualized return: 8.8% - Approximate 1985 to summer 2024 performance 60/40 annualized return: ~10% - Approximate 1985 to summer 2024 benchmark result S&P 500 annualized return: 11.9% - Approximate 1985 to summer 2024 benchmark result Yale volatility: 12% - Long-run volatility estimate in the 1985 to 2024 comparison Average endowment volatility: 10% - Long-run volatility estimate in the comparison 60/40 volatility: 10% - Long-run volatility estimate in the comparison S&P 500 volatility: 15% - Long-run volatility estimate in the comparison Yale Sharpe ratio: 0.8 - Long-run risk-adjusted return estimate Average endowment Sharpe ratio: 0.56 - Long-run risk-adjusted return estimate 60/40 Sharpe ratio: 0.66 - Long-run risk-adjusted return estimate S&P 500 Sharpe ratio: 0.55 - Long-run risk-adjusted return estimate Worst year for average endowment: -18% - Largest one-year decline cited over the long sample Worst year for Yale: -24% - Largest one-year decline cited over the long sample Worst year for 60/40: -13% - Largest one-year decline cited over the long sample Worst year for S&P 500: -26% - Largest one-year decline cited over the long sample 2010 to 2024 average endowment return: ~8% - Shorter recent-period comparison 2010 to 2024 Yale return: ~11% - Shorter recent-period comparison 2010 to 2024 60/40 return: ~10% - Shorter recent-period comparison 2010 to 2024 S&P 500 return: ~15% - Shorter recent-period comparison 2010 to 2024 60/40 Sharpe ratio: 1.25 - Recent-period risk-adjusted performance, showing passive equities did very well 2010 to 2024 Yale Sharpe ratio: 0.96 - Recent-period risk-adjusted performance 2010 to 2024 average endowment Sharpe ratio: 0.73 - Recent-period risk-adjusted performance Swenson individual allocation: 20% U.S. stocks, 20% foreign stocks, 10% emerging markets, 20% REITs, 15% U.S. bonds, 15% TIPS - Allocation from Swenson's 2005 book used as a public-market proxy Simplified Ivy portfolio: 20% each in U.S. stocks, foreign stocks, U.S. bonds, REITs, and commodities - Simplified version of the original allocation discussed in the episode Yale endowment update allocation: 22% absolute return, 2% domestic stocks, 11% foreign stocks, 16% leveraged buyouts, 4% natural resources, 9% real estate, 23% venture capital, 14% cash/fixed income - Rounded figures from a 2020 endowment update Swenson Plus impact: A little over 1 percentage point added to returns - Estimated benefit from applying factor exposures to the Swenson-style portfolio Leveraged portfolio return: ~14% - Long-run simulated result after adding leverage to the public-market replication Leveraged portfolio volatility: ~18% - Volatility of the leveraged replication Leveraged portfolio worst year: ~ -30% - Drawdown severity for the leveraged simulation Trend allocation example: 30% allocation of trend out of the 150% portfolio - Illustrative overlay used to improve risk-adjusted results Yale-like operating costs estimate: At least 3% per year - Referenced estimate of endowment costs when allocating to alternatives

Pivotal Quotes: "Three basic investment principles inform asset allocation decisions in well-constructed portfolios." — David Swenson: Introduces Yale’s core philosophy of equity bias, diversification, and tax sensitivity "What could be some further extensions? ... If you utilized a 30% allocation of trend out of the 150% and normalized everything else, you would have generated similar returns to the leveraged portfolio, but with reduced volatility and drawdowns." — Meb Faber: Explains how trend following may improve the public-market replication of Yale-like returns "Can any of us really invest like Yale?" — Meb Faber: Central question driving the episode and paper

Implications: Most investors cannot fully copy Yale’s advantages, but they can borrow its principles: diversify, tilt thoughtfully, use leverage cautiously, and consider trend overlays. The real lesson is that implementation, fees, access, and time horizon matter as much as asset allocation.