What Yale's Endowment Manager Learned From Keynes

The Yale Endowment Fund has been extremely successful.  Pension funds and other endowment funds have attempted to copy the strategies employed by the Yale endowment.  The manager of the Yale Endowment learned a lot from Keynes who managed the Kings College Endowment between 1921 and his death in 1946.  Some of the ideas that were learned from Keynes are described in this article.

College endowments in England were concentrated in real estate and bonds which were considered to be safer than equities.  Keynes preferred investments in equities because the Kings Endowment had a long term time horizon.  Keynes did not believe that it was possible to successfully time the equity market but equities were more liquid than real estate and over the long term they provided a good return.  Keynes learned about the benefits of a long time horizon during the Great Depression.  Keynes held onto his equity portfolio when prices collapsed in 1929 and he reaped the gains when equities recovered in the late 1930's.  Equities were also preferred to real estate because they were more liquid. If cash was needed in an emergency it could be more easily realized with equities.

That brings us to another important point about private equity investments and real estate.  Investors should build a liquidity premium into their strategies.  Illiquid investments should bring a large premium over more liquid investments.  The Harvard Endowment had invested heavily in illiquid private equity investments and hedge funds; it was forced to raise cash at a steep discount in 2008 when it needed funds for other purposes.  The Harvard Endowment lost billions in 2008.

The Yale fund manager also provided a warning to active investors.  He did not believe that most active investors could be successful in timing the equity market.  Like Warren Buffet, he argues that most equity investors should put their savings in low cost index funds that distribute the risk over a broad portfolio and are not actively managed.  That is good advise that is not typically heeded by individuals.  Most individuals put their savings into more expensive actively managed funds.  Typically their net return is lower than it would have been in low cost index funds.