Yale: Alpha’s Not Dead, But Finding it is Hard

(February 28, 2014) — Yale University has claimed that while alpha isn’t dead, opportunities to access it today may not be available to all investors.

Writing in its annual report, the endowment’s investment office rejected views that the recent drive by other investors into the alternatives markets had reduced the ability to outperform.

The alternatives-heavy and highly illiquid strategy championed by long-time Yale CIO David Swensen has often attracted criticism, not least because the so-called Yale Model led to catastrophic losses of $6.5 billion in 2009—a 24.7% reduction of the endowment’s value.

For 2013, the endowment produced a 12.5% return on investments in the year ending in June, beating the 11.3% average for foundations and endowments, according to Wilshire Associates.

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The annual report stressed that manager selection and having a sophisticated investment team meant it was confident of recovering the losses from the financial crisis in the near future.

“Yale has consistently demonstrated its ability to identify high-quality active managers. For the 20 years ending June 30, 2013, 57% of Yale’s outperformance relative to the median Cambridge Associates endowment was attributable to the value added by Yale’s active managers,” the report said.

“Over the past two decades, the endowment returned a cumulative 1,152% relative to the Cambridge median of 402%, an outperformance of 5.1% per annum.

“The endowment was able to generate alpha even as alternative assets became increasingly capitalized and competitive. Manager selection remains an important differentiating factor for Yale.”

On average, US universities’ allocated 53% of their portfolios to alternative strategies in 2013, down from 54% the year before, according to data from Nacubo and Commonfund.

Among some of the asset allocation changes made in June 2013 by Yale were the increase in absolute return funds to a target of 20% from 18% and the lowering of the private equity target to 31% from 35%, according to its report. It also increased foreign equity targets to 11% from 8%.

The full report can be found here.

The investment office also revealed it has collected $36 million in donations in Swensen’s honour. Swensen, 60, has been the university’s chief investment officer since 1985, and pioneered the alternative investment strategy.

The gifts raised through the Swensen Initiative will be invested in Yale’s Endowment.

(February 28, 2014) — Mohamed El-Erian has accepted a part-time role as chief economic adviser for German insurer Allianz, following his shock decision to leave the Allianz-owned fund manager PIMCO last month.

Allianz CEO Michael Diekmann told a Munich press conference yesterday that El-Erian would spend 50% of his time in the role, working alongside Chief Economist Michael Heise. The remainder will be spent on book projects and spending time with his family.

The former PIMCO chief executive officer and co-chief investment officer hit the headlines on January 21 by shocking the market with his unexpected resignation.

His departure coincided with a broader shakeup of PIMCO’s senior executives and follows one of the firm’s worst years in decades.

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Investors pulled €35.6 billion from PIMCO in the fourth quarter of 2013, capping a tumultuous year for the bond giant in which assets under management fell 10%.

PIMCO’s official announcement failed to provide an explanation for the resignation of Gross’s second-in-command.

But media reports, originated by articles in the Wall Street Journal citing internal PIMCO sources, have since suggested a major falling out between El-Erian and PIMCO founder and co-CIO Bill Gross.

The paper reported that the two men openly squared off in front of more than a dozen colleagues amid disagreements about Gross’s conduct last June.

“I have a 41-year track record of investing excellence,” Gross is said to have told El-Erian, according to two witnesses. “What do you have?”

“I’m tired of cleaning up your ****,” El-Erian is said to have responded, referring to conduct by Gross that he felt was hurting PIMCO, the same two people recalled.

Allianz’s Diekmann said that he could not confirm the media reports about the reason for El-Erian’s resignation, according to Bloomberg.