Leaders Yet Again: Yale and CalPERS
A couple of headlines in Pension’s and Investments caught my attention last week. I learned that “Yale endowment adds $100 million to emerging markets ETF” and that “CalPERS chopping hedge fund allocation.” When it comes to endowments and public pension plans, Yale and CalPERS have been among the leaders for the past thirty years. The Yale model is, after all, the asset allocation scheme that has become the alternative to the conventional “stocks and bonds” model. CalPERS has been the pioneer among public pensions; stepping into hedge funds and private equity well ahead of most other public investors.
It’s not Yale’s investment in emerging markets that caught my eye. Rather it’s their use of a Vanguard exchange-traded fund. The same article mentioned that Yale increased its ownership of an iShares EAFE ETF. Apparently, Yale sold positions in several individual stocks during the same period. Over the years, Yale has been cited for the proposition that investors can generate alpha through careful manager selection in an unconventional asset allocation. We are seeing Yale managing beta (market exposure) in low-cost passive vehicles.
CalPERS, which began investing in hedge funds in the early 1990s is cutting their exposure in half. They’re also cutting their private equity exposure from 14% to 10%. CalPERS faces the same investment environment as everyone else, and the same deficit problem as most public pension plans. The vast majority of big pension plans are continuing to reduce their fixed income portfolio (low yields) in favor of the alternative asset classes in order to reach for higher returns. While CalPERS enjoyed some early successes in these programs, they’ve discovered that it’s difficult to generate exceptional returns when everyone else is piling into the same strategies.
I’m not suggesting that investors should follow Yale into the emerging markets or join CalPERS in reducing their alternative exposure. Rather I think both investors are demonstrating the value of investment leadership. Both Yale and CalPERS are trying to drive down the costs of their investment bets. More importantly, they are doing what they think is right for their respective funds rather than following the herd.