Board paper Practice document Page 1 of 1
Hazel Foundation Investment policy, two choices · a foundation made up for this lesson
Choice A: the whole market, cheaply (as Norway’s oil fund) Hold 70% in shares and 30% in bonds, a small piece of more than 8,500 companies in about 70 countries.1 Almost everything can be sold within days.
When markets push the share part more than two points away from 70%, bring it back.2
Choice B: paid for waiting (as Yale’s endowment) Put much of the money into things that are hard to sell: buyout funds, young companies, property and forests, and hedge-fund-style strategies.3
Yale earned 10.3% a year over the 20 years to June 2024, and 5.7% in the single year to June 2024.4
Before the board decides The man who built Yale’s model wrote a whole book telling private savers not to copy it.5
The Hazel Foundation is made up for Red Start Education. The two funds and their numbers are real; tap a line for its source. Past performance does not predict future returns.
Line 1 · The whole market
A little of almost everything “Hold 70% in shares and 30% in bonds, a small piece of more than 8,500 companies in about 70 countries.”
Norway’s oil fund, one of the largest in the world, follows a simple benchmark: 70% shares and 30% bonds. It owns a small piece of more than 8,500 companies in about 70 countries, and may own some property and wind and solar farms directly. Almost everything it holds can be sold within days.
It lets the trustees Own a small piece of thousands of companies Own some property and wind and solar farms directly It never may Lean the fund on a few companies Tie up most of the money where it cannot be sold Read it slowly Cheap and broad is a choice: the fund’s result stays close to the whole market’s.
Check it yourself Count your own holdings and see how much the largest one weighs.
Source: Norway’s Ministry of Finance mandate, via nbim.no “Investment strategy”; NBIM annual report 2024
Line 2 · Rules, not moods
Back towards 70%, by rule “When markets push the share part more than two points away from 70%, bring it back.”
When markets push the share part more than two points away from 70%, the fund is brought back. If shares rise 25% in a year while bonds stand still, shares become about 74.5% of the fund, and the rule sells some to buy bonds. Nobody asks whether it feels like a good moment.
It lets the trustees Let the mix drift up to two points either way It never may Keep a drift of more than two points Wait for a feeling about the market Read it slowly A rule set in advance sells some of what has risen at the moment that feels least natural.
Check it yourself Write down your own mix today, and the drift at which you would bring it back.
Source: Norway’s fund mandate (regjeringen.no, as of 30 June 2024)
Line 3 · Paid for waiting
Money that can wait ten years “Put much of the money into things that are hard to sell: buyout funds, young companies, property and forests, and hedge-fund-style strategies.”
Yale’s endowment puts much of its money into things that are hard to sell. The idea is that an investor who can wait ten years is paid extra by people who cannot.
It lets the trustees Tie money up for years in buyouts, young companies, property and forests Use hedge-fund-style strategies It never may Need that money back soon Read it slowly Yale publishes no percentages for these parts, so none are given here.
Check it yourself Ask of anything you own: how fast could I sell it if I had to?
Source: Yale Investments Office, 25 October 2024
Line 4 · What it earned
Strong over 20 years, behind in one “Yale earned 10.3% a year over the 20 years to June 2024, and 5.7% in the single year to June 2024.”
Over the 20 years to June 2024, Yale’s endowment earned 10.3% a year. In the single year to June 2024 it earned 5.7%, behind a plain fund of world shares, and its own investment chief said a large share in private assets can lag when listed markets run.
It lets the trustees Judge the choice over decades Sit through years behind listed shares It never may Expect the 20-year average every year Read it slowly Two numbers from the same fund, both true. Always ask which period a return covers.
Check it yourself When a fund shows you a return, find the period it covers and the index beside it.
Source: Yale Investments Office, 25 October 2024 (CIO Matt Mendelsohn)
Line 5 · Where it bends
The builder’s own warning “The man who built Yale’s model wrote a whole book telling private savers not to copy it.”
David Swensen, who built Yale’s model, wrote a whole book telling private savers not to copy it. Yale’s results depend on finding the few outside managers worth paying, with a team and access no person has. For individuals he recommended low-cost index funds, which is closer to Norway than to Yale.
It lets the trustees Use Yale’s model only with Yale’s kind of team and access It never may Assume a private saver reaches the same managers Read it slowly The model’s own architect is the strongest witness, so the paper ends with him.
Check it yourself If a product offers you an endowment’s approach, ask which outside managers it uses.
Source: David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment (Free Press, 2005)