I was recently talking with a principal of a billion dollar global investment fund and he made the comment that even most high net worth investors are underweighted in commercial real estate investments.

The comment reminded me of David F Swenson and the Yale Model. This investment strategy highlights just how essential real estate allocation is to a well-balanced portfolio…

David is the Chief Investment Officer in charge of the Yale Endowment, a trustee of TIAA-CREF (a Fortune 100 financial services organization), and the author of Unconventional Success: A Fundamental Approach to Personal Investment.

David Swenson created the Yale Model which is the investment strategy used by the Yale Endowment. Over the last 20 years, the endowment has grown at a staggering 13.7% compounded annual return.  In other words, $1 million invested 20 years ago, would have grown to over $13 million today.

This is directly from the Yale Endowment’s website:

“Over the past two decades, Yale dramatically reduced the Endowment’s dependence on domestic marketable securities by reallocating assets to nontraditional asset classes. In 1992, over half of the Endowment was committed to U.S. stocks, bonds, and cash. Today, foreign equity, private equity, absolute return strategies, and real assets dominate the Endowment, representing almost 90% of the target portfolio.”

The investment strategy also recognizes that liquidity should be avoided, not pursued, because in a diversified portfolio liquidity could actually result in lower overall returns (capitalizing on the return premium for lower liquidity assets).

Following that principal, the endowment has nearly a quarter of its assets in income producing real estate investments and Yale is increasing that allocation even further. 

Yale Asset Allocation

By comparison, during approximately the same period of time (the timeline of reported returns do not overlap exactly, but close enough to compare), the Fidelity ‘Growth’ allocation returned a 7.4% annual return, which would turn $1 million into just over $4.4 million.

Fidelity Asset Allocation

Fidelity’s 70% growth allocation was chosen because Fidelity is a widely respected financial services firm and a 70% equities/30% bond and treasuries allocation is often used as an example of a ‘balanced’ portfolio.

The glaring omission from most allocation pie charts provided by financial services firms is real estate. Financial services firms typically include stocks and bonds in their portfolio allocations, both of which they generally make commissions when they sell to investors. Financial services firms typically do not make commissions offering direct real estate ownership. However, to compensate for that they replace any direct real estate ownership with REITs, which is basically a stock share of a company that owns real estate.

In his book Unconventional Success: A Fundamental Approach to Personal Investment, David writes, “Pursuit of nontraditional strategies poses significant challenges for investors. Human nature prefers the comfort that comes with pursuing a time-honed strategy.  Sharing a common outcome with a large number of fellow citizens creates a mutually reinforcing social bond. Unfortunately, the comfortable rarely produces success.”

In the book, David uses 20% invested in real estate as his example of a balanced portfolio for an individual. 

David goes on to say, “Asset allocation decisions play a central role in determining investor results. A number of well-regarded studies of institutional portfolios conclude that approximately 90 percent of the variability of returns stems from asset allocation, leaving approximately 10 percent of the variability to be determined by security selection and market timing… Careful investors play close attention to determination of asset class targets.

So should you count your house in the equation? Michael Kirby, a longtime industry analyst and founder of Green Street Advisors answers that in this way, “You should own a house to provide shelter… In a way it’s not an investment, and it’s not part of your investment portfolio.”

Considering a well-balanced portfolio that includes a broad spectrum of asset types that mimics the Yale Endowment could prove beneficial to an investor. The benefits of commercial real estate ownership are not mistakable…higher annual cash returns, appreciation, and pride of ownership.  Unfortunately participating in real estate was nearly impossible as a result of some of the highest barriers to entry of any investment type…until now.


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