The Yale Strategy as a Model: How Foundations Can Preserve Real Purchasing Power Over the Long Term

Preserving capital in real terms has become increasingly demanding, as a wide-range of risks - from political intervention and systematic crises to behavioural investment errors - can erode asset values. However, the most significant threat is not only statistically calculated inflation, but the more fundamental loss of real purchasing power.

As a result, the central objective of a modern foundation portfolio should be capital preservation, after accounting for both consumer price inflation and asset price inflation. Traditional equity-bond allocations, which are still widely used, are often insufficient to achieve this objective.

You often refer to the endowment strategies employed by major US universities, such as Yale. What makes this approach so effective?

Over the past 20 years, the Yale model has delivered consistently strong results, achieving average annual returns approaching 11 percent. This success is underpinned by broad diversification across multiple asset classes.

In addition to equities and bonds, alternative investments - such as property, private equity and commodities - play a critical role in enhancing resilience, particularly in inflationary environments.

While the Yale model cannot be directly replicated within a German multi-asset fund structure, the underlying principle remains highly relevant: even moderate exposure to alternative risk premiums improves a portfolio’s risk/return profile.

What should investors consider when allocating to traditional asset classes?

A disciplined, long-term investment framework is essential, complemented by the flexibility to make active, tactical adjustments to asset allocation.

Within equities, the primary focus should be on companies with strong market positions, sustainable competitive advantages and attractive returns on capital. High-quality companies with reasonable valuations and reliable, growing dividend streams - ideally exceeding inflation - are key contributors to long-term real capital preservation.

In the fixed income sector, a global approach can provide stable returns while offering a degree of inflation protection. In addition to corporate bonds, sovereign bonds issuers s whose central banks prioritise price and currency stability, such as Switzerland and the Czech Republic, can be particularly attractive. Select opportunities also exist in emerging markets with solid fundamentals and appealing real interest rates.

What role do alternative investments play in a resilient foundation portfolio?

Alternative investments are a central component of endowment strategies. Alongside absolute return strategies, this includes instruments such as catastrophe bonds, which are uncorrelated with traditional asset classes, as their performance depends on the occurrence or non-occurrence of insured events rather than market dynamics.

While private equity exposure is not always feasible within a traditional German multi-asset framework, instruments that track physical precious metals, particularly gold, can offer an effective hedge against purchasing power erosion, extreme market events, and systemic crises.

At the same time, sustainability considerations remain important. In the case of precious metals, this includes responsible sourcing practices, environmental standards and supply chain transparency.

What are the implications for foundations reviewing their portfolios today?

Adopting an asset allocation approach inspired by university endowment models, such as those employed by Yale, incorporating a meaningful allocation to alternative investments - enables the construction of more robust and sustainable portfolios.

Such strategies are better positioned to preserve real purchasing power over the long term, while navigating an increasingly complex and uncertain investment environment.