Lessons in managing multi-generational wealth

Kristoffer Jonsson, Senior Investment Manager

Lessons in managing multi-generational wealth

The Yale Model, sometimes known as the Endowment Model, sets out investment strategies and basic principles that are also part of the investment philosophy that are also applicable to families with long-term perspectives.

Top-tier US endowments achieve superior results. The Yale endowment fund has delivered an average annual return of over 11% over the past 10 Years. Yale and other endowment funds are able to achieve strong results by taking advantage of their long-term time horizon and abil­ity to tolerate short-term drawdowns to invest across assets globally with an important allocation to private investments.

A link exists between endow­ment funds and multi-generational wealth management, with similarities in invest­ment objectives and governance. Endowments and families intent on maintaining and growing capital in real terms for the benefit of current and future generations have a lot in common: they both seek to maximise risk-adjusted returns from a portfo­lio of global assets, they have a long-term investment horizon and they both can have high tolerance for short-term drawdowns.

Multi-generational wealth port­folios and endowment funds show a broadly similar allocation to equities and real assets, helping mitigate infla­tion risk. However, liquidity and cash needs differ between family wealth and endowments. Cash flow needs are unique to each situation, something that must be taken into consideration when developing the asset allocation strategy for families.

There are also important issues of scale and governance involved when transposing endow­ment investing to managing money for families. Top-per­forming US endowment funds’ resil­ience and success owe much to their size and long experience in investing in alternative assets.

Nonetheless, families can build an ‘endowment’-like portfolio if they allocate wealth according to three main goals: the first to provide financial security in the face of unknowable risk; the second to maintain and growth wealth net of inflation; and the third to make an impact through more ‘aspirational’ investments. The second goal, to maintain and growth net of inflation, could be managed using an asset allocation similar to that for endowments.

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