Is Yale's David Swensen Horrible for Investing?

An article in Institutional Investor offers an in-depth discussion of the Yale University endowment investment model created by David Swensen, who has overseen the portfolio for over three decades, and the impact it has created in the nonprofit world.

The article describes Swensen, the esteemed university’s chief investment officer for nearly 35 years, as the “architect” of the Yale model who has “raised an entire generation of endowment CIOs in his image,” but adds that although his strategy is much imitated, it has “almost never been replicated. Legions of U.S. nonprofit CIOs claim they’re ‘doing the endowment model.’ They’re not.”

The article reports that, in a recent lecture to Chinese executives, Charles Ellis (the university’s former investment committee chair) explained that Swensen “took the time and his talent to figure out—in a way that no one had yet figured out—what endowment investing was all about: perpetual institutions and their long-term health,” describing his approach as “new, unconventional, and initially difficult for many people. But he explained it so well that soon the whole context of endowment management was changed forever.”

Ellis offered a list of factors that makes the Yale Endowment model unique, including its “all equity” approach, which the article notes is the “most obvious and knocked-off element of Yale’s strategy.” When Swensen took charge of Yale’s endowment in 1985, the article reports, nearly three quarters of the $1 billion portfolio was invested in stocks, bonds and cash. Thirty years later, “Yale’s $30 billion endowment trails only Harvard’s in size, and traditional domestic assets make up less than one tenth of the portfolio.”

“Where Yale’s portfolio has gone,” the article explains, “America’s endowments and foundations have followed.”

But that doesn’t mean that Swensen’s strategy has worked elsewhere, it adds, citing comments from consultant Anna Dunn Tabke, who has worked with nonprofit institutions throughout her career: “Yale has a brand. Even endowments and foundations that don’t have a blue-chip brand want to get into the same kind of deals as Yale, which obviously creates some challenges.”

According to one of Swensen’s longtime associates, the article says, discussing his work with the endowment as if it’s a “portfolio recipe drives Swensen crazy. He really, really can’t stand it when people take what he’s done and summarize it and therefore trivialize it. It’s really complicated stuff.”

In his guide to the Yale model entitled, Pioneering Portfolio Management, Swensen writes, “Even with adequate numbers of high-quality personnel, active management strategies demand uninstitutional behavior from institutions, creating a paradox few successfully unravel.” And while some outside Yale have been successful in that unraveling, the article notes that the top performers are run by folks who were trained by Swensen, citing MIT, Princeton, and Bowdoin College as examples.