Learning from Swensen's Success at Yale

Yale’s endowment fund has performed exceptionally well under David Swensen, returning an average of 10% per year since 2005, beating all major stock indexes and all but 2 of Morningstar’s mutual fund categories. Morningstar’s John Rekenthaler suggests that this outperformance comes from Swensen’s unconventional choices, but quickly quickly parrots Swensen’s advice to individual investors: “don’t try this at home.” So what can we learn from Yale’s success?

Rekenthaler identifies a few possible lessons from Yale’s success:

  1. Illiquid assets can be more profitable;
  1. Reduce or eliminate bond holdings, if possible;
  1. Invest with funds run by successful active managers.

Each of these possible lessons, however, comes with a set of caveats that may be the equivalent of “don’t try this at home.”  Illiquid assets are hard to identify and invest in as an individual, and funds have not had much success attempting to emulate Swensen’s approach on this point.  Fixed-income is a maintstay of a balanced portfolio and finding an alternative is risky. Although Swensen has profited from active managers, he has much better information and access than the individual investor. As Renkenthaler puts it, integrating these ideas is “most appropriate for portfolios with long time horizons, owned by investors who have a relatively high risk tolerance.” He also notes that current market trends may make this a particularly bad time for attempting to apply ideas gleaned from Yale’s success.