The Often-Misunderstood Yale Model

An article in Institutional Investor discusses the long-admired Yale Model and its decades-long record of achievement under the supervision of David Swensen, focusing on the sometimes overlooked but essential components of its success.

The article notes that many endowments try to replicate Swensen’s success by “following the major quantitative metrics: an emphasis on equity investments with minimal bonds and large commitments to venture capital, private equity, hedge funds, and international investments.” And while Swensen’s book, Pioneering Portfolio Management, is a good resource for understanding the more quantitative aspects of the Yale Model, the article argues, “to assume that this is the whole truth about the model would be a serious underestimation of the real thing.”

Equally important, however, is the “series of essential qualitative factors” that the Yale Model incorporates, beginning with the selection of the investment committee members which are chosen by Yale’s president, the chair of the investment committee, and Swensen “for their ability to add value to the governance of the management of the endowment.”

Committee meeting attendance is mandatory, the article explains, as well as “thorough preparation for active participation. Ten or more hours of reading and study before each meeting is normal,” and “devotion to the mission of serving a great university permeates every meeting (and the various non-meeting ways in which committee members are expected to contribute.”

Of all the qualitative factors inherent in the Yale Model, however, the article suggests that Swensen is probably the most significant: “He is the one aspect of the qualitative model that is impossible to replicate…except perhaps by other unusually talented, professionally disciplined, and mission-centered exemplars ready to devote their careers to the success of a great institution and its inspiring mission of service to our nation and the world.”