David Swensen Book on Yale Endowment Success and Criticism

David Swensen's book is a fascinating read for anyone interested in the world of finance and investing.

David Swensen's book, "Pioneering Portfolio Management", was first published in 2000.

The book details Swensen's approach to managing the Yale University endowment, which has consistently outperformed the market.

Under Swensen's leadership, the Yale endowment grew from $1.3 billion to $22.5 billion during his tenure.

David Swensen's Career was marked by a series of impressive moves that set him up for success. He joined Salomon Brothers in 1980, where he worked on structuring the world's first currency swap agreement between IBM and the World Bank.

Swensen's experience at Salomon Brothers likely prepared him for his next role, managing the Yale University endowment, which he took on at age 31 in 1985. He started with an 80% pay cut, and a year later, he was joined by Dean Takahashi, who became his trusted deputy.

By 2005, the Yale endowment had managed annualized returns of 16.1%, earning Swensen the nickname "Yale's 8 billion dollar man" for his nearly $8 billion contribution to the college endowment.

David Swensen's career at Salomon Brothers was a pivotal moment in his professional journey. He joined the company in 1980, following his academic interest in the valuation of corporate bonds.

A Salomon Brothers investment banker and Yale alumnus, Gene Dattel, suggested Swensen join the company and was impressed by his work. Swensen worked as an associate in corporate finance for Salomon Brothers.

In 1981, Swensen played a key role in structuring the world's first currency swap agreement, a deal between IBM and the World Bank. This innovative deal allowed IBM to hedge their exposure to Swiss francs and German marks and the World Bank to make loans in those currencies more efficiently.

David Swensen's tenure as the Yale University endowment manager began in 1985, when he was just 31 years old. He took a pay cut of 80% to accept the position.

Swensen's leadership led to remarkable growth, increasing the endowment from $1 billion in 1985 to $29.4 billion by 2019. He has been dubbed "Yale's 8 billion dollar man" for his achievement of nearly $8 billion in growth between 1985 and 2005.

The Yale endowment's annualized returns averaged 16.1% as of 2005, a testament to Swensen's investment prowess. He attributes his success to his "uncanny ability" to pick top-performing outside money managers.

Under Swensen's guidance, the Yale endowment began to shift its focus in 2014, with a letter to money managers asking them to consider the impact of their investments on climate change. This approach was seen as a more subtle and flexible alternative to outright divestment.

The Yale Model, also known as the Endowment Model, was developed by Swensen and Dean Takahashi. It involves dividing a portfolio into five or six roughly equal parts and investing each in a different asset class, with a focus on broad diversification and equity orientation.

Here are the key components of the Yale Model:

This approach has been widely adopted by larger endowments and foundations, and has been characterized as the "Endowment Model" of investing.

David Swensen's investment philosophy is centered around creating a diversified portfolio that prioritizes long-term results over short-term gains. He advocates for a portfolio with 6 core asset classes, allocating money among them and biasing toward equity sections.

Swensen emphasizes the importance of rebalancing the portfolio regularly to maintain the original weightings of the asset classes. This helps to prevent over-exposure to any one asset class and ensures that the portfolio remains diversified.

In the absence of confidence in a market-beating strategy, Swensen recommends investing in low-cost index funds and exchange-traded funds. He stresses the importance of being mindful of costs, as some indices are poorly constructed and some fund companies charge excessive fees.

Swensen is critical of mutual fund companies that charge high fees and fail to live up to their fiduciary responsibility. He highlights the conflict of interest inherent in the mutual funds, which often prioritize high-fee, high-turnover funds over the best interests of investors.

The following three main points summarize Swensen's investment strategy:

By following these principles, investors can create a portfolio that is well-positioned for long-term success and minimizes the risk of costly mistakes.

David Swensen's book is a must-read for anyone interested in endowment investing. He was the Chief Investment Officer at Yale University for over three decades.

The book is a collection of his insights and strategies for managing the Yale endowment, which grew from $1.3 billion to $31.2 billion during his tenure.

Swensen's approach to investing is centered around a diversified portfolio that includes private equity, venture capital, and real assets. He believed that a successful endowment fund requires a long-term perspective and a willingness to take calculated risks.

With a focus on generating consistent returns, Swensen's team invested in a wide range of asset classes, including hedge funds, private equity, and real estate. Their goal was to create a portfolio that could withstand market fluctuations and provide steady returns over time.

The Yale endowment's success can be attributed to Swensen's willingness to think outside the box and challenge conventional investment strategies. He was not afraid to take calculated risks and invest in unconventional assets.

During his tenure, Swensen's team also developed a robust risk management framework that helped to mitigate potential losses and ensure the endowment's long-term sustainability. This framework included regular portfolio reviews, stress testing, and scenario analysis.

The Endowment Model has faced criticism in recent years, particularly after Harvard's endowment dropped a record 30% to $26 billion in the year ended June 2009.

This significant loss led to an 81-page report that concluded "The endowment model of investing is broken." The report highlighted the need to weigh the long-term gains of the model against its costs to campuses, communities, and the wider financial system.

Mark W. Yusko, founder of Morgan Creek Capital Management and a veteran of the endowment investment model, disputes this criticism. He claims that one year where endowments do not outperform, but rather "tie everybody else", does not break the endowment model.

Investors who have tried to replicate the Swensen Approach and the Yale Model have not seen the same results.