June 18, 2021


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David Swensen, the Yale pioneer who reshaped investing

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Monday, David swensen taught his regular course on investing at his beloved Yale University, despite a long battle with cancer. Two days later, one of the greatest of all time in money management finally succumbed, died at the age of 67.

The investment industry has produced more than its fair share of malicious buccaneers and ruthless tycoons, hapless failures and thoughtless fraudsters. At Swensen – who had managed his alma mater’s $ 31 billion endowment since 1985 – he had a rare ascetic, seemingly indifferent to wealth even as he transformed the industry that runs it.

“Great painters are the ones who change the way others paint, like Picasso. David Swensen has changed the way anyone serious about investing thinks about investing, ”says Charles Ellis, who chaired the Yale endowment between 1997 and 2008.

“The results have been wonderful, but have been organized so as not to be a surprise,” Ellis adds. “If you watch a great chef cook in the kitchen, you know the meal will be good.”

Swensen never commanded the fame of Warren Buffett, Peter Lynch or Jack Bogle, but among industry insiders he is widely regarded within their ranks. Ted Seides, former colleague and author of a book on asset allocators, describes his former boss as the undisputed GOAT – the greatest of all time.

“He was constantly coming up with new ideas, new structures, new approaches,” he says. But even its investment success underestimates its wider influence, argues Seides. “The (Yale) model itself is so special that almost everyone who has worked at Yale Endowment has ended up being successful. It’s like Goldman Sachs or Tiger Management for the endowment world. “

Like many great careers, Swensen had an unlikely start. When he was first approached by Yale University in 1985, he initially assumed it would be for a teaching job – not to lead his $ 1.3 billion endowment. After all, he was only 31 at the time, steeped in economic theory but sadly unfamiliar with investing.

Endowments are funds from wealthy donors – mostly university alumni – that are used to pay for staff salaries, pay for scholarships, or maintain school buildings and educational programs. ‘Athletics.

Asset allocation

Novice investor

After earning a doctorate in economics from Yale in 1980, Swensen turned a thesis on the valuation of corporate bonds into a promising career in finance. At Salomon Brothers – the epitome of brash, freewheeling Wall Street of the 1980s – he helped structure the very first interest rate swap, between the World Bank and IBM. But he had no experience of the investment industry himself.

Nonetheless, when Yale called, he accepted the 80% pay cut and took the job. The career that followed would help reshape the broader investment landscape by transforming the venture capital, hedge fund and private equity industries. Being a novice has proven to be a blessing, freeing Swensen from conventional practice.

At the heart of what has come to be known as the “Yale Model” are the principles Swensen learned from his mentor, Nobel Laureate James Tobin.

© Alamy

Tobin had done foundational work on the importance of diversified investing – drawing on the ‘modern portfolio theory’ of fellow Nobel Laureate Harry Markowitz – a principle Swensen then espoused with an investment horizon. much longer than normal for endowments.

The model predicts much greater exposure to more volatile – but longer-term, higher-yielding stocks – spread across public and private markets to minimize risk. For Swensen and Yale, that meant investing money in nascent hedge fund, private equity, and venture capital industries, as well as real estate and even possibly obscure niches such as lumber.

A practice now established, this approach to asset allocation was sensational at the time. Yale’s model came about when most universities opted for a then-standard stock and bond portfolio – often with an unimaginative 60:40 split – and no endowment was considered worthy. monitored in the investment world.

Yale's endowment has beaten its rivals in the past decade

Swensen sparked a revolution, with endowments springing up into ‘alternative’ investments that had been the preserve of wealthy heirs and wealthy tycoons, transforming the hedge fund, venture capital and private equity industries. .

The results have been excellent. the Yale Office of Investments managed $ 31.2 billion as of June 2020 – with an average annual return of 12.4% over the past three decades – and contributes more than a third of the university’s budget.

Although Swensen is not the only architect of this model, he is credited with having perfected it. He popularized it as well, as an army of acolytes replicated his approach in funds and endowments across the United States.

Swensen had “an amazing ability to identify investment talent,” said Paula Volent, who led the $ 1.8 billion endowment for Bowdoin College in Maine for the past two decades and worked in the office. investment from Yale earlier in his career. “He has helped change many of our lives.”

Vanderbilt Hall stands on top of Yale University © Craig Warga / Bloomberg

Poker hands

His passion for teaching was not limited to the amphitheater. After long investment meetings, he was playing poker late into the night with his investment office staff, not for a lot of money, but for the game itself. In their hands, they would eat away at the investment problems that arose that day.

“He intuitively understood the value of optionality and was also not afraid to play very aggressively when he thought the odds were in his favor,” he says. Robert wallace, which Swensen hired as an intern as an undergraduate student at Yale in his mid-30s, studying economics after a career in professional ballet.

Wallace worked under Swensen for five years, before leading a family office and then managing Stanford University’s $ 29 billion endowment. But he still fondly remembers those poker nights. “I think I learned as much from David in our conversations at the poker table as I did in formal meetings,” he says.

For those who are not at the poker table, the opus magnum 2000 by Swensen, Pioneering portfolio management, allowed them to absorb its investment philosophy.

Yale Endowment Asset Allocation

A bad fit for Wall Street

AT Capital Partners, a $ 40 billion investment group that manages money on behalf of endowments and charities, the book is required reading for new hires, and its founder Stan Miranda paid tribute to the influence of Swensen.

The book “was a masterpiece of investment literature,” he wrote in a note to staff. “(It’s) a powerful model for long-term institutional portfolio management.”

Swensen was born in River Falls, Wisconsin, in 1954. His father was a professor of chemistry at the University of Wisconsin and his mother a Lutheran pastor, who helped to settle over 100 foreign refugees there. His background may explain why he never turned to investment banking.

“I liked the competitive aspects of Wall Street, but – and I’m not making a value judgment here – it was not the right place for me because the end result is people are trying to make a lot of money. money for themselves, ”Swensen once said Yale Alumni Magazine. “It just doesn’t suit me.

He was always richly rewarded: His reported salary of $ 4.7 million in 2017 made him the highest-paid employee at Yale. But there is no doubt that his investment pedigree could have made him a fortune. Had he run a hedge fund the size of Yale’s endowment – and with its returns – Swensen would likely have been a multi-billionaire.

Friends and colleagues point out his dedication to Yale athletics, his fierce competitiveness against the endowment’s “Stock Jocks” softball team, and his routine gestures of kindness. When Tobin’s legs started failing him, Swensen began shoveling snow on his mentor’s doorstep every day during the cold New Haven winters, Ellis recalls.

The question now is who could follow Swensen – or if anyone really can. Miranda hypothesized that Yale’s model would become “like a work of art, it will only become more valued after the artist’s death.”

The most natural successor is Dean takahashi, Swensen’s long-time former lieutenant, who now heads a climate change initiative at Yale. But Ellis notes that the challenges facing any investment agent are now far greater than they were when Swensen took over the reins in 1985, given the high valuation of stocks, record high interest rates. low interest, and one that Yale’s once-pioneering model has copied across the world – with varying success.

“I wouldn’t want to be David’s second person at work,” says Ellis. It’s a sentiment that many of his friends and colleagues echo. “David can have a successor, but not a replacement,” Wallace says. “He was unique.”

Swensen is survived by his wife, Meghan McMahon, three children and two stepchildren.

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