David Swensen, who passed away last week, was among the most influential investors of his generation. As chief investment officer at Yale, Swensen pioneered the endowment model and changed the way institutions invest, moving them from a narrow focus on marketable securities to an extended diversification across a variety of unusual assets, including natural resource funds, private equity, venture capital, and absolute return strategies. He showed that these less-than-efficient markets offered opportunities for astute investors.
As a result, Swensen’s approach was fundamentally humanistic: It centered on identifying, assessing, hiring, and developing talented individuals. The insight that investment management is as much about people as it is about statistics will be one of Swensen’s legacies.
The publication of his book Pioneering Portfolio Management in 2000 coincided with the turn of the millennium and a shift in the zeitgeist of institutional asset management away from passive investment management. This change was led by a handful of top university endowments — Yale, Harvard, Stanford, and Princeton. Pioneering Portfolio Management immediately became the manual for a host of institutional investors seeking to improve performance.
At the outset, Swensen’s foray into alternatives seemed risky. There was little reliable data about the performance of non-marketable assets and this uncertainty barred the path for many institutional managers. Yale’s success was important proof of concept, and allowed many others to follow suit.
Swensen articulated the key maxims in Pioneering Portfolio Management: Equity generates superior returns over the long-term, a well-diversified portfolio requires investing beyond publicly traded securities, some active managers can add value in less-efficient markets, and patient investors have a relative advantage. While these maxims are straightforward, their implementation is not.
Swensen and his long-time collaborator Dean Takahashi developed a process that led to a deep understanding and appreciation of human potential, motivation, intelligence, character, and integrity. The Yale approach looks beyond the numbers into such things as the role that their businesses play in manager’s lives and ambitions.
Swensen was also a dedicated educator. He and Takahashi regularly taught an investment course at Yale. Their students learned how to evaluate managers as people with individual skills, concerns, and interests. The course also provided the two a chance to evaluate talent for the Yale Investment Office itself.
The illustrious “alumni” of the Yale Investment Office, many of whom are graduates of Yale College and the Yale School of Management, have carried on Swensen’s legacy as leaders in the practice of investment management. A list of some of the illustrious protégés of Swensen’s can be found in the 2020 annual report of the Yale Investment Office. They have managed, the endowments of Princeton, MIT, the University of Pennsylvania, The Rockefeller Foundation, Rainwater Charitable Foundation, Wesleyan University, Smith College, The Kaufman Foundation, The Metropolitan Museum of Art, the Packard Foundation, the Carnegie Corporation, Bowdoin, Stanford, the New York Public Library, and Mount Holyoke College, among other institutions.
Swensen immersed himself in the life of the university and its community through teaching, mentorship, and interaction with faculty and students. I had the privilege to know him over much of his time at Yale, and to co-teach with him on one occasion. Swensen’s success in building Yale’s portfolio of alternative asset classes, and a stable of active managers, spurred my personal curiosity and academic research into alternative assets. He will undoubtedly have a lasting impact on the practice of, and research about, investment management.
“He has never had any interest in doing anything but running the endowment as well as he could . . . He has a passion for giving back to an institution with a higher purpose. He never aspired to more money or a higher position.” — Stephen Swensen
I was honored to work with him on Yale’s policies on socially responsible investing. He was deeply committed to the university’s mission and to the idea of investment with a purpose. I deeply admired his perseverance and courage through his personal health struggles, and appreciate how much of himself he gave to Yale.
With David Swensen’s passing, the financial community has lost one of the most important investors of modern times. His example will inspire investment professionals for years to come.
Further Reading on David Swensen and the Endowment Model from CFA Institute
- “Seventy-Five Years of Investing for Future Generations,” by David Chambers, Elroy Dimson, and Charikleia Kaffe, Financial Analysts Journal, 2020.
- “The British Origins of the US Endowment Model,” by David Chambers and Elroy Dimson, Financial Analysts Journal, 2015.
- University Endowments: A Primer, by Richard Franz and Stephan Kranner, CFA Institute Research Foundation, 2019.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: Courtesy of Yale University/ Michael Marsland
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William N. Goetzmann is the Edwin J. Beinecke Professor of Finance and Management Studies and Faculty Director of the International Center for Finance at the Yale School of Management and the Executive Editor of the CFA Institute Financial Analysts Journal. He is an expert on a diverse range of investments. His past work includes studies of stock market predictability, hedge funds, and survival biases in performance measurement. His current research focuses on alternative investing, factor investing, behavioral finance, and the art market. Goetzmann has written and co-authored a number of books, including Modern Portfolio Theory and Investment Analysis, The Origins of Value: The Financial Innovations that Created Modern Capital Markets, The Great Mirror of Folly: Finance, Culture and the Crash of 1720, and most recently, Money Changes Everything: How Finance Made Civilization Possible. He teaches portfolio management, alternative investments, real estate, and financial history at the Yale School of Management.