“David was simply the best at what he did. He was to foundations what Jack Bogle was to funds – he was neither better as a person nor as a professional.” — Steven M. Galbraith
David Swensen, who died last week, was amongst probably the most influential investors of his generation. As chief investment officer at Yale, Swensen pioneered the endowment model and altered the best way institutions invest, shifting the main target from a narrow concentrate on marketable securities to broader diversification across quite a lot of unusual assets, including commodity funds, private equity, enterprise capital and absolute return strategies. He showed that these less efficient markets offered opportunities for smart investors.
Swensen’s approach was subsequently fundamentally humanistic: he focused on identifying, evaluating, hiring and developing talented people. The realization that investment management is as much about people because it is about statistics will remain one in all Swensen’s legacies.
“He showed that there’s a strategy to compete hard and successfully within the financial markets… but that we must focus our lives on something more essential than.” – Andrew K. Golden
The publication of his book in 2000 coincided with the turn of the millennium and a shift within the zeitgeist in institutional asset management away from passive investment management. This shift was driven by a handful of top universities – Yale, Harvard, Stanford and Princeton. It immediately became the handbook for a big selection of institutional investors trying to improve their performance.
Swensen’s foray into alternative investments seemed dangerous at first. There was little reliable data on the performance of non-marketable assets, and this uncertainty blocked the trail for a lot of institutional managers. Yale’s success was a crucial proof of concept and enabled many others to follow his example.
Swensen articulated the important thing maxims in : equities generate higher returns over the long run, a well-diversified portfolio requires investments beyond publicly traded securities, some energetic managers can add value in less efficient markets, and patient investors have a relative advantage. While these maxims are easy, their implementation will not be.
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 to features reminiscent of the role their firms play within the lives and ambitions of managers.
Swensen was also a dedicated educator. He and Takahashi commonly taught an investment course at Yale. Their students learned to guage managers as individuals with individual skills, concerns and interests. The course also gave the pair the chance to guage talent for the Yale Investment Office themselves.
The Yale Investment Office’s famous alumni, a lot of whom are graduates of Yale College and the Yale School of Management, have continued Swensen’s legacy as leaders within the practice of investment management. For an inventory of a few of Swensen’s famous protégés, see the 2020 Annual Report of the Yale Investment OfficeThey have managed the endowments of Princeton, MIT, the University of Pennsylvania, the Rockefeller Foundation, the 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, amongst other institutions.
Swensen immersed himself within the lifetime of the university and its community through his teaching, mentorship, and interaction with faculty and students. I had the privilege of knowing him during much of his time at Yale and once co-teaching with him. Swensen’s success in constructing Yale’s alternative asset portfolio and a cadre of energetic managers sparked my personal curiosity and academic research in alternative investments. He will undoubtedly have a long-lasting impact on investment management practice and research.
It was an honor to work with him on Yale’s socially responsible investing policies. He was deeply committed to the university’s mission and the concept of purpose-driven investing. I deeply admired his perseverance and courage during his personal health struggles and appreciate how much of himself he gave to Yale.
With David Swensen’s death, the financial world loses one of the vital essential investors of our time. His example will proceed to encourage investment professionals for a few years to come back.
More details about David Swensen and the Endowment Model from the CFA Institute
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Photo credit: Courtesy of Yale University/Michael Marsland
