David Swensen Investor: A Pioneer in Endowment Investment

David Swensen was a pioneer in endowment investment, serving as the chief investment officer at Yale University from 1985 to 2015.

He took Yale's endowment from $1.4 billion to $25.4 billion during his tenure, outperforming the S&P 500 by a significant margin.

Swensen's investment strategy was characterized by a focus on private equity, real assets, and absolute return investments, which allowed Yale to achieve higher returns and lower volatility.

He also believed in diversification, often saying "the biggest risk is not taking enough risk."

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David Swensen joined Salomon Brothers in 1980, where he worked on structuring the world's first currency swap agreement between IBM and the World Bank.

He spent three years on Wall Street at Lehman Brothers, specializing in swap activities and developing new financial products. He engineered the first currency swap transaction.

Prior to joining Yale in 1985, Swensen worked at Lehman Brothers for three years and Salomon Brothers for three years, where his work focused on developing new financial technologies.

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David Swensen's time at Salomon Brothers was a pivotal moment in his career. He joined the company in 1980 after being suggested by Gene Dattel, a Salomon Brothers investment banker and Yale alumni who was impressed by Swensen's academic interest in valuation of corporate bonds.

In 1981, Swensen worked as an associate in corporate finance to structure the world's first currency swap agreement between IBM and the World Bank. This deal allowed IBM to hedge their exposure to Swiss francs and German marks, while the World Bank could make loans in those currencies more efficiently.

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David Swensen's time at Lehman Brothers was a pivotal moment in his career. He spent three years on Wall Street as a senior vice president, specializing in swap activities.

His work at Lehman Brothers focused on developing new financial products. He engineered the first currency swap transaction.

This experience laid the groundwork for his future successes.

David Swensen, the renowned Chief Investment Officer at Yale, passed away at the age of 67. He was a money manager who revolutionized endowment investing.

David Swensen gave up a lucrative Wall Street career to oversee Yale University's endowment, where he proceeded to make it the best-performing fund in the country over a 20-year period. He shifted endowment investing from a formulaic menu of stocks and bonds to a portfolio that included hedge funds and even timberlands.

The Yale endowment, which was worth $1.3 billion when Swensen took over in 1985, has grown to $31.2 billion, passing those at both Princeton and the University of Texas and trailing only Harvard University's. He was particularly proud of how the growing endowment had helped the university contribute to financial aid.

Swensen believed that anyone who qualified for admission to Yale should be able to afford to attend, and financial aid was a huge part of what the endowment does. He said this in an interview for an obituary in 2014.

A year after receiving his cancer diagnosis in 2013, 90 colleagues, friends, and family members raised $35 million in Swensen's honor, gifts that were invested in the Yale endowment.

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David Swensen lived in Westville, Connecticut, and some Yale alumni had mounted a campaign to name one of two new residential colleges after him.

He spent six years on Wall Street before joining Yale in 1985, working at Lehman Brothers and Salomon Brothers, where he developed new financial technologies and structured the first swap.

David Swensen authored two books: Pioneering Portfolio Management and Unconventional Success, both published by The Free Press.

He led Yale's endowment for over 24 years, generating returns of 14.2 percent per annum, a record unequalled among institutional investors.

David Swensen was a Fellow of Berkeley College, an Incorporator of the Elizabethan Club, and a Fellow of the International Center for Finance at Yale.

He was a Trustee of TIAA and a Trustee of The Brookings Institution, and advised several organizations, including Cambridge University and the New York Stock Exchange.

David Swensen died from kidney cancer at Yale New Haven Hospital on May 5, 2021, aged 67.

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David Swensen's investment philosophy is centered around the idea of diversification and minimizing risk. He believes that a diversified portfolio is the best way to achieve long-term returns while minimizing risk.

Swensen's approach to investing is all about thinking outside the box and being willing to make unconventional investments. He was one of the first to recognize the potential of alternative investments such as private equity, real estate, and hedge funds.

One of the key elements of the Yale Model is the emphasis on low-cost index funds and passive investment strategies. Swensen believed that these types of investments were the most efficient way to achieve long-term returns and that actively managed funds were unlikely to outperform the market in the long term.

The Yale Model portfolio, which Swensen oversaw from 1985 to 2020, generated an annualized return of 12.5%, outperforming the S&P 500 index by 2.8%. This outperformance can be attributed to the portfolio's focus on alternative investments and its diversified asset allocation.

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Swensen also emphasized the importance of rebalancing a portfolio on a regular basis to maintain its original asset allocation. He recommended rebalancing back to the original weightings of the asset classes in the portfolio.

Here are the 6 core asset classes that Swensen recommended for a diversified portfolio:

Swensen's investment philosophy is centered around the idea of creating wealth over the long term, rather than trying to beat the market in the short term. He believed that a well-diversified portfolio with a focus on alternative investments and low-cost index funds was the key to achieving this goal.

The David Swensen investor is known for his emphasis on diversification, focusing on alternative investments such as private equity, real estate, and hedge funds. This approach has been widely adopted by endowments, foundations, and high-net-worth individuals.

To achieve diversification, Swensen recommended starting with a mix of low-cost index funds or exchange-traded funds (ETFs) that track various stock and bond markets. This is a crucial step in creating a diversified portfolio.

The key elements of the Yale Model portfolio include a significant allocation to alternative investments, such as private equity, real estate, and natural resources, as well as a diversified mix of traditional investments, such as stocks and bonds. The Yale Model is characterized by relatively heavy exposure to asset classes such as private equity compared to more traditional portfolios.

Swensen believed that a diversified portfolio was the best way to achieve long-term returns while minimizing risk. He placed a strong emphasis on identifying and investing in undervalued assets and was willing to make unconventional investments that other investors were avoiding.

To create a diversified portfolio, consider allocating your investments across different asset classes, sectors, and geographies. This can help reduce the overall risk of the portfolio by spreading the risk across different types of investments.

Here is a general asset allocation guideline for the David Swensen Portfolio:

¹ Swensen specifically calls for 15% TIPS as part of the bond portion of the portfolio.

The Endowment Model has faced criticism, particularly after Harvard's endowment dropped 30% to $26 billion in 2009.

Many institutional investors have tried to replicate the Swensen Approach and the Yale Model, but have not seen the same results.

The harsh reality is that the Endowment Model may not be as effective as once thought, with some critics arguing it's "broken."

Despite this, Mark W. Yusko, founder of Morgan Creek Capital Management, still believes in the Endowment Model, claiming it's the most viable proposition for long-term investors.

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The endowment model of investing has faced criticism in recent years, particularly after Harvard's endowment dropped 30% to $26 billion in 2009.

Many argue that the endowment model is broken, and its costs are now outweighing its benefits. The model's long-term gains must be weighed against its impacts on campuses, communities, and the financial system.

Mark W. Yusko, founder of Morgan Creek Capital Management, disagrees, stating that one year of underperformance doesn't break the endowment model. According to Yusko, the model is still the most viable proposition for long-term investors.

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

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Swensen won numerous awards for his investing and management of Yale's endowment. He was awarded the American Academy of Arts & Sciences Fellowship in 2008.

The Yale Medal was awarded to him for "outstanding individual service to the University" in 2012.

He received the Mory's Cup in 2007 for "conspicuous service to Yale."

The Hopkins Medal was awarded to him in 2007 for "commitment, devotion and loyalty to Hopkins School."

In 2008, he was inducted into Institutional Investors Alpha's Hedge Fund Manager Hall of Fame.

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