David Swensen, who died last week, was one of 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 broad diversification across a variety of securities. unusual assets, including natural resource funds, private equity, venture capital, and absolute return strategies. He showed that these less than efficient markets provided opportunities for savvy investors.
As a result, Swensen’s approach was fundamentally humanistic: it centered on identifying, evaluating, hiring and developing talented people. The idea 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 shift has been led by a handful of top university endowments – Yale, Harvard, Stanford and Princeton. Pioneering portfolio management immediately became the manual for a multitude of institutional investors seeking to improve their performance.
At first, Swensen’s foray into alternatives seemed risky. There was little reliable data on the performance of non-tradable assets and this uncertainty blocked the way for many institutional managers. Yale’s success was an important proof of concept and allowed many others to follow its lead.
Swensen articulated the key maxims in Pioneering portfolio management: Stocks generate superior long-term returns, 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 simple, their implementation is not.
Swensen and his longtime collaborator Dean Takahashi developed a process that led to a deep understanding and appreciation of human potential, motivation, intelligence, character and integrity. Yale’s approach goes beyond the numbers and looks at things like the role their companies play in the lives and ambitions of managers.
Swensen was also a dedicated educator. He and Takahashi regularly taught an investment course at Yale. Their students learned to assess managers as people with individual skills, concerns, and interests. The course also provided the two with an opportunity to assess 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, continued Swensen’s legacy as leaders in the practice of investment management. A list of some of Swensen’s illustrious proteges can be found in the 2020 Annual Report of the Yale Investment Office. They have managed endowments from Princeton, MIT, University of Pennsylvania, Rockefeller Foundation, Rainwater Charitable Foundation, Wesleyan University, Smith College, Kaufman Foundation, 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, mentoring, and interacting with faculty and students. I had the privilege of knowing him for much of his time at Yale and co-teaching with him on one occasion. Swensen’s success in building Yale’s portfolio of alternative asset classes and a stable of active managers has spurred my personal curiosity and academic research on alternative assets. He will undoubtedly have a lasting impact on investment management practice and research.
“He never had any interest in doing anything but managing the staffing 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 the idea of investing with purpose. I deeply admired his perseverance and courage through his personal health challenges, and I appreciate how much of himself he gave to Yale.
With the passing of David Swensen, 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 CFA Institute Staffing Model
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
Image Credit: Courtesy of Yale University/Michael Marsland
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