David Swensen, an influential investor, died on May 5
START IN THE In the 1980s, the endowments of a handful of major American universities began to divert their investments from publicly traded stocks and bonds to âalternativeâ assets, such as venture capital and private equity. David Swensen, who died on May 5 at the age of 67, perfected the approach. Called variously the endowment model, Yale or Swensen, it has since been copied – by family offices, sovereign wealth funds and, more recently, by large pension funds.
In 1985, Mr. Swensen was persuaded by James Tobin, a Nobel Prize-winning Yale economist, to abandon a lucrative career on Wall Street and return to his former university to run his investment office. Yale’s endowment was then worth around $ 1 billion. By the middle of last year, that figure had risen to $ 31 billion. Even this astonishing growth underestimates Mr. Swensen’s influence. He was responsible for developing a flow of talented asset managers at Yale. And in two bestselling books, he laid out his investment philosophy for a wider audience.
Three pillars of this reflection stand out. The first concerns the time horizon. Because endowments have obligations that extend far into the future, they can take a long-term view. They can sacrifice ease of trading in public markets for the best returns promised in private equity. In doing so, they can earn an illiquidity premium – a reward for giving up the opportunity to sell easily.
The second pillar concerns information. It is difficult to find poorly priced stocks in public markets because information about listed companies travels quickly and is quickly incorporated into prices. But private market investors who do their homework are more likely to be rewarded. This is because reliable data and analysis are much harder to find.
The third pillar is the importance of a frustrating mindset. Mr. Swensen had the opportunity to demonstrate his very early on. Following the stock market crash of October 1987, he took charge of the company’s shares, which had become much cheaper, by selling bonds that had risen in price. This rebalancing was in accordance with the policy agreed by the fund. But in the face of the sluggish market, it seemed thoughtless. Its investment committee was worried. One member warned there would be “hell to pay” if Yale got it wrong. But Mr. Swensen has stuck to his guns. The decision was upheld and paid off.
Nowadays, the Swensen model is often reduced to an asset allocation decision: to keep alternatives. But as money poured into private equity funds, average returns converged into public market returns. There is no longer an obvious illiquidity premium. But Mr Swensen’s argument about information remains relevant. The dispersion of returns – the difference between the best and the worst funds – is much higher in the private than in the public. Selecting the right private equity manager requires expertise. Yale has some advantages: it can, for example, tap into its alumni network to access better managed funds.
Mr. Swensen is being given too much credit on one point. Endowments had a history of innovation before it returned to Yale. Harvard’s was already changing. And endowments had already been pioneers in asset allocation: Ivy League funds shifted sharply from bonds to stocks from the 1930s. In other respects, Mr. Swensen is not getting enough money. credit. Star investors are generally not good at mentoring others. But Swensen alumni have regularly found themselves in senior positions in other endowments. âHe was a smart player but also a great coach,â said a colleague. In this, as in other areas of investment practice, David Swensen was a real special case. â
This article appeared in the Finance & Economics section of the print edition under the title “Le houx et le lierre”