David F. Swensen

Born

David Frederick Swensen


January 26, 1954
DiedMay 5, 2021 (aged 67)
Alma materUniversity of Wisconsin-River Falls (BS) (BA)
Yale University (PhD)
OccupationInvestor, money manager, philanthropist
Known forThe Yale Model
Swensen approach
Managing the Yale Endowment
Scientific career
ThesisA Model for the Valuation of Corporate Bonds
InfluencesJames Tobin
William Brainard
InfluencedEndowments influenced
Investors influenced

David Frederick Swensen (January 26, 1954 – May 5, 2021) was an American investor, endowment fund manager, and philanthropist. He was the chief investment officer at Yale University from 1985 until his death in May 2021.

Swensen was responsible for managing and investing Yales endowment assets and investment funds, which totaled $25.4 billion as of September 2016.[1] As of September 2019 the total amount is $30.3 billion.[2] He was considered to be the highest-paid employee in Yale, leading a team of about 30 employees. He invented The Yale Model with Dean Takahashi, an application of the modern portfolio theory commonly known in the investing world as the Endowment Model. His investing philosophy has been dubbed the Swensen Approach[3] and is unique in that it stresses allocation of capital in Treasury inflation protection securities, government bonds, real estate funds, emerging market stocks, domestic stocks, and developing world international equities.[4]

His investment success with the Yale Endowment has attracted the notice of Wall Street portfolio managers and other universities. Hes right up there with John Bogle, Peter Lynch, [Benjamin] Graham, and [David] Dodd as a major force in investment management, says Byron Wien, a longtime Wall Street strategist.[2] Investment heads from universities such as Harvard, MIT, Princeton, Wesleyan, and the University of Pennsylvania have adopted his allocation strategies to mixed success. Under Swensens guidance the Yale Endowment saw an average annual return of 11.8 percent from 1999 to 2009.[5] As of the 2016 fiscal year, Yales endowment had risen by 3.4%, the most out of any Ivy League school, according to Institutional Investor.[6]

Swensen was listed third on aiCIOs 2012, a list of the 100 most influential institutional investors worldwide. In 2008, he was inducted into Institutional Investors Alphas Hedge Fund Manager Hall of Fame.[7]

Early life and education[edit]

David Frederick Swensen was born in Ames, Iowa, on January 26, 1954, and was raised in River Falls, Wisconsin.[8] His father, Richard David Dick Swensen, was a chemistry professor and dean at the University of Wisconsin-River Falls. His mother, Grace Marie (Hartman),[9] after raising six children, became a Lutheran minister. After graduating from River Falls High School in 1971 Swensen elected to stay in his hometown of River Falls and receive his B.A. and B.S. in 1975 from the University of Wisconsin-River Falls where his father Richard Swensen was a professor. Swensen pursued a PhD in economics at Yale, where he wrote his dissertation, A Model for the Valuation of Corporate Bonds. One of Swensens dissertation advisers at Yale was James Tobin, a top economic adviser to John F. Kennedy administration and a future Nobel Prize laureate in economics. According to Charles Ellis, founder of Greenwich Associates and former chair of Yales investment committee, When it snowed, David went to Jims house to shovel the sidewalk. James Tobins Nobel Prize, among other things, was for his contribution in creation of Modern Portfolio Theory. Swensen was fascinated by the idea of Modern Portfolio Theory. During his 2018 reunion speech Swensen said: For a given level of return, if you diversify you can get that return at lower risk. For a given level of risk, if you diversify you can get a higher return. Thats pretty cool! Free lunch![2]

Investment career[edit]

Swensen began his investment career in the early 1980s, and has since advised the Carnegie Corporation, the New York Stock Exchange, the Howard Hughes Medical Institute, the Courtauld Institute of Art, the Yale-New Haven Hospital, The Investment Fund for Foundations (TIFF), the Edna McConnell Clark Foundation, and the States of Connecticut and Massachusetts.

Salomon Brothers[edit]

Following his academic interest in valuation of corporate bonds, Swensen joined Salomon Brothers in 1980. This career move was suggested by a Salomon Brothers investment banker and Yale alumni, Gene Dattel, who was deeply impressed by Swensen. In 1981 Swensen worked as an associate in corporate finance for Salomon Brothers to structure the worlds first currency swap agreement, a deal between IBM and the World Bank which allowed IBM to hedge their exposure to Swiss francs and German marks and the World Bank to make loans in those currencies more efficiently.[10]

Lehman Brothers[edit]

Prior to joining Yale in 1985, Swensen spent three years on Wall Street as senior vice president at Lehman Brothers,[11] specializing in the firms swap activities, where his work focused on developing new financial products. Swensen engineered the first currency swap transaction according to When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein.

Yale University endowment[edit]

Swensen was tapped to serve as the Yale endowment manager at age 31 in 1985.[12] This position was offered by Swensens other dissertation adviser, Yales provost, William Brainard. Swensens candidacy was suggested by James Tobin, who, despite his former students young age, believed he could be the right person. Swensen was hesitant about taking the job at first, since he did not know much about portfolio management aside from his studies in graduate school. Nevertheless, Brainard convinced him to take the position and Swensen started on April 1, 1985, by taking an 80% pay cut.[2] A year later, in 1986, he was joined by Yale College and School of Management graduate Dean Takahashi, who soon became Swensens trusted deputy. In 1985, when Swensen started managing the endowment, it was worth $1 billion; in 2019 it was worth $29.4 billion.

As of 2005, the fund had managed annualized returns of 16.1%. He has been called Yales 8 billion dollar man for his attainment of nearly $8 billion for the college endowment from 1985 to 2005.[12] According to former Yale President, economist Richard Levin, Swensens contribution to Yale is greater than the sum of all the donations made in more than two decades. Weve just done better, Levin says, because of Swensens uncanny ability to pick the best outside money managers. Swensens former staff members, who later became managers of other endowment funds - including MIT, Stanford and Princeton - also showed impressive results in multiplying fund wealth.

In September 2014, Swensen began to move the Yale endowment away from investment in companies that have a large greenhouse footprint, expressing Yales preferences in a letter to the endowments money managers. The letter asked them to consider the effect of their investments on climate change, and to refrain from investing in companies that do not make reasonable efforts to reduce carbon emissions. This method was characterized by Swensen as a more subtle and flexible approach, as opposed to outright divestment.[13]

Swensen made headlines on March 5, 2018 for arguing with the undergraduate editor-in-chief of the Yale Daily News. Swensen called the editor-in-chief a coward for deleting an inaccurate sentence and removing a footnote in an op-ed that he submitted to the paper; his column, which he required to be published unedited, responded to a student teach-in that criticized companies allegedly in the Yale portfolio.[14]

Investment philosophy[edit]

On January 28, 2009, Swensen and Michael Schmidt, a financial analyst at Yale, published an op-ed piece in The New York Times entitled News You Can Endow discussing the idea of newspaper organizations run as non-profits by endowments.[15] On August 13, 2011, David Swensen published an op-ed in The New York Times entitled The Mutual Fund Merry-Go-Round,[16] about how the pursuit of profits by the management companies creates a conflict of interest with fiduciary responsibilities to their investors. The advertising of Morningstar ratings leads investors to chase past leaders and roll money out of recently downgraded or poorly rated funds into recently upgraded or highly rated funds. The result is the equivalent of buying high and selling low and results in returns for a typical investor far worse than simply buying-and-holding the funds themselves, especially for highly volatile areas such as technology funds. People would do better to focus on diversification among sectors and asset classes, which are the main determinants of long-term results.

The Yale Model[edit]

src=https://upload.wikimedia.org/wikipedia/commons/thumb/1/1b/Yale_University_Branford.jpg/220px-Yale_University_Branford.jpg

Swensen has been advising the Yale Endowment since 1985, having earned his Ph.D from the school, he coined his investment philosophy The Yale Model.

The Yale Model, sometimes known as the Endowment Model, was developed by David Swensen and Dean Takahashi and is described in Swensens book Pioneering Portfolio Management. It consists broadly of dividing a portfolio into five or six roughly equal parts and investing each in a different asset class. Central in the Yale Model is broad diversification and an equity orientation, avoiding asset classes with low expected returns such as fixed income and commodities.

Particularly revolutionary at the time was his recognition that liquidity is a bad thing to be avoided rather than a good thing to be sought out, since it comes at a heavy price in the shape of lower returns.[17] The Yale Model is thus characterized by relatively heavy exposure to asset classes such as private equity compared to more traditional portfolios.[18] The model is also characterized by heavy reliance on investment managers in these specialized asset classes, a characteristic that has made manager selection at Yale a famously careful process.[19]

This type of investing — allocating only a small amount to traditional U.S. equities and bonds and more to alternative investments — is followed by many larger endowments and foundations and is therefore also known as the Endowment Model (of investing).[18]

Soon after heading the Yale investment office, Swensen, together with Takahashi, sought out investments that would allow both diversification and higher return. They also implemented strategies that would take advantage of endowment idiosyncrasies: presumption of perpetuity, tax-exempt status, as well as distinguished and devoted alumni in the financial world. Hence, investments were made in venture capital firms, tech firms, and hedge funds. At the early stages not many firms dealt with types of assets Swensen was interested in. In order to invest in such assets he first helped to create those assets by becoming a venture capitalist of venture capitalists. As of 2019 about 60% of Yale endowment portfolio is allocated to alternative investments such as hedge funds, venture capital and private equity.[2]

Criticism of the Endowment Model[edit]

After Harvards endowment dropped a record 30% to $26 billion in the year ended June 2009, an 81-page report released in May 2010 found that The endowment model of investing is broken. Whatever long-term gains it may have produced for colleges and universities in the past must now be weighed more fully against its costs — to campuses, to communities and to the wider financial system that has come under such severe stress.[20] In a video interview, Mark W. Yusko founder of Morgan Creek Capital Management, one of the veterans of the endowment investment model, claims that one year where endowments did not outperform but rather tie everybody else does not break the endowment model. According to Yusko, the endowment model is still the most viable proposition for long-term investors. Investors would also realize that mark-to-market reporting has a bigger impact on reported performance than before.[21][better source needed]

Many institutional investors have tried to replicate the Swensen Approach and the Yale Model to fit their hedge funds, pensions funds, and endowments, but have not seen the same results.[6]

Unconventional success[edit]

In 2005, Swensen wrote a book called Unconventional Success, which is an investment guide for the individual investor. The general strategy that he presents can be boiled down to the following three main points of advice:[22]

  • The investor should construct a portfolio with money allocated to 6 core asset classes, diversifying among them and biasing toward the equity sections.
  • The investor should rebalance the portfolio on a regular basis (rebalancing back to the original weightings of the asset classes in the portfolio).
  • In the absence of confidence in a market-beating strategy, invest in low-cost index funds and exchange-traded funds. The investor should be very watchful of costs as some indices are poorly constructed and some fund companies charge excessive fees (or generate large tax liabilities).

He slams many mutual fund companies for charging excessive fees and not living up to their fiduciary responsibility. He highlights the conflict of interest inherent in the mutual funds, claiming they want high fee, high turnover funds while investors want the opposite.[23]

Personal life[edit]

Swensen lived in Killingworth, Connecticut.[8] Some Yale alumni had mounted a campaign to name one of two new residential colleges after Swensen;[24] the two residential colleges were ultimately named after Benjamin Franklin and Pauli Murray.

Swensen taught endowment management at Yale College and at the Yale School of Management. He was a fellow of Berkeley College and an incorporator of the Elizabethan Club.

Swensen died from kidney cancer at Yale New Haven Hospital on May 5, 2021, aged 67.[8][25]

Political and economic views[edit]

In February 2009, Swensen was named to a two-year term on President Barack Obamas Economic Recovery Advisory Board, on which he served from 2009 to 2011.[26][27]

Views on capital markets[edit]

During an interview with Yales international center of finance, he stated that capital markets would be much better off under the Glass–Steagall legislation (provisions in the U.S. Banking Act of 1933 that limits the interaction between stock activities within commercial and investment banks). He stated that commercial banking serves a very important, useful function: gathering of deposits and making of loans, and if we define that function very narrowly and regulate it very heavily and required it to maintain a high level of capital then the capital environment would be much safer.[23]

Legacy and honors[edit]

Swensen won numerous awards for his investing and management of Yales endowment. In 2012, he won the Yale Medal for outstanding individual service to the University. In 2008, he was awarded the American Academy of Arts & Sciences Fellowship and the year prior, the Morys Cup for conspicuous service to Yale. Also in 2007, he was awarded the Hopkins Medal for commitment, devotion and loyalty to Hopkins School. In 2004, he won the Institutional Investor Award for Excellence in Investment Management.[23]

In 2008, he was inducted into Institutional Investors Alphas Hedge Fund Manager Hall of Fame along with Alfred Jones, Bruce Kovner, George Soros, Jack Nash, James Simons, Julian Roberston, Kenneth Griffin, Leon Levy, Louis Bacon, Michael Steinhardt, Paul Tudor Jones, Seth Klarman and Steven A. Cohen.[28]

See also[edit]

Bibliography[edit]

References[edit]

  1. ^ Investment return of 3.4% brings Yale endowment value to $25.4 billion. Yale News. Retrieved February 18, 2017.
  2. ^ a b c d e McDonald, Michael; Lorin, Janet; Bennett, Drake (September 11, 2019). How David Swensen Made Yale Fabulously Rich. www.bloomberg.com. Retrieved April 28, 2020.
  3. ^ YaleCourses (April 5, 2012), 6. Guest Speaker David Swensen, retrieved February 18, 2017
  4. ^ David Swensens portfolio (from Unconventional Success) | Bogleheads.org. www.bogleheads.org. Retrieved February 18, 2017.
  5. ^ Yale University Endowment Update 2009, p. 24 Archived October 11, 2010, at the Wayback Machine
  6. ^ a b Can Anyone Beat David Swensen?. Institutional Investor. Retrieved February 18, 2017.
  7. ^ The Alpha Hedge Fund Hall of Fame |. Institutional Investors Alpha. Retrieved February 24, 2017.
  8. ^ a b c Fabrikant, Geraldine (May 6, 2021). David Swensen, Who Revolutionized Endowment Investing, Dies at 67. The New York Times. ISSN 0362-4331. Retrieved May 6, 2021.
  9. ^ https://www.legacy.com/obituaries/waverlydemocrat/obituary.aspx?n=richard-david-swensen-dick&pid=191326670
  10. ^ 70 Years Connecting Capital Markets to Development, Chapter 4, Pioneering Swaps (PDF). World Bank. The World Bank Treasury. Retrieved May 7, 2021.
  11. ^ Yale.edu - David F. Swenson
  12. ^ a b Inc., Yale Alumni Publications. Yales $8 Billion Man: Yale Alumni Magazine (Jul/Aug 2005). archives.yalealumnimagazine.com. Retrieved February 14, 2017.
  13. ^ Fabrikant, Geraldine (September 7, 2014). Yale Fund Takes Aim at Climate Change. The New York Times. Retrieved November 20, 2014.
  14. ^ Lorin, Janet. Yales David Swensen Gets Into Spat With Student Paper Over Endowment. www.bloomberg.com. Bloomberg. Retrieved March 6, 2018.
  15. ^ Swenson, David; Schmidt, Michael (January 28, 2009). News you can endow. The New York Times (NY edition): A31. Retrieved February 15, 2009.
  16. ^ Swenson, David (August 13, 2011). The Mutual Fund Merry-Go-Round. The New York Times. Retrieved August 14, 2011.
  17. ^ Gary Hirst (2013). The International Association of Insurance Supervisors and Insurers that are Too Big to Fail. The Gary Hirst Insurance Blog. Retrieved April 8, 2013.
  18. ^ a b Yale Model Definition from Financial Times Lexicon. lexicon.ft.com. Retrieved February 18, 2017.
  19. ^ Ellis, Charles (February 1, 2020) Institutional Investor Retrieved from: https://www.institutionalinvestor.com/article/b1k52pp0nq4f8b/The-Easily-Misunderstood-Yale-Model
  20. ^ Did Big Endowments Make Economic Crisis Worse? | onPhilanthropy. onphilanthropy.com. Retrieved February 18, 2017.
  21. ^ Mark Yusko: The Endowment Model isnt broken - Opalesque.TV. YouTube.
  22. ^ Ferri, Rick. More Unconventional Failure. Forbes. Retrieved February 18, 2017.
  23. ^ a b c Interview with David Swensen. Yale School of Management. December 8, 2013. Retrieved February 21, 2017.
  24. ^ Alumni mount campaign for Swensens name on new college Archived May 17, 2008, at the Wayback Machine, The Yale Daily News April 18, 2008.
  25. ^ David Swensen. Office of the President. May 6, 2021. Retrieved May 6, 2021.
  26. ^ Irwin, Neil; Shear, Michael D. (February 9, 2009). White House Names Board of Outside Economic Experts. The Washington Post. p. D3. Retrieved February 15, 2009.
  27. ^ Obama taps Swensen for Economic Advisory Board. Yale Bulletin. February 13, 2009. Archived from the original on July 13, 2010. Retrieved February 15, 2009.
  28. ^ Cohen, Simons, 12 Others Enter Hedge Fund Hall. Institutional Investor. Institutional Investor LLC. September 23, 2008. Retrieved June 16, 2019.

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