David Swensen (January 26, 1954- May 5, 2021) served as chief investment officer at the Yale University Endowment from 1985 until his death in 2021. His legacy is that of a pioneer in the world of asset allocation and alternative investments. Prior to the 1980s, endowments had invested exclusively in stocks and bonds, with an especially large allocation to the latter. His performance far exceeded that of other university endowments. When he started the endowment had $1 billion in assets. When he died it had $31 billion. Yet a 31x return actually understates his impact.
He attracted a legion of imitators, forever altering the intellectual landscape of investing. . His approach, which included a large allocation to equities and alternative investment products, but a relatively low allocation to fixed income is sometimes called the “endowment method”. Others just call it the Swensen Approach. Many family offices, sovereign wealth funds, and large pension funds use the Swensen Approach.
A whole slew of obituaries and commentaries followed his untimely death at the relatively young age of 67. These obituaries were a chance to reflect both on a life well lived, and an intellectual legacy. The Economist recently featured an article that outlined the three pillars of David Swensen’s thinking. These three pillars also formed the basis of his competitive advantage.
While most investors are focused on day to day price movements, endowments think long term. Like really long term. The defining feature of endowments is that they have obligations extending far out into the future. Unlike most investors, they don’t need to worry much about liquidity and ease of trading. Endowments can harvest an illiquidity premium. Being more patient than your counterparties can be an important advantage in markets.
Public stock markets are mostly efficient. It’s nearly impossible to get an informational edge. In contrast, private markets reward people who do deeper homework. Reliable data and analysis are harder to acquire in public markets. Swensen built out research teams to cover markets where nobody else was paying attention.
Closely related to this, Swensen was able to get in on the ground floor with a lot of emerging managers in the early days of alternative investments. Many of the funds he invested in during the 1980s and 1990s have stellar track records, and are now closed to new investors. Superior access is a corollary to superior information. While anyone can theoretically get access to superior information on individuals in private markets, superior access requires being in the right place at the right time, and developing connections over years. There is a feedback loop that allows superior access to grow in importance.
Swensen was a contrarian before it was cool. The extent of Swensen’s contrarian mindset is best illustrated with an anecdote:
Following the stockmarket crash in October 1987, he had loaded up on company shares, which had become much cheaper, by selling bonds, which had risen in price. This rebalancing was in line with the fund’s agreed policy. But set against the prevailing market gloom, it looked rash. His investment committee was worried. One member warned that there would be “hell to pay” if Yale got it wrong. But Mr Swensen stuck to his guns. The decision stood—and paid off handsomely.
Another notable aspect of Swensen’s legacy is his mentorship. Dozens of alumni of Yale’s Endowment fund have taken senior positions at other endowments.