On Monday, David Swensen gave his usual investing class at his beloved Yale University, despite a long battle with cancer. Two days later, one of the greatest money management greats finally collapsed, at the age of 67.
The investment industry has produced more than its fair share of roguish buccaneers and ruthless tycoons, unfortunate failures and feeble fraudsters. In Swensen – who had managed his alma mater’s $ 31 billion since 1985 – it had a rare ascetic, seemingly uninterested in wealth, even as he transformed the industry that runs it.
“The really great painters are the ones who change the way other people paint, like Picasso. David Swensen changed the way anyone who invests seriously thinks about investing, ” said Charles Ellis, who chaired the Yale endowment between 1997 and 2008.
“The results were great, but were organized not to be a surprise,” adds Ellis. “When you see a great cook preparing in the kitchen, you know the meal will be good.”
Swensen has never had the fame of Warren Buffett, Peter Lynch, or Jack Bogle, but he is widely regarded in their rank among industry insiders. Ted Seides, a former colleague and author of a book on asset allocators, describes his former boss as the undisputed GOAT – the greatest of all time.
“He was constantly coming up with new ideas, new structures, new approaches,” he says. But even his investment success underpins his broader influence, says Seides. “The (Yale) model itself is so special that almost everyone who worked at Yale Endowment was successful. It’s like Goldman Sachs or Tiger Management for the endowment world. “
Like many great careers, Swensen had unlikely beginnings. When he was first approached by Yale University in 1985, he initially assumed it would be for a teaching job – not to lead the $ 1.3 billion endowment. After all, he was only 31 at the time, steeped in economic theory, but unfortunately unfamiliar with investing.
Endowments are pools of money from wealthy donors – usually university alumni – that go towards the cost of staff salaries, scholarship payments, or the maintenance of school buildings and athletic programs.
After graduating from Yale in 1980 with a PhD in economics, Swensen wrote a dissertation on valuing corporate bonds for a promising financial career. At Salomon Brothers – the epitome of brash, freewheeling ’80s Wall Street – he helped structure the very first interest rate swap between the World Bank and IBM. But he had no experience in the investment industry itself.
But when Yale called, he accepted the 80 percent pay cut and took the job. The career that followed would help reshape the broader investment landscape by transforming the venture capital, hedge fund and private equity industries. Being a beginner turned out to be a blessing, breaking Swensen away from conventional practice.
At the heart of what became known as the “Yale Model” are principles Swensen learned from his mentor, Nobel laureate James Tobin.
Tobin had pioneered the importance of diversified investing – building on fellow Nobel laureate Harry Markowitz’s “ modern portfolio theory ” – a principle that Swensen subsequently married with a much longer investment horizon than was normal for endowments.
The model prescribes much greater exposure to more volatile – but in the long run, higher yielding – stocks, spread across public and private markets to minimize risk. For Swensen and Yale, this meant putting money into what were still burgeoning hedge fund, private equity, and venture capital industries, as well as real estate, and eventually even obscure niches like wood.
This approach to asset allocation was now an established practice and was sensational at the time. The Yale model came when most universities hung a then-standard stock-and-bond portfolio – often with an unimaginative 60:40 split – and no endowment was considered worth seeing in the investment world.
Swensen unleashed a revolution, with endowment money eventually flowing into “alternative” investments reserved for wealthy heirs and wealthy tycoons, transforming the hedge fund, venture capital and private equity industries in the process.
The results were astounding. The Yale Investments Office managed $ 31.2 billion as of June 2020 – an average annual return of 12.4 percent over the past three decades – contributing more than a third of the university’s budget.
While Swensen was not the sole architect of this model, he is credited with perfecting it. He also made it popular, as an army of acolytes replicated his approach in funds and endowments in the US.
Swensen had “an uncanny ability to identify investment talent,” said Paula Volent, who led the $ 1.8 billion endowment for Bowdoin College in Maine for the past two decades and worked in the Yale investment firm earlier in her career. “He was instrumental in changing many of our lives.”
Hands of poker
His passion for teaching was not limited to the lecture hall. After long investment meetings, he played poker late into the night with his investment firm employees, not for a lot of money, but for the game itself. Between hands, they chewed about investment issues that had arisen that day.
“He intuitively understood the value of optionality and wasn’t afraid to play very aggressively when he thought the odds were right for him,” said Robert Wallace, who hired Swensen as an intern when he was a Yale student in his mid-30s and economics. studied. after a career in professional ballet.
Wallace worked under Swensen for five years before running a family office and then moving to manage Stanford University’s $ 29 billion endowment. But he still fondly remembers those poker nights. “I think I learned as much from David during our discussions at the poker table as I did during the formal meetings,” he says.
For those not sitting at the poker table, Swensen’s 2000 magnum opus, Groundbreaking portfolio management, allowing them to absorb his investment philosophy.
A wrong fit for Wall Street
At Partners Capital, a $ 40 billion investment group that manages money on behalf of endowments and charities, the book is mandatory for new hires to read, and founder Stan Miranda paid tribute to Swensen’s influence.
The book “was a masterpiece of investment literature,” he wrote in a memo to staff. “(It’s) a powerful blueprint for long-term institutional portfolio management.”
Swensen was born in River Falls, Wisconsin in 1954. His father was a chemistry professor at the University of Wisconsin, and his mother a Lutheran pastor who helped settle more than 100 foreign refugees there. His background may explain why he never started investment banking.
“I loved the competitive aspects of Wall Street, but – and I’m not making a value judgment here – it wasn’t the right place for me, because the end result is that people are trying to make a lot of money for themselves,” Swensen once told it. Yale alumni magazine. “That just doesn’t suit me.”
He was still richly rewarded: his reported $ 4.7 million salary in 2017 made him Yale’s highest-paid employee. But there is no doubt that his investment pedigree could have made him a fortune. Had he managed a hedge fund the size of the Yale endowment – and the proceeds from it – Swensen would likely have been a multi-billionaire.
Friends and colleagues point to his commitment to Yale athletics, his fierce competitiveness when it came to the Donation’s “Stock Jocks” softball team, and his routine acts of kindness. When Tobin’s legs began to fail, Swensen started shoveling snow off his mentor’s doorstep every day during the cold New Haven winters, Ellis recalls.
The question now is who could follow Swensen – or if anyone really can. Miranda speculated that the Yale model “will become like works of art, it will only be appreciated higher after the artist passes away”.
The most natural successor is Dean Takahashi, Swensen’s longtime former lieutenant, who is now leading a climate change initiative at Yale. But Ellis notes that the challenges facing every investment officer are now much greater than when Swensen took the reins in 1985, given the high valuation of stocks, record low interest rates and that the once groundbreaking Yale model has copied over. around the world – with varying degrees of success.
“I wouldn’t want to be the second person in David’s job,” says Ellis. It is a feeling many of his friends and colleagues repeat. “David can have a successor, but no replacement,” said Wallace. “He was unique.”
Swensen leaves behind his wife Meghan McMahon, three children and two stepchildren.