David F. Swensen

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 world's 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]

Prior to joining Yale in 1985, Swensen spent three years on Wall Street as senior vice president at Lehman Brothers,[11] specializing in the firm's 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.

Swensen was tapped to serve as the Yale endowment manager at age 31 in 1985.[12] This position was offered by Swensen's other dissertation adviser, Yale's provost, William Brainard. Swensen's candidacy was suggested by James Tobin, who, despite his former student's 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 Swensen's 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 "Yale's 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, Swensen's "contribution" to Yale is greater than the sum of all the donations made in more than two decades. "We've just done better," Levin says, because of Swensen's "uncanny ability" to pick the best outside money managers. Swensen's 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 Yale's preferences in a letter to the endowment's 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]

Swensen began advising the Yale Endowment in 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 Swensen and Takahashi and is described in Swensen's 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]

After Harvard's 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]

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]

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]

During an interview with Yale's 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]