David F. Swensen

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David Swenson
Born River Falls, Wisconsin, U.S.
Residence New Haven, Connecticut, U.S.
Citizenship United States
Alma mater University of Wisconsin-River Falls
Yale University
Thesis A Model for the Valuation of Corporate Bonds
Known for The Yale Model
Swensen approach
Managing the Yale Endowment
Influences James Tobin
William Brainard
Influenced Endowments influenced
Investors influenced

David F. Swensen (born 1954) is an American investor, endowment fund manager, and philanthropist. He has has been the chief investment officer at Yale University since 1985.

Swensen is responsible for managing and investing Yale's endowment assets and investment funds, which total $25.4 billion as of September 2016.[1] 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"[2] 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.[3]

His investment success with the Yale Endowment has attracted the notice of Wall Street portfolio managers and other universities. Investment heads from universities such as Harvard, MIT, Princeton, Wesleyan, and the University of Pennsylvania have adopted his allocation strategies to mixed success. Under Swensen's guidance the Yale Endowment has seen an average annual return of 11.8 percent from 1999 to 2009.[4] As of the 2016 fiscal year, Yale's endowment has risen by 3.4%, the most out of any Ivy League school, according to Institutional Investor.[5]

Swensen was listed third on aiCIO's 2012, a list of the 100 most influential institutional investors worldwide. In 2008, he was inducted into Institutional Investors Alpha's Hedge Fund Manager Hall of Fame.[6]

Early life and education[edit]

David F. Swenson was born in River Falls, Wisconsin. 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.

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.

Lehman Bothers[edit]

Prior to joining Yale in 1985, Swensen spent six years on Wall Street as senior vice president at Lehman Brothers,[7] specializing in the firm's swap activities, and as an associate in corporate finance for Salomon Brothers, where his work focused on developing new financial technologies. Swensen engineered the first 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.[8] As of 2005, the fund has 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.[8]

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.[9]

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.[10] On August 13, 2011, David Swensen published an op-ed in the New York Times entitled "The Mutual Fund Merry-Go-Round,"[11] 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]

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 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[12] The Yale Model is thus characterized by relatively heavy exposure to asset classes such as private equity compared to more traditional portfolios.[13]

This type of investing — allocating only a small amount of 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).[13]

Criticism of the Endowment Model[edit]

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.”[14] 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.[15]

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.[5]

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:[16]

  • The investor should construct a portfolio with his money allocated to 6 core asset classes — diversify among them and have a bias toward the equity sections.
  • The investor should rebalance his 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.[17]

Personal life[edit]

Swensen lives in New Haven, Connecticut. Some Yale alumni have mounted a campaign to name one of two new residential colleges after Swensen.[18] At Yale, where he teaches endowment management at Yale College and at the Yale School of Management, he is a fellow of Berkeley College, an incorporator of the Elizabethan Club.

Political and economic views[edit]

In February 2009, Swensen was named to a two-year term on President Barack Obama's Economic Recovery Advisory Board, which he served from 2009 to 2011.[19][20]

Views on capital markets[edit]

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."[17]

Legacy and honors[edit]

Swensen has won numerous awards for his investing and management of Yale's 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 Mory’s 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.[17]

In 2008, he was inducted into Institutional Investors Alpha's Hedge Fund Manager Hall of Fame along with Seth Klarman, Louis Bacon, Steven Cohen, Kenneth Griffin, Paul Tudor Jones, George Soros, Michael Steinhardt, Jack Nash, James Simmons, Alfred Jones, Leon Levy, Julian Roberston, and Bruce Kovner.[6]

See also[edit]

Bibliography[edit]

References[edit]

  1. ^ "Investment return of 3.4% brings Yale endowment value to $25.4 billion". Yale News. Retrieved 2017-02-18. 
  2. ^ YaleCourses (2012-04-05), 6. Guest Speaker David Swensen, retrieved 2017-02-18 
  3. ^ "David Swensen's portfolio (from Unconventional Success) | Bogleheads.org". www.bogleheads.org. Retrieved 2017-02-18. 
  4. ^ Yale University Endowment Update 2009, p. 24
  5. ^ a b "Can Anyone Beat David Swensen?". www.institutionalinvestor.com. Retrieved 2017-02-18. 
  6. ^ a b "The Alpha Hedge Fund Hall of Fame | Institutional Investor's Alpha". www.institutionalinvestorsalpha.com. Retrieved 2017-02-24. 
  7. ^ Yale.edu - David F. Swenson
  8. ^ a b Inc., Yale Alumni Publications,. "Yale's $8 Billion Man: Yale Alumni Magazine (Jul/Aug 2005)". archives.yalealumnimagazine.com. Retrieved 2017-02-14. 
  9. ^ Fabrikant, Geraldine (7 September 2014). "Yale Fund Takes Aim at Climate Change". The New York Times. Retrieved 20 November 2014. 
  10. ^ "News you can endow" Op-ed by David Swenson and Michael Schmidt, 1/28/09 p A31 NY edition. Retrieved 2-15-09.
  11. ^ "The Mutual Fund Merry-Go-Round" Op-ed by David Swenson, 8/13/11. Retrieved 8/14/11.
  12. ^ Gary Hirst (2013). "The International Association of Insurance Supervisors and Insurers that are Too Big to Fail". The Gary Hirst Insurance Blog. Retrieved 2013-04-08. 
  13. ^ a b "Yale Model Definition from Financial Times Lexicon". lexicon.ft.com. Retrieved 2017-02-18. 
  14. ^ "Did Big Endowments Make Economic Crisis Worse? | onPhilanthropy". onphilanthropy.com. Retrieved 2017-02-18. 
  15. ^ "Mark Yusko: The Endowment Model Isn't Broken" http://www.youtube.com/watch?v=_OiO5Avv3bw. Aired on May 19, 2010
  16. ^ Ferri, Rick. "More Unconventional Failure". Forbes. Retrieved 2017-02-18. 
  17. ^ a b c "Interview with David Swensen". Yale School of Management. 2013-12-08. Retrieved 2017-02-21. 
  18. ^ Alumni mount campaign for Swensen’s name on new college, The Yale Daily News April 18, 2008.
  19. ^ White House Names Board of Outside Economic Experts Irwin, Neil and Michael D. Shear. Washington Post. P. D3. February 9, 2009. Retrieved 2-15-09.
  20. ^ "Obama taps Swensen for Economic Advisory Board" Yale Bulletin, 2-13-09. Retrieved 2-15-09.

External links[edit]