The Yale Model of Investing

The Yale Model of Investing David Swensen, the chief investment officer of Yale University's endowment since 1985 and father of the “Endowment Model” of portfolio management, passed away yesterday at the age of 67. He played an influential role in the industry-wide move among endowments, pension funds, and other institutional investors toward alternative investments. Those include the likes of private equity and venture capital. Swensen also delivered superlative long-term investment results for Yale's endowment, Andrew Bary and Mary Romano wrote in an obituary today. The university's endowment was worth more than $31 billion as of June 2020, after average returns of 9.9% annually in the past two decades. That beats U.S. stocks' 6.2% annual return in the same period. Under Swensen, Yale invested heavily in venture capital, hedge funds, and private equity and little in U.S. stocks. "The heavy allocation to nontraditional asset classes stems from their return potential and diversifying power," the endowment said in its 2020 annual report. The endowment had just a 9.75% allocation target to domestic stocks, bonds, and cash in June 2020, against 90.25% for a group of assets including foreign equity, absolute return, real estate, natural resources, leveraged buyouts, and venture capital. The actual exposure to U.S. stocks was just 2.3% in June 2020, among the lowest of any major endowment. It became more difficult for Yale’s alternatives-oriented approach to top the U.S. stock market in the past decade given the strong run in public equities. The Yale endowment returned 10.9% annually in the 10 years through June 2020, behind the 13.7% yearly return on U.S. stocks but ahead of the 7.4% average gain of college and university endowments. Swensen was put in charge of the Yale endowment when he was just 31 years old and a relatively unknown, raising eyebrows with some big Yale donors at the time. Today, several other prominent endowments are headed by Yale endowment alumni, including those of Princeton University and Bowdoin College. They're sometimes referred to as “Yale pups,” a play on the “Tiger cubs” alumni of Tiger Global Management.