David Swensen, an influential investor, died on May 5th
May 15th 2021STARTING IN THE 1980s, the endowments of a handful of big American universities began to divert their investments away from publicly traded equities and bonds towards “alternative” assets, such as venture capital and private equity. David Swensen, who died on May 5th aged 67, perfected the approach. Referred to variously as the endowment, Yale or Swensen model, it has since been copied—by family offices, sovereign-wealth funds and, more recently, by big pension funds.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on iOS or Android.In 1985 Mr Swensen was persuaded by James Tobin, a Nobel-prizewinning Yale economist, to give up a lucrative career on Wall Street to return to his former university to run its investment office. Yale’s endowment was then worth around $1bn. By the middle of last year the figure had risen to $31bn. Even this astonishing growth understates Mr Swensen’s influence. He was responsible for developing a stream of talented asset managers at Yale. And in two best-selling books, he set down his investment philosophy for a wider audience.Three pillars of this thinking stand out. The first concerns time horizon. Because endowments have obligations stretching far into the future, they can take a long-term view. They can sacrifice the ease of trading in public markets for the better returns promised in private equity. By doing so, they can earn an illiquidity premium—a reward for giving up the ability to sell out easily.The second pillar concerns information. It is hard to find mispriced stocks in the public markets, because news about listed companies travels fast and is quickly incorporated into prices. But investors in private markets who do their homework are more likely to be rewarded. That is because reliable data and analysis are much harder to come by.The third pillar is the importance of a contrarian mindset. Mr Swensen had a chance early on to demonstrate his. 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.These days, the Swensen model is often reduced to an asset-allocation decision: hold alternatives. But as money has flooded into private-equity funds, average returns have converged on the returns in public markets. There is no longer an obvious illiquidity premium. But Mr Swensen’s point about information remains relevant. The dispersion of returns—the gap between the best and worst funds—is far higher in private than in public equity. Selecting the right private-equity manager takes expertise. Yale has some advantages: it can, say, tap into its alumni network for access to the better-run funds.Mr Swensen is given too much credit in one regard. Endowments had a history of innovation before his return to Yale. Harvard’s was already changing. And endowments had previously been pioneers in asset allocation: the Ivy League funds shifted markedly from bonds into equities from the 1930s. In other respects Mr Swensen gets too little credit. Star investors are generally not good at mentoring others. But Swensen alumni have regularly turned up in senior jobs at other endowments. “He was a smart player but also an incredibly good coach,” says a colleague. In this, as in other matters of investment practice, David Swensen was a true outlier. ■This article appeared in the Finance & economics section of the print edition under the headline “The holly and the ivy”