Monday, March 23, 2009

David Swensen and the Yale Model

David Swenson, manager of the Yale endowment, is probably one of JLM's favorite investment managers—here's a recent example. Now Conde Nast Portfolio has run an interesting profile of Swenson, and a discussion of what happens when all the endowments try to simultaneously follow the Swenson investment philosophy—you get today's market meltdowns, for example.

It has long been observed that if one had the magic secret to investment success, sharing the secret publicly would necessarily destroy the magic, as everyone tried to follow the formula. The article hints that Swenson deliberately did not follow his own rules, he deliberately built a cash reserve, which he is now going to use to buy up assets from other endowments being unloaded at distress prices.

Perhaps his sharing of his brand of investment magic, which seemed to be against his own self interest, was Swenson's way of legally manipulating the markets?

When the Yale endowment reach $10 billion, Nobel laureate James Tobin wrote a limerick for Swenson called “Son of Sven”:
A young Viking, a badger called Dave
Determined poor Eli to save
First he’d be
A PhD
And then make those markets behave.
One can't argue with success.

2 comments:

JLM said...

David Swensen undoubtedly has learned something about real estate and illiquid "alternative investments." But as The Wall Street Journal reported in January, he also believes most of those imitating his model are only going through the motions:

"A lot of institutional investors think they are emulating Yale, but they are not. Most endowments use fund of funds and consultants, rather than making their own well-informed decisions. You can divide institutional investors into two camps: those who can hire high-quality, active-management investors and those who can't."

One of the advantages of being in the rich camp, it seems, is the ability to discover that deals have gotten so dubious that you're better off in cash.

Anonymous said...

Another way to divide institutional investors: those who have brains and those who do not. A study by Lerner, Schoar and Wongsunwai (2007) found that university endowments are far ahead of other institutional investors in terms of returns. The worst performaners are, surprise! investment banks like Merril Lynch. According to Lerner, Schoar and Wang (2008), among university endowments, GPA actually is a factor in their realized returns.