David Swensen
Encyclopedia
David F. Swensen has been the Chief Investment Officer at Yale University
since 1985. He is responsible for managing and investing the University's endowment assets
and investment funds
, which total $19.4 billion. Realizing an average annual return
of 11.8 percent on his investments over the ten years to 2009, Swensen's consistent track record has attracted the notice of Wall Street
portfolio
managers. Currently, he lives in New Haven, Connecticut with his children Tory, Alex, and Tim.
He is chiefly notable for having invented what has become known as "The Yale Model" which is an application of Modern Portfolio Theory
.
and B.S.
in 1975 from the University of Wisconsin-River Falls
, Swensen pursued a Ph.D. in economics
at Yale, where he wrote his dissertation, A Model for the Valuation of Corporate Bonds
.
Prior to joining Yale in 1985, Professor Swensen spent six years on Wall Street
as senior vice president at Lehman Brothers
, 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
.
Swensen is a trustee
of the Carnegie Institution of Washington and treasurer of the Hopkins Committee of Trustees
. He serves as a trustee of TIAA
(Teachers Insurance and Annuity Association of America), and a non-executive director of Schroders PLC
. He has 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
.
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
, and a fellow of the International Center for Finance. Some Yale alumni have mounted a campaign to name one of two new residential colleges after Swensen.
In February 2009, Swensen was named to a two-year term on President Barack Obama
's Economic Recovery Advisory Board
.
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. The Yale Model is thus characterized by relatively heavy exposure to asset classes such as private equity compared to more traditional portfolios.
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).
In a video interview Mark Yusko, 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. 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.
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.
Yale University
Yale University is a private, Ivy League university located in New Haven, Connecticut, United States. Founded in 1701 in the Colony of Connecticut, the university is the third-oldest institution of higher education in the United States...
since 1985. He is responsible for managing and investing the University's endowment assets
Financial endowment
A financial endowment is a transfer of money or property donated to an institution. The total value of an institution's investments is often referred to as the institution's endowment and is typically organized as a public charity, private foundation, or trust....
and investment funds
Collective investment scheme
A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...
, which total $19.4 billion. Realizing an average annual return
Return on investment
Return on investment is one way of considering profits in relation to capital invested. Return on assets , return on net assets , return on capital and return on invested capital are similar measures with variations on how “investment” is defined.Marketing not only influences net profits but also...
of 11.8 percent on his investments over the ten years to 2009, Swensen's consistent track record has attracted the notice of Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
portfolio
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
managers. Currently, he lives in New Haven, Connecticut with his children Tory, Alex, and Tim.
He is chiefly notable for having invented what has become known as "The Yale Model" which is an application of Modern Portfolio Theory
Modern portfolio theory
Modern portfolio theory is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets...
.
Biography
After receiving his B.A.Bachelor of Arts
A Bachelor of Arts , from the Latin artium baccalaureus, is a bachelor's degree awarded for an undergraduate course or program in either the liberal arts, the sciences, or both...
and B.S.
Bachelor of Science
A Bachelor of Science is an undergraduate academic degree awarded for completed courses that generally last three to five years .-Australia:In Australia, the BSc is a 3 year degree, offered from 1st year on...
in 1975 from the University of Wisconsin-River Falls
University of Wisconsin-River Falls
The University of Wisconsin–River Falls is a liberal arts undergraduate and graduate university and a member of the University of Wisconsin System. UW–River Falls is located in River Falls, Wisconsin on the famed trout fishing Kinnickinnic River. The campus consists of 32 major buildings, ten of...
, Swensen pursued a Ph.D. in economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
at Yale, where he wrote his dissertation, A Model for the Valuation of Corporate Bonds
Corporate bond
A corporate bond is a bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date...
.
Prior to joining Yale in 1985, Professor Swensen spent six years on Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
as senior vice president at Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
, specializing in the firm's swap
Swap (finance)
In finance, a swap is a derivative in which counterparties exchange certain benefits of one party's financial instrument for those of the other party's financial instrument. The benefits in question depend on the type of financial instruments involved...
activities, and as an associate in corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
for Salomon Brothers
Salomon Brothers
Salomon Brothers was a bulge bracket, Wall Street investment bank. Founded in 1910 by three brothers along with a clerk named Ben Levy, it remained a partnership until the early 1980s, when it was acquired by the commodity trading firm Phibro Corporation and then became Salomon Inc. Eventually...
, 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
When Genius Failed: The Rise and Fall of Long-Term Capital Management
When Genius Failed: The Rise and Fall of Long-Term Capital Management is a book by Roger Lowenstein published by Random House in 2000. As of 2008, there have been six editions....
by Roger Lowenstein
Roger Lowenstein
Roger Lowenstein is an American financial journalist and writer. He graduated from Cornell University and reported for the Wall Street Journal for more than a decade, including two years writing its Heard on the Street column, 1989 to 1991. Born in 1955, he is the son of Helen and Louis Lowenstein...
.
Swensen is a trustee
Trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
of the Carnegie Institution of Washington and treasurer of the Hopkins Committee of Trustees
Hopkins School
The Hopkins School is a private, college-preparatory, coeducational day school, located in New Haven, Connecticut....
. He serves as a trustee of TIAA
TIAA-CREF
Teachers Insurance and Annuity Association – College Retirement Equities Fund is a Fortune 100 financial services organization that is the leading retirement provider for people who work in the academic, research, medical and cultural fields...
(Teachers Insurance and Annuity Association of America), and a non-executive director of Schroders PLC
Schroders
Schroders plc is a British multinational asset management company with over 200 years of experience in the world's financial markets. The company employs 2,905 people worldwide who are operating from 32 offices in 25 different countries around Europe, America, Asia and the Middle East...
. He has advised the Carnegie Corporation, the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
, the Howard Hughes Medical Institute
Howard Hughes Medical Institute
Howard Hughes Medical Institute is a United States non-profit medical research organization based in Chevy Chase, Maryland. It was founded by the American businessman Howard Hughes in 1953. It is one of the largest private funding organizations for biological and medical research in the United...
, the Courtauld Institute of Art
Courtauld Institute of Art
The Courtauld Institute of Art is a self-governing college of the University of London specialising in the study of the history of art. The Courtauld is one of the premier centres for the teaching of art history in the world; it was the only History of Art department in the UK to be awarded a top...
, the Yale-New Haven Hospital
Yale-New Haven Hospital
Yale-New Haven Hospital , Connecticut's largest hospital with 966 beds, is located in New Haven, Connecticut.The hospital is owned and operated by the Yale New Haven Health System, Inc...
, The Investment Fund for Foundations (TIFF), the Edna McConnell Clark Foundation
Edna McConnell Clark Foundation
The Edna McConnell Clark Foundation is a New York-based institution that currently focuses on providing opportunities for low-income youth in the United States...
, and the States of Connecticut
Connecticut
Connecticut is a state in the New England region of the northeastern United States. It is bordered by Rhode Island to the east, Massachusetts to the north, and the state of New York to the west and the south .Connecticut is named for the Connecticut River, the major U.S. river that approximately...
and Massachusetts
Massachusetts
The Commonwealth of Massachusetts is a state in the New England region of the northeastern United States of America. It is bordered by Rhode Island and Connecticut to the south, New York to the west, and Vermont and New Hampshire to the north; at its east lies the Atlantic Ocean. As of the 2010...
.
At Yale, where he teaches endowment management
Financial endowment
A financial endowment is a transfer of money or property donated to an institution. The total value of an institution's investments is often referred to as the institution's endowment and is typically organized as a public charity, private foundation, or trust....
at Yale College
Yale College
Yale College was the official name of Yale University from 1718 to 1887. The name now refers to the undergraduate part of the university. Each undergraduate student is assigned to one of 12 residential colleges.-Residential colleges:...
and at the Yale School of Management
Yale School of Management
The Yale School of Management is the graduate business school of Yale University and is located on Hillhouse Avenue in New Haven, Connecticut, United States. The School offers Master of Business Administration and Ph.D. degree programs. As of January 2011, 454 students were enrolled in its MBA...
, he is a fellow of Berkeley College
Berkeley College (Yale)
Berkeley College is a residential college at Yale University, constructed in 1934. The eighth of Yale's 12 residential colleges, it was named in honor of Reverend George Berkeley , dean of Derry and later bishop of Cloyne, in recognition of the assistance in land and books that he gave to Yale in...
, an incorporator of the Elizabethan Club
Elizabethan Club
The Elizabethan Club is a social club at Yale University named for Queen Elizabeth I and her era. Its profile and members tend toward a literary disposition, and conversation is one of the Club's chief purposes....
, and a fellow of the International Center for Finance. Some Yale alumni have mounted a campaign to name one of two new residential colleges after Swensen.
In February 2009, Swensen was named to a two-year term on President Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
's Economic Recovery Advisory Board
President's Economic Recovery Advisory Board
The President’s Council on Jobs and Competitiveness, originally the President's Economic Recovery Advisory Board, is a panel of non-governmental experts from business, labor, academia and elsewhere that President of the United States Barack Obama created on February 6, 2009. The board reports...
.
The Yale (or Endowment) Model
The Yale 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 incomeFixed income
Fixed income refers to any type of investment that is not equity, which obligates the borrower/issuer to make payments on a fixed schedule, even if the number of the payments may be variable....
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. The Yale Model is thus characterized by relatively heavy exposure to asset classes such as private equity compared to more traditional portfolios.
This type of investing - allocating only a small amount of traditional U.S. equities and bonds and more to Alternative Investments
Alternative investment
An alternative investment is an investment product other than the traditional investments of stocks, bonds, cash, or property. The term is a relatively loose one and includes tangible assets such as art, wine, antiques, coins, or stamps and some financial assets such as commodities, private equity,...
- is followed by many larger endowments and foundations and is therefore also known as the "Endowment Model" (of investing).
Criticism of the Endowment Model
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.”In a video interview Mark Yusko, 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. 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.
Swensen alumni
The impact of Swensen's influential work in endowment management extends beyond Yale. Endowment managers with ties to Mr. Swensen include:- Seth Alexander, MIT
- Donna Dean, Rockefeller FoundationRockefeller FoundationThe Rockefeller Foundation is a prominent philanthropic organization and private foundation based at 420 Fifth Avenue, New York City. The preeminent institution established by the six-generation Rockefeller family, it was founded by John D. Rockefeller , along with his son John D. Rockefeller, Jr...
- Andrew K. GoldenAndrew K. GoldenAndrew K. Golden is President of the Princeton University Investment Company which manages the university's financial endowment. According to a report in the Daily Princetonian, the endowment earned a 5.6 percent return for the 12 months ended in June 2008, growing from $15.8 billion to $16.4...
, Princeton UniversityPrinceton UniversityPrinceton University is a private research university located in Princeton, New Jersey, United States. The school is one of the eight universities of the Ivy League, and is one of the nine Colonial Colleges founded before the American Revolution.... - Randy Kim, Conrad N. Hilton Foundation
- Jane MendilloJane MendilloJane Mendillo is the President and Chief Executive Officer of Harvard Management Company.Jane returned to Harvard Management Company as its president and chief executive officer on July 1, 2008 and is now responsible for directing Harvard's $35 billion endowment.Prior to rejoining Harvard, she was...
, Harvard Management CompanyHarvard Management CompanyHarvard Management Company or HMC is an American investment management corporation wholly owned subsidiary of Harvard University, charged with managing the university's endowment, pension assets, working capital, and non-cash gifts... - Ellen Shuman, Carnegie Corporation of New YorkCarnegie Corporation of New YorkCarnegie Corporation of New York, which was established by Andrew Carnegie in 1911 "to promote the advancement and diffusion of knowledge and understanding," is one of the oldest, largest and most influential of American foundations...
- Paula Volent, Bowdoin CollegeBowdoin CollegeBowdoin College , founded in 1794, is an elite private liberal arts college located in the coastal Maine town of Brunswick, Maine. As of 2011, U.S. News and World Report ranks Bowdoin 6th among liberal arts colleges in the United States. At times, it was ranked as high as 4th in the country. It is...
- Anne Martin, Wesleyan UniversityWesleyan UniversityWesleyan University is a private liberal arts college founded in 1831 and located in Middletown, Connecticut. According to the Carnegie Foundation for the Advancement of Teaching, Wesleyan is the only Baccalaureate College in the nation that emphasizes undergraduate instruction in the arts and...
Unconventional Success
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:- 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 fundIndex fundAn index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions.-Tracking:Tracking can be achieved by trying to hold all of the...
s and ETFs. 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
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
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.
Other contributions
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" and discussing the idea of news organizations as non-profits funded more on the university model. On August 13, 2011, David Swensen published an op-ed in the New York Times entitled "The Mutual Fund Merry-Go-Round," 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.External links
- David Swensen Insight
- Yale UniversityYALERapidMiner, formerly YALE , is an environment for machine learning, data mining, text mining, predictive analytics, and business analytics. It is used for research, education, training, rapid prototyping, application development, and industrial applications...
biography - Brookings Institute trustee biography
- Yale Alumni MagazineYale Alumni MagazineThe Yale Alumni Magazine is an alumni magazine about Yale University. It was founded in 1891. It is independent from the university, and is governed by a corporation, Yale Alumni Publications, Inc....
: "Yale's $8 billion man" - The New York TimesThe New York TimesThe New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
: "For Yale's Money Man, a Higher Calling" - National Public Radio: "Yale's Money Guru Shares Wisdom with Masses"
- National Public Radio: "Yale Money Whiz Shares Tips on Growing a Nest Egg (4/3/08)"
- National Public Radio: "Despite Losses, Star Investor Trusts in Stocks (3/4/09)"