David Swensen’s coda
David Swensen, Yale’s chief investment officer from the mid-1980s until his death in May of this year, unfailingly emphasized the importance of measuring success not by single-year returns, but instead by returns over much longer periods. Still, it is fitting to note his career’s staggering coda: during Swensen’s last year heading the Yale endowment, it notched a 40.2% gain — one of the highest in the university’s history.
On June 30, 2021, less than two months after Swensen’s death, Yale’s endowment totaled $42.3 billion. When Swensen assumed management of the endowment in 1985, it stood at $1.3 billion. During his 36-year term as chief investment officer, his stewardship led to $57.6 billion of investment gains for Yale and more than $21.8 billion of spending to support Yale’s operations.
Swensen’s investment track record is incomparable. Over those 36 years, Yale produced an annualized gain of 13.7% per annum, outperforming the average endowment (as measured by Cambridge Associates) by 3.4% per annum. In dollar terms, outperformance during Swensen’s tenure represented over $50 billion in value added relative to the average endowment. Without spending, a single dollar invested at the start of his tenure would have grown to nearly $103 by the end of the 36 years. By comparison, a dollar invested in the S&P 500 would be worth slightly more than $50.
“Simply put, David’s long-term track record is unequalled in the world of institutional funds management,” said Michael Cavanagh, chairman of Yale’s Investment Committee. “David was the best in the business, and it was Yale and the world of higher education that benefited the most. We were unbelievably fortunate to have him.”
When Swensen began his career as Yale’s chief investment officer, the typical institutional fund was invested in a traditional “60/40 portfolio” comprised of 60% domestic equities and 40% bonds. Swensen, alongside long-time collaborator Dean Takahashi, took principles of modern portfolio theory espoused by his mentor, Nobel laureate James Tobin, and his fellow Nobel laureate Harry Markowitz, and pioneered an approach to endowment investing that transformed the institutional investment landscape and became known as the “Yale Model.” Emphasizing diversification and an equity orientation to take advantage of Yale’s long time horizon, Swensen expanded Yale’s portfolio into alternative assets such as hedge funds, real estate, timber, and private equity long before such an approach became standard. The pioneering work paid off. Measured relative to the traditional 60/40 portfolio, Yale outperformed by 4.0% per annum under Swensen’s watch.
“While Yale has been supported by many incredibly generous benefactors, no individual has contributed more to the university’s financial wherewithal than David Swensen,” said President Peter Salovey. “Furthermore, the revolution that David led in the world of endowment management, as well as the numerous chief investment officers he trained and mentored, represent a profound and permanent contribution to higher education most widely.”
At Yale, Swensen’s investment success enabled the university to boost spending from the endowment from $45 million, approximately 10% of the budget, when he began in 1985, to $1.6 billion in the current fiscal year, representing approximately 33% of the operating budget. Excluding the medical school, which is supported largely by grants and clinical income, endowment spending funds a remarkable 58% of the university’s budget.
Increased endowment support has underpinned the university’s recruitment and retention of exceptional and diverse faculty, major campus renovations, various pedagogical initiatives across all disciplines, and the dramatic increase in financial aid available for Yale College students, a cause close to Swensen’s heart. In 1985, Yale was not need blind for international students — “need blind” means that students are admitted on the basis of academic and personal promise, without regard to their ability to pay — and financial aid for domestic students was far less generous. Today, Yale is one of only a handful of colleges to be globally need-blind, and no parental contribution is expected for students of families earning less than $75,000. This expansion in the accessibility of Yale College was made possible by the investment performance generated by Swensen and his team.
But Swensen’s contributions went well beyond his investment success. He took great pride in being a teacher, not only through his publications, “Pioneering Portfolio Management,” an essential primer for institutional investors, and “Unconventional Success,” for personal investors, but through decades of teaching in Yale College and Yale School of Management. He gave legendary campus tours to prospective students, and often took time to have lunch with current students, advising them on life, courses, and their careers after Yale. He hosted countless beer and wine tastings for seniors in Yale’s residential colleges, particularly at Berkeley College, where he was proud to serve as a fellow. Swensen was a stalwart supporter of Yale athletics, cheering on the Bulldogs at home and away games and mentoring student-athletes off the field.
“David was a heartfelt and enthusiastic mentor and teacher to all around him, especially those of us fortunate enough to have worked for him at the Investments Office,” said Matt Mendelsohn, David’s successor as Yale’s chief investment officer. “While he is sorely missed, we will honor his legacy as one of the university’s great citizens with everything that we do, knowing that his contribution to Yale will reverberate for generations to come.”