The hissing sound you’re hearing is David Swensen’s ego inflating to ever-grander proportions.
Some people have big egos to mask disconcerting insecurities. Others have egos pumped up by long track records of success. Think Steve Jobs, Warren Buffet, Oprah Winfrey, Richard Branson — and David Swensen.
No, Swensen is not a household name. But, as CIO of the Yale Endowment, the man has proven he knows how to make money and burn his own path. And he does that with a heavy emphasis on non-liquid assets, including private equity real estate and other real assets, such as natural resources. It’s a strategy Swensen detailed in Pioneering Portfolio Management, a book he published in 2000.
Then the global financial crisis hit with catastrophic force, and Swensen took a drubbing, as the mighty Yale Endowment watched $7 billion flushed out of its coffers. That was followed by a chorus of I-told-you-so’s from liquidity advocates. But, with the fiscal year ended June 30, Swensen sent yet another counterstroke to his naysayers, reporting a 20.2 percent return, making it the best performer among four Ivy League schools that have reported results. More impressive still, during the past 10 years its average return was 11 percent, while domestic stocks had returned an average of 8.4 percent and bonds returned 4.9 percent. For that same period, the average annual performance for 138 institutions of higher learning tracked by Cambridge Associates was 7.6 percent. That gives Yale the best 10-year results of any Ivy League endowment (2003–2013), matched only by Columbia University.
The value of Yale’s endowment now stands at $23.9 billion, meaning the fund has recouped its losses from the economic collapse and has more assets under management than ever. The stampede of incremental returns was largely driven by a 17 percent position in real estate and an 8 percent position in natural resources.
Obviously, Swensen is not about to back off from his philosophy that large investors — endowments, foundations and public pension funds among them — can achieve superior returns by reallocating a large portion of investments away from traditional stocks and bonds and into select hedge funds, private equity real estate and other alternatives.
But let’s not oversimplify things: it’s not just the recipe; it’s the chef. As Forbes magazine reported, hundreds of college endowments have adopted some form of the Yale model during the past 10 years, and in doing so have spent billions of dollars on consulting fees, hedge funds, incentives and other profit-sharing arrangements. “All the spending was a waste. The returns did not develop for most of these other schools,” Forbes wrote.
Swenson, as reported by the New York Times, says he will keep the Yale Endowment’s portfolio deeply invested in illiquid markets.
“My regret,” Swensen says, “is that we did not have more liquidity to play offense.”
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Mike Consol is editor of The Institutional Real Estate Letter – Americas.
