David F. Swensen (1954–2021)

When describing the optimal approach to designing an investment portfolio, financial economists often begin by considering the problem faced by an infinite-lived investor. Of course, given that all individuals will eventually “expire,” that assumption is quite unrealistic for the vast majority of the investing public. This distinction is critical, however, to understanding what makes college endowment funds a unique class of investor: universities expect to survive forever and their spending needs remain relatively stable for long periods of time. As such, managers of endowment funds have the capacity to think very differently about financial risk-taking than virtually any other type of investor.

Despite the advantages that having an infinite time horizon provides (e.g., the ability to commit more capital to illiquid asset classes), college portfolios have been remarkably slow to take advantage of those opportunities over the last two centuries. David Swensen, the legendary manager of Yale University endowment fund, changed all that in the mid-1980s. In Pioneering Portfolio Management, Swensen explains with clarity and considerable detail what this transformation from traditional “plain vanilla” investing to the use of modern portfolio management techniques entailed.

The main innovations central to his approach to endowment management are: (1) diversify the portfolio into several asset classes, concentrating on equity investments, (2) invest in private markets (i.e., real estate, commodities, private equity) that offer increased long-term return potential per unit of risk, and (3) use external active managers for non-indexed investments. Much of the book is devoted to explaining and documenting the success of these strategies, which form the foundation of what has come to be called the “endowment model” (or Yale model) of investing.

While insightful on virtually every page, this book is not written for the casual reader; it certainly is not intended as a “how to” manual for the novice investor. As other reviewers have noted, Swensen’s writing style can be somewhat less than scintillating on occasion and some of the chapters contain far more information than many readers will care to know. Nevertheless, those inside the money management profession hold him in the same regard as they do Warren Buffett and that is reason enough to spend some time considering his thoughts on how institutional assets should be invested.… (mehr)