Yale Fund Pioneer Reshaped Investing

Updated April 13, 2024. David Swensen, the Yale fund pioneer who reshaped investing, has forever changed the way we view investing. Moreover, Swensen completed a 35-year tenure as Yale University’s endowment chair.

Grew the Yale Fund from $1.3 billion to More Than $31 billion

But, more importantly, David Swensen grew Yale’s endowment fund from $1.3 billion in 1985 to more than $31 billion today. As a result, this means the fund generated returns of 13.1% through June 2020. These are outstanding returns. So, let’s take a look at how he did it.

Swensen never commanded the fame of Warren Buffett, Peter Lynch, or Jack Bogle. However, among industry insiders he is widely considered to be in their ranks.

Willing to Play the Long Game to Win

One aspect of Swensen is the fact that he was willing to play the long game. For example, he invested in assets that had much longer time frames to reach maturity, but that had spectacular return profiles. The key is that his approach to investing worked brilliantly!

Swensen Had An Unlikely Beginning

Like many great careers, David Swensen had an unlikely beginning. On the contrary, many people say that he was self-confident, yet selfless. Consequently, when Swensen was first approached by Yale University in 1985, he assumed a teaching career.

At that time, Swensen was 31 years old, and he had the economic theory with a Yale Ph.D in economics. Nevertheless, he was very unfamiliar with investing.

Unshackled From Conventional Wisdom

Even so, being a novice investor proved to be a blessing. Unlike past endowment chairs, Swensen was unshackled from conventional wisdom. Therefore, at the core of what became the “Yale Model” are the principles that Swensen learned from his mentor, Nobel Laureate James Tobin.

In 2009, Swensen wrote the book Pioneering Portfolio Management. In this book, Swensen describes the Yale Model in -depth, also sometimes known as the Endowment Model. I highly recommend reading his book.

The Yale Model

Particularly of interest was his recognition of liquidity. For that reason, Swensen realized that liquidity comes at a heavy price for lower returns.

Therefore, the Yale fund pioneer who reshaped investing is thus characterized by relatively heavy exposure to asset classes such as private equity when compared to more traditional portfolios. The Yale Model is also more heavily reliant on investment managers who specialize in these specific asset classes.

Don’t Try to Time the Market

David Swensen also realized that market timing was not the answer. He realized that market timing represents a losing strategy.

Swensen recognized that there is no evidence of any large institutions having a consistent ability to get in when the market is low and get out when the market is high. He comprehended that attempts to switch between stocks and bonds, or between stocks and cash, in anticipation of market moves have been relatively unsuccessful.

Swensen’s Allocation Thinking Was Nonexistent

Large institutional funds were almost entirely composed of U.S. equities, some foreign equities, cash, and fixed income. Suffice to say that in the 1980’s, Swensen’s type of thinking was by and large almost nonexistent.

The Yale Model is different from other types of investing because it allocates only a small amount to traditional U.S. equities and bonds. To replace these small allocations, this type of investing relies more on alternative investments.

Accordingly, Swensen built a portfolio allocation model that was more heavily weighted in alternative assets.

Yale Fund Asset Strategy & Allocation

• hedge funds
• venture capital (VC) funds
• real estate
• natural resources
• private equity

Three Strategy Approach

• Construct a portfolio with money allocated to six core asset classes.
• The investor should rebalance the portfolio on a regular basis.
• Invest in low-cost index funds and exchange-traded funds.

Swensen Model Portfolio

David Swensen described his model portfolio in a 2015 interview with NPR. It consists of the following asset allocation:

How To Replicate Swensen Portfolio Using Vanguard

How To Replicate Swensen Portfolio Using Fidelity

Finding The Best Allocations

If you decide to use the Swensen model portfolio for your investments, I wish you success. In Addition, always remember to invest the funds in a tax-efficient manner.

Put the tax-inefficient REITs, bonds, and emerging markets funds in tax-referred or retirement accounts. Then put your Total U.S. Stock Market and International Stock Market funds in taxable accounts.

Needless to say, David Swensen, the Yale fund pioneer who reshaped investing, has forever changed the way we view investing.

Other Real Estate Strategies To Create Wealth

I would also recommend the strategy of searching directly for houses to invest in. The Three Real Estate Strategies That Work Every Time are: residential rentals; wholesaling; and rehab and resell. These are the most popular real estate strategies that produce consistent results regardless of the timing.

Portfolio of Rental Properties for Passive Income

More importantly, learn the best ways to to improve your rental property cash flows, by reading my blog on the three ways to Boost Your Rental Property Cash Flows. I recommend this strategy because of the excellent real estate tax breaks available on your taxes annually. This strategy will help you build wealth.

Please let me know your thoughts on using his portfolio. Best wishes!

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Last Updated on April 13, 2024 by Financial Goodness