David Swensen’s Investment Strategy
David Swensen‘s success as Yale’s endowment fund manager is well known. In this video, Origin’s Michael Episcope explains what has made Swensen’s investment strategy for the Yale endowment so successful over the years. Swensen’s Yale Model advocates for the importance of illiquidity, using proper asset allocation strategy, and the forever outlook.
The Yale Model
This portfolio investment model involves avoiding low-risk asset classes with low expected returns such as fixed income and commodities. One of the revolutionary elements of the Yale Model was the idea that liquidity could actually be a detriment to long term portfolio performance. This way of thinking led to a higher allocation to real estate than was typically the case when Swensen took over as Yale’s endowment manager in 1985. The strategy employed would come to be called the Yale Model.
The Forever Outlook
When Swensen began managing the Yale endowment in 1985, he wanted to employ a long-term strategy that focused on diversifying investments between sectors and asset classes. It is more efficient to stay in the technology sector long term than to try and predict the spikes. This is called the forever outlook and it would become a core element of Swensen’s investment philosophy and the Yale Model.
What Does This Teach Individual Investors?
Swensen’s 2005 book, Unconventional Success, serves as a guide for individual investors. He reiterates his belief in the forever outlook, illiquidity, and asset class allocation strategy. He also believes in regular re-balancing of the portfolio based on performance. When one asset class outperforms, you should move some of those funds to an asset that is under-performing. And finally, in the absence of a market-beating strategy, investors should invest in low cost index funds and exchange-traded funds. With these core concepts, investors can begin to think more like David Swensen.