Key Questions: What Can Investors Learn From an Investment Legend?
A fundamental understanding of one’s investment purpose is indispensable for long-term success.
All throughout our society, individuals who achieve greatness are immortalized through enshrinements such as halls of fame, lavish award ceremonies, and other displays of recognition. But what distinguishes those who are merely great from those who are truly legendary? In my view, legends are people who not only perfect their craft and achieve tremendous success but profoundly alter how their craft is practiced, resulting in countless others attempting to replicate similar accomplishments. Last week, the investment community lost one such individual: David Swensen, longtime chief investment officer of Yale University, who died at age 67 after a long battle with cancer.
Swensen served as a selfless and innovative steward of Yale’s endowment for over 35 years, a remarkable tenure. During this time, he generated an unrivaled track record of investment performance: According to the university, the Yale endowment generated returns of 13.1% per annum through June 30, 2020, outperforming its peer group by 3.4% per annum and a traditional portfolio of 60% invested in stocks and 40% invested in fixed income by 4.3% per annum.
Putting these numbers into perspective, had someone invested $1 million in the traditional 60/40 portfolio 35 years ago (and not spent a dime or paid a dollar in taxes), their portfolio would be valued at roughly $19 million today -– a tidy sum. Yet, had someone been able to invest $1 million in the Yale endowment portfolio 35 years ago, today, their portfolio would be valued at over $74 million!
In attaining such extraordinary performance, Swensen architected an investment philosophy that became known as the “Yale Model,” an approach that has since been emulated and adopted by hundreds if not thousands of other institutions throughout the world.1 Such a statement can be validated by the fact that dozens of Swensen’s former colleagues went on to lead investment offices, all adhering to Swensen’s playbook and most generating exceptional returns.
Consequently, Swensen not only transformed a major university,2 but he transformed the investment industry writ large. So, what can investors learn from an investment legend? While the list is long, three lessons are especially noteworthy.
First, Swensen and his colleagues truly embraced a longterm time horizon governed by an astute and committed investment committee that measured success in increments of five, ten, and twenty years. This permitted Swensen to attentively focus on asset allocation decisions, minimize time spent on security selection actions, and renounce market timing altogether. In so doing, Yale’s endowment features “an unusually heavy commitment to equity investments with bonds relegated to providing only enough liquidity to meet cash requirements,” in the words of Yale’s former investment committee chair.
Secondly, while equity exposure in Yale’s portfolio is material, Swensen espoused robust diversification beyond publicly traded stocks. To wit, again, as of June 30, 2020 (the most recent date for which such information is available), Yale’s endowment held just 13.7% of its assets in listed stocks, with 11.4% held in foreign equities and 2.3% in domestic equities. Other equity-oriented investments such as venture capital (22.6% of Yale’s endowment), hedge funds (21.6%), private equity (15.8%), and real estate (8.6%) commanded far larger allocations. This highlights another contributor to Swensen’s success: his willingness to accept illiquidity, think and act unconventionally, and embrace innovation. He was keenly interested in investing with newly formed investment firms led by experienced and highly capable individuals.
Finally, Swensen was driven by a strong sense of purpose and was laser-focused on hiring individuals and investment managers who not only possessed skill but an unwavering commitment to integrity. This purpose and focus ensured a deep alignment between external partners, various internal stakeholders, and the institution they served.
Admittedly, not every investor can adopt a truly long-term time horizon and measure investment success in increments of decades. Nor are non-traditional, opaque, and illiquid investments suitable for every investor. Swensen himself wrote: “Because of the enormous difficulty in identifying and engaging superior active [alternative] managers, many investors should avoid ‘noncore’ asset classes.”
But what is unavoidable is the steadfast principle that every investor possesses the ability to articulate her/his objectives or, more simply stated, their purpose for investing. Through such an understanding, conviction can result, which can then trigger knowledge. And, in the words of investment legend David Swensen, “knowledge -– knowledge of one’s aspirations, limitations and their unique purpose for investing -– is indispensable for long term investment success.”
Thank you, David.
For more information, please contact your Key Private Bank Advisor.