Venture Capital: Yale Endowment’s Legendary Boss Swensen Moves To Change “Mostly White, Mostly Male”

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David Swensen tells Yale’s fund managers to increase diversity, or else.

David Swensen stands tall in the field of management of endowment funds at universities. He joined the Yale Investments Office at the age of 31. The fund was then worth $1 billion. Today, Swensen runs $31.2 billion for Yale, second only to Harvard’s corpus of $40 billion.

His Yale Model transformed the University’s portfolio, investing more in “alternatives” such as venture capital, private equity, hedge funds, and international opportunities. At the same time, progressively lesser amounts went to public equities and bonds.

Diversity and inclusion at Yale’s fund managers

On October 2, Swensen wrote to the investment management firms that handled Yale’s prodigious endowment fund.

The subject: The lack of women and minorities in the asset management industry.

His message: Increase the diversity in the composition of their staff by hiring more women and minorities. And do so early in their careers. If possible, even recruit directly from college campuses, Swensen suggested.

“By and large, the number of experienced investment professionals is fixed. We do not solve the larger problem of underrepresentation by recruiting diverse candidates from other investment organizations. Such position shuffling is a zero-sum game, doing nothing to improve the diversity of the overall industry,” he clarified.

Close mentorship and training, such as imparted through the old-fashioned apprenticeship, can be instrumental in transmitting the hard and soft skills of senior members to the new hires.

“Shadowing experienced colleagues and absorbing their approach to analyzing opportunities provide a solid foundation for a career in asset management,” observed Swensen.

Swensen signed off by asking the 70 Yale fund managers to file a survey detailing the numbers of diverse professionals on their investment team and in support functions at various levels of seniority.

“I plan on asking you for annual updates,” Swensen said.

The Yale endowment fund

Yale’s strategy is to seek high inflation- and risk-adjusted returns through an asset allocation via managers that “improve the operations of public and private businesses.”

The cornerstone of the strategy is mean-variance analysis. That is a portfolio management tool developed by Nobel laureates James Tobin and Harry Markowitz.

“Despite the operational challenges, the rigor required in conducting mean-variance analysis brings an important element of discipline to the asset allocation process,” says Yale.

Asset allocation at Yale has changed dramatically since 1989. At the time about 75% of the portfolio rested in U.S. stocks, bonds, and cash. Currently, domestic marketable securities constitute less than 10%, with the rest being made up of alternatives, foreign equity, absolute return strategies, and real assets.

“Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management,” says the Yale Investments Office. “The Endowment’s long time horizon is well suited to exploiting illiquid, less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber, and real estate.”

Returns

The endowment earned, net of fees, a 6.8% investment return during the year ended June 30, 2020. The fund grew in value from $30.3 billion to $31.2 billion in that time.

Over the past two decades, the fund earned 9.9% per annum. That outperformed both stocks (which returned 6.2% annually) and bonds (which returned 5.1% annually).

According to the Wall Street Journal, Swensen’s investment approach has reshaped how endowments and foundations invest.

Many of his proteges have gone on to manage other endowments.

Swensen told the WSJ that the Black Lives Matter movement had had a powerful effect on him and the team.

Related Story:    Liquid Alts Offer Endowment Style Investing to Individuals

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