David Swensen is the Warren Buffett of institutional investors, having achieved phenomenal investment returns for several decades at Yale University, based on a philosophy of investing that many try to imitate but few can actually implement. Below are some words of wisdom from one of his rare interviews.
A Conversation with David Swensen, Chief Investment Officer, Yale University
Stephen C. Freidheim Symposium on Global Economics
November 14, 2017
So for most of the 32 years that I’ve been at Yale, the standard assumption for endowment returns for the operating budget was 8.25% nominal. And that turned out to be a pretty decent working assumption. I think our 32-year rate of return is something like 13.5%, so we’ve generated a substantial cushion over the budgetary assumption for more than three decades. What I’ve been talking to the provost about for the past 12 or 18 months is, for the first time in this very long period, reducing the expected return assumption in the budget to 5% nominal.
Investing as a profession, not a business
In the investment world, if people are the way that you’re taught and – introductory econ – if they’re maximizers, they’re going to raise massive funds, charge high fees, and make a lot of money for themselves. I’m looking for somebody that’s got a screw loose and they define winning not by being as rich as they can be individually, but by producing great investment returns. And you do that – you can still make a great living, but instead of managing $20 billion, you probably manage $2 billion.
You know, I think track records are really overrated. Some of Yale’s best investments have been with people that don’t have a track record. We took a couple of people out of proprietary trading at Goldman Sachs 25 years ago. If they had had a track record, it wouldn’t really matter because Goldman Sachs has a very different form of organization and a different way of giving resources to the people that are making investment decisions. But we didn’t even have those numbers. And it was really just a decision that this was a woman and this was a man that we thought were going to produce great returns, and they’ve done a really good job for the university.
Relative peer performance
Comparing returns to peers is all-pervasive. And I think it’s incredibly dysfunctional when it comes to making really good investment decisions. People are concerned about underperforming, and that causes them to want to put together portfolio allocations that look like other similar institutions. And so the advice that I would give would be to try and put together a portfolio that really works for your institution, and try and pay less attention to the returns that others with riskier portfolios might be generating, knowing that ultimately, if you’re making well-grounded decisions, that the numbers will come.