Swensen’s investment theories - and Yale - take a hit

By A. James Memmott

September 25, 2009 at 12:04pm

A strategy that had led to enormous investment gains at some major universities in recent years may not have held up in the face of the current recession.

Harvard University reported a 27.3 percent loss on its investments during the fiscal year that ended June 30.

Taking into account these losses, as well as contributions and expenditures, the endowment fell $10.9 billion, dropping from $36.9 billion to $26 billion, still the largest endowment in the U.S.

David F. Swensen
David F. Swensen

Yale University had an investment loss of 24.7 percent. When that loss was joined with money spent and money received, the endowment ended up at $16.3 billion, down from $22.9 billion the year before.

The downturn at Yale represents a setback of sorts for the money management theories of David F. Swensen, the university’s chief investment officer since 1985 and a star and mentor in the world of university investment.

The Yale Ph.D. and former Lehman Brothers senior vice president pioneered a strategy that called for the diversification of an endowment portfolio.

Rather than load up on stocks and bonds exclusively, Swensen invested portions of the Yale endowment in private equity, hedge funds, real estate, energy and commodities.

Diversification paid off for Yale in the boom years, but recently it’s hurt.

In the last fiscal year, the Yale endowment lost 34 percent in assets that included real estate and timber and 47 percent in energy, according to The Wall Street Journal.

In contrast, the university lost only 13 percent in stocks, bonds and other conventional holdings.

Of course, it can be argued that Yale would not have had the billions to lose, were it not for Swensen.

As reported in a 2007 New York Times story, by Yale’s calculations, the Yale endowment had outperformed average university endowments by $7.8 billion during Swensen’s first 20 years on the job.

Even with the last year’s loss, the endowment had an annualized return of 12 percent, according to the Journal.

Swensen has written extensively on endowment portfolio management. Beyond that, he has trained many investment officers who have gone off to manage endowments for other institutions.

Seth Alexander, the president of the Massachusetts Institute of Technology Investment Office, worked at the Yale investments office under Swensen, as did Donna J. Dean, the chief investment office of the Rockefeller Foundation.

Other Swensen alums include Andrew K. Golden at Princeton University, Lauren A. Meserve at The Metropolitan Museum of Art in New York, D. Ellen Schuman of Carnegie Corporation of New York and Paula J. Volent at Bowdoin College in Maine.

In some cases, Swensen’s disciples had a better year than he did last year, though no one escaped unscathed.

The endowment managed by Alexander at MIT lost 17 percent on its investments and, taking into account other factors, the endowment dropped 21 percent.

At Bowdoin under Volent, the endowment lost 16.9 percent on its investments.

Jane L. Mendillo, who oversees Harvard’s endowment as the president and CEO of the Harvard Management Company, has strong Yale connections, though she did not work with Swensen.

She has both an undergraduate and graduate degree from Yale, and she was a manager in the investments office in the 1980s before Swensen arrived.

In announcing the drop in Harvard’s endowment, Mendillo said that the university was better off than it would have been if it had followed a more conservative investment strategy in the past few years.

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