David Swensen's Yale Endowment Portfolio

by: Larry MacDonald

David Swensen has achieved acclaim as the portfolio manager of Yale University’s endowment fund. Under his guidance, its value increased 18-fold from 1985 to 2006 -- easily beating the S&P 500 and other U.S. endowment funds. What’s more, it was done with unusually low volatility.

His innovation was in the field of asset allocation (other institutions are now following his example). As noted in a recent Financial Times of London article, Swensen’s asset mix has low weights for the conventional assets of fixed income (4%) and equities (27%) and large weights for the alternative assets of hedge funds (25%), private equity (17%), and real assets (27%). The latter includes property, timberland and oil fields (which require long-term horizons).

What gives this portfolio such low volatility is the low correlations between the asset classes. When the S&P 500 was down by 30% in the bear market of 2001-2002, Swensen’s fund was up 10% thanks to its diversification into assets uncorrelated with stocks. This low volatility also enhances the compounding effect.

For further reading, see Swensen’s books, Pioneering Portfolio Management (for institutional money managers) and Unconventional Success (for do-it-yourself investors).

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