The media is obsessed with the latest investment fads, stock ideas or celebrity investors. You cannot turn on the TV news without hearing about Robin Hood Traders, Elon Musk, Bitcoin or some Crypto millionaire story. Few, however, know that one of the most influential investors of our time recently passed away. The legacy he left will continue to affect global investing and asset allocation used by today’s largest and most important institutions.
His name is David Swensen and sadly, he died prematurely at the age of 67. His is not a household name. Very few in Canada would have ever heard of him, yet what is surprising is many of our large institutions such as the Ontario Municipal Employment Retirement System, Canada Pension Plan, and the Ontario Teachers’ Pension Plan have been in some way influenced by his investment approach. Mr. David Swensen has had an exceptionally large impact on the savings of many Canadians. How is it that most people have never heard of this man who was so influential to our most trusted institutions? In my humble opinion, it was because of his patience.
A case in point. In February, Elon Musk announced with great fanfare his company’s commitment to Bitcoin. Tesla was investing $1.5bn USD of their cash and was going to start accepting Bitcoin as payment for their products. A few months later, Elon moved on and Bitcoin was no longer viable. Not years but months! This “investment decision” by Musk is the opposite of thoughtful, methodical, well-reasoned, deeply researched, and long term. Alas, most know about this turn of events for Elon and Bitcoin. David Swensen’s approach, on the other hand, was thoughtful, methodical, well reasoned and deeply researched, and with a very long time horizon. All these attributes take time and a level of patience most investors do not have and, as a result, it is not deemed newsworthy. Swensen developed the Endowment Model of Investing, and as the Wall Street Journal put it, he “changed the course of Institutional Investing.”
David Swensen was Chief Investment Officer of the Yale Endowment Fund from 1985 until his death on May 6th, 2021. When Mr. Swensen began at the endowment, assets were a little over $1bn USD. According to the Wall Street Journal, assets at the end of 2020 were $31.2bn. What is more remarkable and bears reminding, endowments pay out 4% of assets, on average, every year. Total investment gains under Swensen’s leadership are estimated to be more than $45bn, excluding annual endowment payouts. His pioneering approach is used by the largest institutional and endowment investors today. The endowment model abandoned the traditional 60/40 equity/bond split to generate uncorrelated and differentiated returns and, in its simplest form, adding hedge funds, private equity, venture capital, property and other alternative or illiquid assets. The endowment time horizon enabled this ultra-long-term approach.
I was fortunate to hear Swensen speak about investing many years ago while living in England. And, my experience using the endowment model he developed has shaped my investment outlook and our current approach. I utilized this model extensively both professionally as a CIO and as a volunteer on investment committees for over 10 years. The endowment model is by far the most powerful and holistic investment approach when compared to the various techniques and strategies I have used in my experience as a Portfolio Manager at Morgan Stanley, Invesco, or investing on behalf of sovereign wealth funds, institutions and other firms over 16 years.
Thinking long-term, making asset allocation decisions that are deeply researched and reasoned is now second nature to me. Heavy due diligence, significant scenario analysis and constructing portfolios to stand the test of time through good and bad markets is what I strive for. Cycles occur, and when they do, it pays to be well prepared. This philosophy is embedded deeply in what we do. Importantly, Swensen was not an advocate for recreating the endowment model for retail investors. In fact, he is on record saying, individuals do not have the time horizons or access to the kind of information necessary to make such an approach work. Do I believe individual investors can recreate the endowment model? In a word, no. However, I do believe that modern finance, low-cost ETFs, and the ability to invest globally across asset classes provides a very good base from which to start. A Portfolio Manager with significant portfolio construction experience using the endowment model is also a significant benefit. Multi-asset investing in today’s low interest rate world creates further challenges for the retail do-it-yourself crowd. Leveraging an experienced multi-asset portfolio management team is a significant value-added proposition.
Many are wowed by outsized returns and fast money. Stories of fame and fortune attract great interest as do systems like blockchain or crypto currency. Indeed, we are bombarded by ideas on how to get rich quick. Mr. David Swensen built a model and an institution over 35 years. His immense intellect, hard work, unwavering commitment to transparency, rigorous research and a long-term investment horizon was hugely successful. These attributes are difficult to combine in a short-term world. Our approach aspires to emulate his model and build endowment-like portfolios for our clients. We believe asset allocation within our multi-asset universe; strong diversification; and a global approach can go some way to delivering endowment-like model portfolios for our clients and investors. By implementing such an approach, we strive to give our clients stable, repeatable, compounded returns over the long term. Our approach and execution of this model is unique in that it has the backing of years of implementation experience in the institutional world.
Feel free to contact us for more discussions on endowment investing or to learn about other unsung investment heroes. As well, if you are not already on our mailing list and would like to receive similar Global Investor Insights, please subscribe here.
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