The Economist: The Legacy of An Influential Investor(1)
The holly and the ivy
The legacy of an influential investor
Starting in the 1980s, the endowments of a handful of big American universities began to divert their investments away from publicly traded equities and bonds towards "alternative" assets, such as venture capital and private equity.
David Swensen, who died on May 5th aged 67, perfected the approach.
Referred to variously as the endowment, Yale or Swensen model, it has since been copied—by family offices, sovereign-wealth funds and, more recently, by big pension funds.
In 1985 Mr Swensen was persuaded by James Tobin, a Nobel-prizewinning Yale economist, to give up a lucrative career on Wall Street to return to his former university to run its investment office.
Yale's endowment was then worth around $1bn.
By the middle of last year the figure had risen to $31bn.
Even this astonishing growth understates Mr Swensen's influence.
He was responsible for developing a stream of talented asset managers at Yale.
And in two best-selling books, he set down his investment philosophy for a wider audience.
Three pillars of this thinking stand out.
The first concerns time horizon.
Because endowments have obligations stretching far into the future, they can take a longterm view.
They can sacrifice the ease of trading in public markets for the better returns promised in private equity.
By doing so, they can earn an illiquidity premium—a reward for giving up the ability to sell out easily.
The second pillar concerns information.
It is hard to find mispriced stocks in the public markets, because news about listed companies travels fast and is quickly incorporated into prices.
But investors in private markets who do their homework are more likely to be rewarded.
That is because reliable data and analysis are much harder to come by.