On a Tuesday in early April, David Swensen sat onstage in a gradually filling lecture hall. Sunlight slanted through a Tiffany stained-glass window of angels personifying various pursuits of the mind. Outside, tour groups moved along the paths of Yale’s Old Campus, spilling onto topsoil ventilated with small holes to speed the growth of the grass upon which undergrads would picturesquely recline in warmer weather.
Swensen is a legend at Yale, and its highest-paid employee. But he’s neither the university president nor the football coach. He’s the money manager who for 34 years has been in charge of the endowment—the multibillion-dollar pool of money, seeded and fed by donations, that comprises Yale’s fortune. It’s largely thanks to Swensen that the university can woo star scholars, that its admissions can be need-blind, its libraries and cafeterias staffed, its sports teams fielded, its grad students stipended, its antique windows tended, and its lawns aerated.
The afternoon’s event was a conversation on personal finance with NPR correspondent Chris Arnold. “This is my passion,” Swensen told the audience. He warned about how money managers can take advantage of their clients. “All of the ads that you see steer you in the wrong direction, because it’s ad money being spent by for-profit organizations.” In khakis, a button-down, and a fleece vest with a Y over his chest, Swensen at 65 is square-jawed, with a teenager’s gangly frame. Several years ago he began receiving treatment for cancer. Onstage, he moved with evident effort, and his speech was punctuated by pauses for breath.
Exactly halfway through the hourlong conversation, a member of the Yale Democratic Socialists named Lorna Chitty stood up in the second row. A few dozen other stone-faced students also rose. “David Swensen,” she proclaimed, “while you stand here teaching us how to hoard wealth, there are 20 students occupying the investments office. When will you respond to the years of student activism calling for you to divest from holdings in Puerto Rican debt and the fossil fuel industry?” From the stage, Arnold proposed that the protesters hold off until the Q&A, when everyone could have “a civil exchange of questions.”
“He’s right up there with John Bogle, Peter Lynch, Graham, and Dodd as a major force”
“Instead,” Chitty responded, “we will be leaving and joining our comrades who are sitting at the investments office.” As the students filed out they shook their banners and chanted, “Hey, hey! Ho, ho! Fossil fuels have got to go!” The disruption wasn’t a surprise—Yale police were on hand—and it lasted a mere two minutes. (A few blocks away, the investment-office occupiers got no farther than the building lobby.) Throughout, Swensen sat silently. With chants still echoing from the hallway, he picked up where he had left off: hammering on the unconscionably high fees of financial firms. To him, that was an injustice worth decrying. “The problem,” the great money manager said, “is that when you’re motivated by profit, oftentimes you stray.”
Swensen is regularly mentioned in the same breath as Warren Buffett and other investing greats. “He’s right up there with John Bogle, Peter Lynch, [Benjamin] Graham, and [David] Dodd as a major force in investment management,” says Byron Wien, a longtime Wall Street strategist. The endowment was worth $1 billion in 1985 when Swensen started at Yale; today it’s $29.4 billion. Other schools—including Bowdoin, MIT, Princeton, Stanford, and Penn, whose endowment heads all once worked for Swensen—have seen their wealth multiply. Harvard’s stash is bigger, at $39 billion, but Swensen’s reputation is more than a matter of returns and asset size. He’s an intellectual leader whose once-radical ideas have become an orthodoxy. More than anyone, Swensen convinced the smart money that the best opportunities lie not in buying and holding ordinary stocks, but in esoteric hedge fund strategies and private equity—a template for long-term investing now widely known as “the Yale model.” Swensen did all this not as the chief of a giant asset management firm, but as the financial steward of a nonprofit institution of higher learning.
Today, though, the massive size of the top universities’ purses has become a flashpoint in a broader argument about elitism and inequality. Politicians have begun to question the tax-free status universities have long enjoyed: The 2017 tax law signed by President Trump included a new endowment tax, and Yale’s home state of Connecticut a few years ago weighed something similar. Meanwhile, students discovering that they’re stakeholders in these fortunes are proving increasingly aggressive in scrutinizing the sources of the returns. And away from campus, the investment world is grappling with the implications of the shift from public equity (i.e., the stock market) to private investment, where access and connections are the coin of the realm and the best opportunities tend to go to a relative handful of plugged-in investors, including top endowments. All this, too, is part of the world the Yale model helped create.
Swensen regularly teaches investing courses at Yale, and in the late 1990s some former students bought him a first edition of John Maynard Keynes’s masterwork, The General Theory of Employment, Interest, and Money. As Swensen would recount in a talk at the 2018 Yale reunion, the graduate presenting him the book had told him, “David, you always read from Keynes as if you were reading from the Bible.”
Swensen likes to remind people that Keynes wasn’t just a theorist, he was also an extraordinarily successful investor. For more than 20 years the great economist managed the endowment of King’s College, Cambridge, expanding it steadily during the turbulent decades between the two world wars. He would discharge his fiduciary duties first thing in the morning, poring over company reports and phoning brokers while still in bed.
Endowment management is a less genteelly domestic affair today—Swensen leads a team of almost 30. But the career of Yale’s chief investment officer is marked by a similar combination of theory and practice. He first came to Yale as a grad student in economics in 1975, after graduating from the University of Wisconsin in his hometown of River Falls. His father was a chemistry professor and dean at UWRF; his mother, after raising six children, would become a Lutheran minister. One of Swensen’s dissertation advisers at Yale was James Tobin, who’d been a top economic adviser to the Kennedy administration and would soon win a Nobel Prize. According to Charles Ellis, founder of Greenwich Associates and former chair of Yale’s investment committee, “When it snowed, David went to Jim’s house to shovel the sidewalk.”
Among the work that earned Tobin his Nobel was his contribution to Modern Portfolio Theory, formulated in the 1950s by his friend Harry Markowitz. The basic concept is simple enough: Asked by a reporter once to explain it, Tobin said, “You know, don’t put your eggs in one basket.” But by translating risk and return into mathematical concepts, the theory birthed a set of practical tools that are relied on every day by legions of 401(k) investors, who diversify their savings into thousands of underlying securities, most of which would be far too risky as a single investment. To Swensen it felt a little like getting away with something. “Diversification, as Harry Markowitz says, is a free lunch,” Swensen said in his 2018 reunion talk. “For a given level of return, if you diversify you can get that return at lower risk. For a given level of risk, if you diversify you can get a higher return. That’s pretty cool! Free lunch!”
As a grad student, Swensen looked and acted the part. He grew a beard and organized beer tastings at the residential college where he was a fellow. His academic interest, though, was against type: the valuation of corporate bonds. He got to know an investment banker at Salomon Brothers named Gene Dattel, a Yale alum who suggested that Swensen work there for a few years to get a firsthand feel for the topic. Dattel, deeply impressed by Swensen, had a feeling he’d thrive at the firm. But he did counsel the young academic, he recalls, to “look investment banker-ish” for his interview. “It was a way of saying to shave your beard,” he says, “and wear a suit.”
The early 1980s were famously fast times at Salomon, and a cleanshaven Swensen fit right in as the firm upended the once-staid bond business. In 1981 he helped structure the world’s first swap agreement, allowing IBM Corp. to hedge its exposure to Swiss francs and German marks in a deal with the World Bank. After three years, Swensen left to head the swaps desk at Lehman Brothers. His foray was beginning to look like a career.
Then he got a call from Yale’s provost, William Brainard, who’d been his other dissertation adviser. Brainard was looking for someone to run the endowment, and Tobin had suggested their former student. At first, Swensen begged off: All he knew about portfolio management was the Markowitz and Tobin he’d studied in grad school. But he agreed to go to New Haven and chat with Brainard. “He was the only candidate among many who thought and could talk intelligently about what was special about managing the large endowment of a tax-exempt university,” Brainard recalls. And that was that. Swensen took the job, and with it an 80% pay cut. He started on April 1, 1985.
If the hiring of a 31-year-old was a vote of confidence in Swensen, it also reflected the stature of the job. Ivy League endowments, like Ivy League football teams, tended to be unexceptional performers helmed by unfamous people. The conventional wisdom was that a portfolio was prudently diversified if it was divided between blue-chip stocks and bonds, with a few exotic investments as a garnish. But the 1970s had been a disaster for most universities’ finances. The global recession that followed the 1973 oil embargo hammered stocks as inflation ate up bond returns. Stagflation revealed that the eggs had been in one basket, after all.
Steadily losing out to inflation is particularly bad for a college. Individuals investing for themselves can ballpark the minimum they need to earn by multiplying annual spending by the number of years they expect to live. Three-hundred-year-old universities, on the other hand, assume immortality and invest accordingly—they can’t let their money be whittled down.
In 1986, a Yale College and School of Management graduate named Dean Takahashi joined the investment office, quickly becoming Swensen’s sounding board and trusted deputy. They sought out investment categories that would at once allow for true diversification and beat the market. Such assets weren’t easy to find—plenty of investors and economists argued they didn’t exist. But Yale had certain advantages. Its nonprofit status sheltered it from taxes on income. It could access top outside fund managers. It had alumni in high places in business and finance who, like Swensen, bled Yale blue. Even in its relatively straitened circumstances, Yale came to the table with a bankroll of a billion dollars. What’s more, as Swensen realized, its presumption of perpetuity didn’t have to be a burden; it could be an edge. Allowed a longer time horizon, he could make bets that locked up money for years at a time.
Swensen had discovered working in finance that sophisticated investors had new options. There were the venture capital firms along Palo Alto’s Sand Hill Road that were seeding semiconductor manufacturers and the newer tech companies. There were the nascent private equity firms leveraging up to take faltering companies private, then remake and resell them (or their parts) at a profit. And there were hedge funds, profiting by exploiting discrete, temporary opportunities—an artificially propped-up currency, say, or a stock whose price didn’t fully reflect the odds of an impending merger.
And so, after Swensen took over, the garnish became the meal. He invested in San Francisco’s Farallon Capital Management LLC, founded by Tom Steyer, Yale class of ’79. Farallon started out in merger arbitrage, then moved into distressed debt, buying up, among other things, the largest bank in Indonesia. By the time Steyer left Farallon in 2012 to devote himself to liberal activism—he’s now running for president—it was one of the largest hedge funds in the world.
Yale’s biggest rival was doing something similar. In the early 1990s, under new head Jack Meyer, Harvard Management Co. began hiring private equity specialists and hedge-fund-style investors to run its money internally. Yale and Harvard also began investing heavily in natural resources such as oil, natural gas, and timberland. If you wanted to unload your forest quickly, good luck. But to Swensen and other endowment officers, that was a virtue. “The illiquid nature of real assets and the information-intensive aspects of the transaction processes favor skilled and experienced investors,” a 2003 Yale endowment annual report read. In other words, the assets were going cheap because so few people could handle them.