Yale Endowment Guru Not Changing Approach after Tough Year

David Swensen, who produced exceptional returns as Yale University’s endowment’s chief investment officer for two decades before hitting a rough patch in 2008, talked to the Wall Street Journal this week about a number of key financial issues, ranging from his own strategy, to Bernard Madoff, to what he believes are the best opportunities in the current market.

As the chief overseer of Yale’s endowment, Swensen “pioneered an approach that de-emphasized stocks and bonds while embracing less-traditional fare like hedge funds, private equity, and oil and gas”, according to the Journal. That strategy more than tripled Yale’s assets during the 10-year period that ended at the end of this past June, as Swensen’s average annual returns of 16 percent blew away the S&P 500’s 2 percent annual return during that period. But as of late December, the endowment had plunged 25 percent amid the market turmoil, and for the first time since 1988 Swensen is on track for a losing year, according to the Journal.

Swensen isn’t panicking, though. “I don’t think it makes sense for an institutional investor with as long an investment horizon as Yale’s to structure a portfolio to perform well in a period of financial crisis,” he said. “That would require moving away from equity-oriented investments that have served institutions with long time horizons well.”

Currently, Swensen says, “Distressed securities are one of the most interesting opportunities for institutional investors. But returns won’t come right away because the credit markets are fundamentally broken.” He says massive inflationary pressures will at some point mount because of the government’s relief efforts, so TIPS [Treasury-Inflation Protected Securities] are a good choice. “Stocks also look a lot more attractive than they have for a long time,” he adds. “We prefer higher-quality companies with low leverage.”

Swensen also offers some intriguing comments on other investing issues, including the use of funds of funds (a “cancer” that “facilitates the flow of ignorant capital”, he says); his own $2 million salary; and his rules for investing with hedge funds (‘We either know every position, or we don’t invest. … If they won’t trust us with that information, why should we trust them with our money?”).