Penn’s Attempt to Copy Yale’s Famous Endowment Strategy Could Backfire
In 1985, Yale hired investor David Swensen to manage its mega-sized endowment. Since then, Swensen’s “Yale Model” has been the most celebrated in the country. In the last decade, the school’s endowment netted a 10.6 annual return; Penn, by contrast, netted 7 percent. Many have since tried to copy the Yale Model, and Penn is now the latest, having just hired one of Swensen’s deputies to manage its $7.8 billion in assets. Huzzah for the Quakers? Not so fast.
The Yale Model is distinguished by investing in hedge funds and other illiquid, “alternative” assets. For a while, that provided a big boon, compared to boring, steady old stocks and bonds. When the crash hit in 2008, however, all the risk Yale (and other copycats, like Harvard) took on came back to bite them in the ass.
In the year to June 30th 2009, the Yale endowment fell by 24.6% and Harvard’s portfolio fell by 27.3%, losing the latter a whopping $10 billion (there has been a modest recovery since then). The illiquidity of the portfolios counted against them.
Compare that to an 18.6% loss for the average endowment over the same time frame. Not only is the Yale Model risky, but it’s not necessarily applicable elsewhere; it’s called the Yale Model for a reason.
[Swensen] has cautioned that few could expect to replicate Yale’s results, because Yale had access to top managers whose doors were closed to all but a favored few. Mr. Kinniry agreed. “Because of their size and relationships, and the ability to commit to a continuing investment cycle, Harvard, Yale, M.I.T. and Notre Dame have unique access.”
On the other hand, if you’re going to try and do it, hiring from Yale seems like the best way to go. As Forbes put it last year:
The model has failed most institutions because their investment committees are far less capable than the Yale board members. The people making the investment decisions don’t have the experience or skills that Yale has compiled. In fact, many people on these boards could be considered investment novices.
Swensen “protégé” Peter Ammon, at the very least, is not. Still, Quakers: Consider yourselves warned.
