Iron Capital Insights

  • Iron Capital Insights
  • May 10, 2021
  • Chuck Osborne

A Great Loss

Thursday morning last week I was greeted by a text message from a friend: David F. Swensen had lost his fight with cancer at age 67.

Swensen was the manager of Yale’s endowment and a legend in our industry. Many people often say that Warren Buffett is the greatest investor of all time, but truth be told, Buffett is simply the greatest at drawing attention to himself. There are lots of great investors, most of whom prefer not to be in the spotlight, and Swensen was certainly one of those.

That isn’t to say that Swensen was some mild-mannered person afraid of making a statement. He once claimed that CNBC personality Jim Cramer was a waste of an Ivy League education, and this wasn’t some off-the-cuff cocktail party comment; he began a chapter in his book, “Pioneering Portfolio Management,” with that zinger. Ouch.

I never met Swensen personally, but he influenced Iron Capital all the same. He believed in an aggressive allocation of capital and continually rebalancing, not towards some arbitrary target allocation, but based on future expected returns. Although he successfully managed Yale’s endowment since 1985, he became well-known in the industry in the aftermath of the tech-bubble bust. His process of rebalancing towards investments with larger future expected returns meant that Yale did not own a lot of technology stocks.

In fact, at the time they had a heavy allocation to so \-called alternative investments:  private equity, market-neutral hedge funds, and real estate – all areas that had underperformed in the 1990s and were therefore due to outperform in the 2000’s. Outperform they did, and as a result lots of people in our industry copied what became known as the “endowment model.” Of course, as is typical with humans, most did not copy the hard work of Swensen’s process, which would lead to putting money where it is likely to do well moving forward, as opposed to putting it in what did well yesterday. That, like so many truths in life, is simple but not easy.

No, most endowment model followers took the easy route and simply copied the resulting portfolio. This led to one of my favorite Wall Street Journal articles of all time, in which Swensen said that not only were these people not emulating him, but they were in fact “a cancer” and they serve to “facilitate the flow of ignorant capital.” I discussed this at the time in our First Quarter 2011 issue of our “Quarterly Report” newsletter, “There Is No Alternative.”

It likely comes as no surprise that I would have huge respect for someone who was that bluntly honest. I also respected what he did. Under his leadership, Yale’s endowment grew from $1 billion to more than $31 billion. They went from supporting a tenth of Yale’s annual budget to more than a third. The fact that an endowment grew by 30 times and the portion of the budget it pays for only grew three times reflects the criminal enterprise of modern “education,” which we recently addressed on our blog, but that wasn’t Swensen’s fault.

At Iron Capital we have implemented many of the strategies he spelled out in his writings. Ironically, since he was so known for alternative investing, he is a large part of the reason that we never invest in alternatives. He influenced our asset allocation process and specifically our views on rebalancing.

This is not to say we agree with everything he did. Late in his career he publicly stated that investors who were not Yale should invest in index funds. I personally credit that with the fact that he was part of academia and therefore bound to political correctness; in finance departments across the nation, that means worshiping the index fund. However, like every serious investor who has ever said anything good about index funds, that isn’t at all what he did. Being independent and therefore able to give more weight to actual correctness, I file that under the category of do what they do, not what they say.

There is an old Cherokee Indian proverb that says, “When you came into this world you cried and the world rejoiced. Live your life so that when you die, the world cries and you rejoice.” David Swensen has left this world and the investment world is weeping.

Warm regards,

Chuck Osborne, CFA
Managing Director