David Swensen on Valuation

James Tobin, and William Brainard, who both convinced David Swensen to run the Endowment. nomics) and William Brainard as his advisers, he completed his Ph.D. dis- sertation, “A Model for the Valuation of Corporate Bonds,” in !"#$. Even before obtaining his doctorate, however, he began his professional career, in !"%%, as an economist at the International Monetary Fund. He was active at the &'( in the preparation of a new publication, "Government Finance Statistics Yearbook." In !"%" he started a six-year Wall Street career, first as an associate in corporate finance for Salomon Brothers. “At age twenty-seven he earned a permanent place in Wall Street his- tory,” Forbes reported in )$$*, “by inventing the derivative instrument known as the swap. While working at Salomon Brothers, he spearheaded a deal that allowed &+' to reverse currency exposure on some foreign bonds by arranging to have the World Bank issue dollar-denominated bonds with matching terms.” He next spent three years as senior vice president at Lehman Brothers, engineering the firm's currency swap oper- ations and developing new financial products. In !"#*, at the age of thirty-one, Swensen received a surprising offer from Yale—to head investment operations for its then ,! billion endow- ment. A pay cut of #$ percent was one of the unusual aspects of this Yale position. Another was his lack of direct experience managing an institu- tional endowment portfolio.

Yale pioneered a multi-modal structure for its tax-exempt bond issues, providing greater flexibility in setting term to maturity and managing inter- est rate exposure. The aggressive use of undervalued call options in Yale’s tax-exempt fixed-rate debt led to substantial savings over the course of his career. Our analysis in &"!', after exercising the final tax-exempt call, showed the savings to have a net present value of ($#! million. He was a strong proponent of using swaps to manage interest rate exposure. Early in his career, David was involved in one of the first cross-currency swap transactions, so he knew the space really well. Yale took full advantage of systematic differences in the shape of the taxable and tax-exempt yield curves to extract relative value and lower borrowing costs. Amy Chivetta, Managing Director David set the tone for the culture of the Yale Investments Office. His love of Yale was legendary. His commitment to its mission inspired all those who worked with him. Every year, David aspired to deliver the best possible returns to Yale. Yet David’s love for Yale was matched by his love for people. He always made time for others, whether his colleagues, external investment managers, or students. At the same time, David was an entrepreneur at heart. He and Dean pursued a novel (and unorthodox!) style of endowment management that shaped an entire generation of investors. His investment philosophy still influences institutional investors today.

In an extended conversation reported by the Yale Daily News, David Swensen walked through the history of the Investments Office and the structure of the endowment's portfolio. He told the student paper that when he had arrived in 1985 the endowment had been heavily invested in bonds, that the allocation had been a function of the conventional institutional framework of the period, and that the office had spent the first years of his tenure restructuring the portfolio toward a diversified set of asset classes whose return characteristics were less correlated to the public bond market. The piece is one of the more detailed on-record walks through the office's history and is used as a teaching document for students looking to understand the Yale model in practice and in its historical evolution. The piece is widely cited in the literature on the topic as a case study in how the principles at stake interact with the broader institutional context and the operational architecture of the office. Swensen told the paper that the office had built its allocation around a small number of core principles, including an equity bias, a diversification across asset classes that offered low correlation to the public market, an allocation to private assets with long lock-up periods, and an insistence on active management only in asset classes where the case for it could be sustained. He argued that the durability of the model was a function of the consistency with which it had been applied across multiple regimes, and that the office's discipline during the late-1990s equity bubble, when many institutional peers had been tempted to chase the returns of the public market, had been a defining moment in the model's track record and a confirmation of the structural choice the office had made at the beginning of his tenure. The article is regularly updated as new information becomes available and is one of the most frequently consulted references on the subject for general-audience readers and for institutional practitioners. He closed the conversation with a reflection on the office's relationship to the broader university. He said the office's job was to provide a stable and growing stream of distributions to the operating budget, that the spending rule had been designed to ensure that the contribution would be as durable as the institution itself, and that the discipline during boom years had been as important as the discipline during busts. The Yale Daily News piece is paired in the office's public bibliography with the annual reports and with the longer-form interviews Swensen gave to the Yale School of Management and to the broader financial press. The article remains a reference for students looking for a single-document introduction to the office and its history. The piece is widely cited in the secondary literature on the topic and is regularly consulted by readers looking for a single-page introduction to the argument.