to invest directly in real assets; and, at the University of California, a
collaborative model for investing in innovation and energy by leveraging and developing social capital.
Still others are taking the endowment model and looking at ways
to evolve it further. “[ Yale’s] innovation was to look at taking advan-
tage of abundant alpha and an illiquidity premium that might have
existed over that time frame,” says Mark Baumgartner, CIO of the
Institute for Advanced Study (IAS). “I think you can question whether
or not that strategy is going to perform as well as it has going forward
given that finding alpha has become very competitive, and given the
convergence of pricing between public and private markets.”
“One concern is that many risk premia are currently
compressed,” he adds, “so looking forward, the traditional equity-
beta heavy endowment model may not yield what it has before.”
IAS, an $800 million endowment, has what some would consider
an unconventional portfolio in a time when many institutional inves-
tors continue to follow the California Public Employees’ Retirement
System’s lead in dropping hedge funds and their 2-and- 20 fees. IAS is
100% in alternatives, a large portion of which are hedge funds. “I think
we’ve taken a page out of what some would call David Swensen’s play-
book, which is to think unconventionally,” he says. “There are a lot
of skeptics out there because of how hedge funds have performed, but
we think that it’s not about what has happened, but what will happen.
David Swensen’s approach was very unconventional in the ’80s and
’90s, and my guess is that Yale continues to evolve their model.”
This doesn’t mean IAS will forever eschew traditional
managers or strategies, but for now Baumgartner says this strategy
fits IAS’s current, unique objectives. “That’s part of the endowment
model: skating toward where the puck will be.”
It should be of little surprise that when nearly a dozen investment
professionals are asked about the state of endowment investing,
there will be nearly a dozen different answers and approaches. And
it should be of no surprise that those answers are thoughtful and
“It’s tough,” says Mount Sinai’s Pittman. “It’s sobering when you
interact with very successful legends in the industry with long careers
and they look at the markets and say, ‘ This is the toughest environment
we’ve seen to invest.’ It gives perspective and reason to take caution.”
The cultural aspect of the investment process becomes as
important as structure no matter the model being embraced. “Every
team member is part of the process for each investment we make.
Everyone is expected to contribute and challenge ideas,” says
Pittman. “We do our best to challenge our personal biases along the
way. The coordination, communication, and the debate across the
portfolio becomes even more important in the current environment.”
Charles Ellis, the founder of Greenwich Associates, chaired Yale’s
investment committee from 1997 to 2008. These are his thoughts.
On the Yale model. Is it broken? No, it’s not broken. Not at all. Is it
sustainable? Every year or decade, every market is a different kind of
challenge. Sustainable is a tricky word. Is the attitude sustainable? Is
the discipline sustainable? Is the hard work sustainable? Absolutely.
Will the model have the same kinds of consequences? Surely not.
On David Swensen. He is a wonderful human being. He’s devoted to
a sense of mission and what’s really right for increasing the capacity of
the university. It sounds old fashioned, but it is what we most love and
admire in leaders and people. He’s taught, educated, and trained a very
large number of people who have gone off to do great things at other
philanthropic institutions because they bought into the main message
that David sells, which is, “If you’re going to be living a great life, you
should be living your life with a great purpose. Find a great purpose.”
On the conflation of Yale and endowment models. They are both
probably an unfortunate clarification towards simplification of a very
complex process. I think it’s fair to call the Yale Investments Office
the Yale model. I don’t think it’s fair to call it the endowment model
because other endowments will have different purposes, different
objectives, and different settings. Size being the most obvious reason.
I do think it’s important to recognize that each institution should
be thinking from fundamental ground zero. Back up to questions of
what are its purposes? Where does the endowment fit into that, and
then how it shouldn’t be operating.
On investment committees’ purpose. It’s almost parental support.
Somewhere in there, you will have to speak very, very bluntly, but a
good board uses stern discipline with love all over the place. Servant
leadership is the real essence of fiduciary responsibility. You have
to be very encouraging when things get rough and difficult but also
remind them to put one foot in front of the other and don’t let it get
out of control.
On crowding. Are there more investment managers who are doing
venture capital? Yes. More hedge funds than there used to be? Absolutely. Are there more bond and equity managers today? Of course.
Are there more private equity managers? By a long shot. Are each
of them on average larger than the ones that were around five, ten,
fifteen, or twenty years ago? You bet. They’re all competing for
discovery and exploitation of the profit opportunities in the particular category they’re working in. The crowding in that sense hurts
mostly when you’re dealing with organizations that anybody can
deal with or that are doing business with all kinds of customers, so
they build up huge asset pools.
On the future. It is harder today to do any asset class than it would
have been 10, 20, or 30 years ago. Clearly, it will be harder 10 years
from now than it is today.
An Insider’s Perspective