In my book I devoted an entire chapter to the institutional investment world because that’s where I’ve spent my time in this business over the years. Many of those pages were devoted to Yale’s David Swensen, who I described as the Warren Buffett of institutional investing.
Swensen wrote the bible on how to think about the many challenges of creating a successful institutional investment office in his book, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment.
The foreword to the book was written by legendary investment author and consultant Charley Ellis, who has witnessed Swensen’s performance firsthand by sitting on the endowment fund’s investment committee for a number of years. Ellis used his foreword to lay out six reasons for Swensen’s enviable track record, which now spans a multi-decade period.
I thought his reasons provide an interesting perspective on what it takes to create not only a successful investment office, but a successful organizational culture in general. Here they are with a mixture of quotes from Ellis and some paraphrasing on my part:
1. An evidence-based decision-making process. Ellis says that Swensen uses, “A carefully constructed, rigorously tested portfolio structure and decision-making process that are clearly defensive.” This one should be a no-brainer, but I’m always amazed at the amount of “trust-me” or “gut instinct” decisions that pass for a legitimate process in the investment business.
2. A team effort. Swensen (deservedly) gets all the credit, but Ellis makes the point that it wouldn’t be possible without a strong team behind him: “…the rich culture of professional respect and personal affection that bonds so many talented and committed individuals into a superbly effective team whose collective efforts excel.” Swensen gets the most out of his team by trusting them and ignoring the standard office politics or positioning that ruin so many organizations from within. This is also important for the continuity of the fund going forward.
3. Professional respect. The respect and trust extends beyond the team members of Yale’s investment office to their third party outside money managers. It’s a give and take as Swensen always looks to help others who are more than willing to reciprocate. People are actively looking for ways to help him and his team.
4. A focus on the client. “Swensen & co. are extraordinarily thoughtful about their engagement with their client, Yale University.” In addition to the typical portfolio management responsibilities that come with running a large endowment fund, Swensen devotes much of his time thinking about the best interests of the institution, including their long-term goals and spending needs. Focusing on your client’s needs should always be job number one, but it’s something that is often overlooked in the mainly sales-first, client-second financial industry.
5. Personal respect and affection. Ellis claims this may be the most important secret to Yale’s success: “Visitors to Yale’s Investment Office are invariably impressed by the open architecture and informal ‘happy ship’ climate that is almost as obvious as the disciplined intensity with which the staff work at their tasks and responsibilities.” The outcome of creating an inviting organizational culture is happier employees, which means very low turnover in staff. I’m always amazed when companies don’t go out of their way to create a workplace where people actually want to work.
6. Integrity. “There’s more money than certified talent in the world of investing, so outstanding investment managers have many choices because so many investors want to be their clients. Given their freedom of choice, managers prefer to work for and with clients they like and admire, and they like and admire David Swensen very much.” This one may seem obvious — of course money managers want to work Swensen — but Ellis makes the Darwinian point that social desirability trumps competitive strength in this case.
Countless professional investors and organizations have tried to crack the code over the years to be able to replicate the Yale model with their own portfolio. I’m always skeptical because in some ways it’s like an individual investor trying to replicate Buffett’s success at Berkshire Hathaway. It’s never going to happen.
Few investment organizations in the world could ever come close to matching Yale’s investment performance over the long-term (I’ll try to cover these reasons in a future post). And those who try are always looking in the wrong place. They want to know how to pick the best money managers like Yale does, how to structure their portfolio just like Swensen or how to match his returns.
These copycat institutions have it all backwards. They want all the answers but they’re not even asking the right questions. They’re all looking for the tactics to employ without first making sure they have the correct organizational culture in place. There’s no way that Swensen would have enjoyed the same type of success without creating the right atmosphere from the start. He has the support of his University. He has an investment committee that trusts his judgment and allows him to do his job without the shackles of short-term performance concerns.
Although it may seem odd to some that Ellis described so many non-investment related reasons to define Swensen’s success over the years, it’s those intangibles that have made the biggest difference. I also find it interesting that Ellis is one of the foremost proponents for simple investment strategies for nearly everyone else besides Yale. He knows what it takes to produces the kinds of performance numbers Swensen has put up over the years and understands that it’s not something that can be replicated elsewhere.
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