Specifically, beyond these concerns about an investor’s structure and corporate governance, how important are fees -- not just as a lead weight that detracts from performance, but also as perhaps giving the investment manager different interests from the client’s?
Janet Lorin Investing Reporter
10/05 12:24 ET
These are two really wonderful questions. Starting first, David Swensen took a very straightforward view. He was focused on the mission of serving Yale University and therefore serving the students who come to the university over many, many years. That centrality of mission or purpose governed every aspect of what he did.
And of course that mission or purpose was very, very long term. David thought carefully about how to be the best client for an investment manager. And if you look at the behavioral characteristics, you get the message.
Charles D. Ellis, Greenwich Associates Founder
10/05 12:24 ET
First, you’re very quick to make a decision. Within days of making a presentation, you would know if you were going to be a Yale manager or not.
You would get some stern “Dutch uncle” advice on how to make your case stronger, and implicitly you would get David’s affirmation, which would help you with other prospective clients.
Charles D. Ellis, Greenwich Associates Founder
10/05 12:25 ET
In exchange for those characteristics, David was looking for a very long-term relationship. Even though many of the managers chosen by Yale endowment were not well-known, the average duration of a manager relationship with Yale was over 14 years.
Charles D. Ellis, Greenwich Associates Founder
10/05 12:26 ET
Let me give one example of how David differentiated Yale from other investments. Once a year Yale would host a weekend with Swensen, inviting investment managers to come and play Yale’s famous golf course with members or recent alumni of Yale’s varsity team and the coaches of the varsity team. The second day would be playing tennis with professional women tennis players in rapid rotation, so everybody got to play everybody.
With those two sporting events, a dinner at which the president and senior officers of the university came to say thank you to those investment managers -- thank you for doing great work, thanks for enabling us to do our great work -- and a nice talk by the president showing his appreciation.
And then some entertainment and then some swag bags filled with all kinds of Yale memorabilia.
But the direction of affirmation was the reverse of norms. How many institutional investors make a big deal of celebrating how wonderful their investment managers really are? Yale went all out to get that message across:
Thank you, thank you, thank you.
Charles D. Ellis, Greenwich Associates Founder
10/05 12:30 ET
And that was just one of many different ways in which Yale made itself an ideal client, and expected ideal managers in response.
Take another example. New Haven is an interesting city but not a giant center of investment management. You’re David Swensen and you want to put together a really outstanding team of talented people as an investment organization. And there you are in New Haven, with competition from Boston and New York, which are already certified outstanding investment-management centers.
How do you build a great investment team in New Haven? Start with: Every year, more than 1,000 talented young people come to study. If among them you can get two dozen outstanding candidates, you have something going. If you create a to-die-for course on investing, and carefully screen the 200-300 applicants for the 25 most promising; of that 25 you choose one, two or three to intern for the summer in the Yale investment office; and of those interns, one or two get invited to come and stay for two or three years. They are the best of the best of the best of the best, and those that fit in really well with team-playing are invited to stay for a longer period of time.
Charles D. Ellis, Greenwich Associates Founder
10/05 12:33 ET
Now you treat that group of people with great respect and include them in all major decisions, so they are always learning, learning and learning. And presto! You have the makings of a great investment organization in New Haven, because you took advantage of the Yale talent pool to find the best of the best inside that talent pool.
And the same thing was done with investing committee, the same thing was done with investment policies, the same thing was done with every aspect of Yale’s management organization.
Charles D. Ellis, Greenwich Associates Founder
10/05 12:35 ET
The one thing I always like to emphasize: Everybody likes to talk about the terrific long-term success that Yale had.
The return of investment was very high. Even better than that was the rigorous management of risk on every dimension.
Charles D. Ellis, Greenwich Associates Founder
10/05 12:36 ET
As bonds evidently look dangerous at present, where does that leave cash? Does it at least have value for the optionality it gives you to dive in to situations when they arise?
John Authers, Bloomberg Opinion, New York