David Swensen Portfolio: Unveiling the Yale Endowment Fund Model

David Swensen was the President and Chief Investment Officer of Yale University endowment from the mid-1980s until his death in May 2021. Swensen, along with Dean Takahashi, invented The Yale Model. Let’s take a look at the David Swensen Portfolio (Yale Model).

The David Swensen Portfolio is a diversified investment strategy developed by David Swensen, the chief investment officer of the Yale endowment fund. The portfolio is designed to maximize returns while minimizing risk by diversifying investments across a variety of asset classes, with a focus on alternative investments such as private equity, real estate, and hedge funds.

In this post, we take a look at the David Swensen Portfolio (Yale Model). At the end of the article, we make a backtest of the portfolio to show its performance and historical returns.

You might also want to take a look at our other articles about investment strategies. We have written hundreds of both short- and long-term strategies!

Table of contents:

Introduction to the David Swensen Portfolio

The David Swensen Portfolio is a well-known investment strategy developed by the late David Swensen, the chief investment officer of the Yale endowment fund for over 30 years. During his tenure, he transformed the Yale endowment from a small, poorly performing portfolio that typically used the 60% stock and 40% bond model into one of the world’s largest and most successful endowments.

The portfolio is based on diversifying investments across various asset classes, focusing on alternative investments such as private equity, real estate, and hedge funds. It also emphasizes the importance of low-cost index funds and passive investment strategies.

The key to Swensen’s success was his ability to identify and invest in undervalued assets, and his willingness to make unconventional investments. He also strongly emphasized risk management and believed that a diversified portfolio was the best way to achieve long-term returns while minimizing risk.

The David Swensen Portfolio has been widely adopted by endowments, foundations, and high-net-worth individuals, and has become one of the most popular investment strategies in the world.

The History and Philosophy of the Yale Model

The history of the Yale Model begins in the mid-1980s when David Swensen was appointed as the chief investment officer of the Yale endowment fund.

At the time, the endowment was a small, poorly performing fund with a portfolio heavily invested in traditional stocks and bonds based on the 60/40 model. Swensen recognized the potential of alternative investments and began to shift the endowment’s investments toward these types of assets. Over the next three decades, he transformed the endowment into one of the world’s largest and most successful endowments.

Swensen based his Yale Model portfolio on diversifying investments across various asset classes, focusing on alternative investments such as private equity, real estate, hedge funds, and natural resources. The philosophy behind the model is that these types of investments have the potential to generate higher returns than traditional investments such as stocks and bonds while also providing a degree of diversification and reduced volatility.

One of the key elements of the Yale Model is the emphasis on low-cost index funds and passive investment strategies. Swensen believed that these types of investments were the most efficient way to achieve long-term returns and that actively managed funds were unlikely to outperform the market in the long term.

Another important aspect of the Yale Model is the focus on risk management. Swensen believed that a diversified portfolio was the best way to achieve long-term returns while minimizing risk. He placed a strong emphasis on identifying and investing in undervalued assets and was willing to make unconventional investments that other investors were avoiding.

Benefits of the David Swensen Portfolio

The David Swensen Portfolio offers several benefits for investors looking for a diversified and long-term investment strategy. These are some of the benefits:

Diversification: The portfolio is designed to diversify investments across a variety of asset classes, including stocks, bonds, private equity, real estate, hedge funds, and natural resources. This diversification helps to spread risk and reduce volatility in the portfolio.
Alternative investments: Alternative investments such as private equity, real estate, and hedge funds have the potential to generate higher returns than traditional investments such as stocks and bonds. By including these types of investments in the portfolio, it can help to increase the overall returns of the portfolio.
Low-cost index funds: The portfolio emphasizes the importance of low-cost index funds and passive investment strategies. These types of investments are considered to be more efficient than actively managed funds, which are unlikely to outperform the market in the long term.
Risk management: The David Swensen Portfolio strongly emphasizes risk management. Diversifying investments across multiple asset classes helps minimize risk and maximize returns over the long term.
Long-term approach: The David Swensen Portfolio is designed for long-term investors and does not focus on short-term performance. It’s better to consider the portfolio as a long-term investment strategy, rather than trying to time the market.
Flexibility: The David Swensen Portfolio is flexible and can be customized to suit the individual investor’s needs, goals, and risk tolerance.

Understanding the Asset Allocation

The David Swensen Portfolio is characterized by its diversified asset allocation, with a focus on alternative investments. The asset allocation of the portfolio looks like this (with our suggested ETF allocations):

30% Total Stock Market (VTI)
15% International Stock Market (VEA)
5% Emerging Markets (EEM)
15% Intermediate Treasury Bonds (IEI)
15% TIPS (TIP)
20% REITs (VNQ)

There is no ETF for alternative investments in the list. The reason is that the history for any relevant ETF is short. However, an example of alternative investments could be KMLM, for example, a trend following ETF that tracks the mt. Lucan Managemant Index.

The stock allocation is diversified across different sectors and geographies, as well as both large-cap and small-cap equities. The bond allocation is diversified across different types of bonds, such as government bonds, corporate bonds, and high-yield bonds. The portfolio also includes a significant allocation to alternative investments, such as private equity, real estate, natural resources, and hedge funds. These types of investments are considered to have a low correlation with traditional investments such as stocks and bonds and have the potential to generate higher returns.

It’s important to note that the asset allocation of the David Swensen Portfolio is not fixed and can be adjusted over time to suit the individual investor’