13-07-2025
- Business
- Wall Street Journal
Diminishing Returns for University Endowments
David Swensen left a lucrative Wall Street career in 1985 to manage the Yale endowment. He introduced a new investment-management philosophy and literally wrote the book describing the technique. The Swensen model worked spectacularly at Yale and at many other educational institutions. But just as the technique is now widely advertised as the optimal way for all portfolios to invest, there are good reasons to believe that it will be less effective in the future. Individual investors should especially be cautious.
The Swensen model used 'alternative' assets to capture higher investment returns without accepting additional risk. Because such assets weren't readily salable, they could be expected to provide an illiquidity premium and thus a higher risk-adjusted return. University endowments were the perfect institutional investors to employ the new model. Money given to endow a professorship, for example, would remain in the institution's endowment forever. Only the income would be spent to cover the professor's salary and research costs. So universities could accept illiquidity and earn a premium over the returns on publicly traded stocks and bonds.
During the decade 1999-2009, the Yale endowment performed brilliantly, earning an average annual return of 11.8%. A publicly traded portfolio of all equities earned a negative rate of return in the same period. The Yale portfolio continued to outperform more moderately through 2021, when Swensen died. But in recent years, the generous excess returns from alternative investments disappeared. In the period 2022-24, the Yale portfolio underperformed the S&P 500 by an average of more than 8 percentage points a year. And when Yale sold a significant portion of its 'alternatives' portfolio in 2025, it sold at a slight discount from its carrying value, raising the possibility that valuations of some of these investments might be inflated.
One can't use three years of data to predict the future. But since private valuations have risen to the stretched levels of public ones, the conditions now are less favorable for private returns to excel.
