Charley Ellis on the Yale Model

February 6, 2020

As former member of the Investment Committee at Yale, Charley Ellis shared what distinguishes the school's model of investing.

The selection of managers has long been dominated by detailed assessments of character; the diversified structure of the total portfolio is designed to withstand the stresses of disruptive capital markets; diversification within each asset class is carefully designed; cash flows in venture and private equity are modeled to avoid “inconvenient” demands for funding; and once each year a soup-to-nuts review of the portfolio structure is undertaken in a rigorous search for imperfections.

These are the main components of the objective view of the Yale Model. Any endowment would be advantaged by examining and adopting the core principles underlying this version. But to assume that this is the whole truth about the model would be a serious underestimation of the real thing. At least as important to its great success are a whole slew of other contributing factors. These factors are “soft,” not hard, subjective rather than objective, and are easily missed by those focused on the quantitative factors.

The (Easily Misunderstood) Yale Model, Institutional Investor

The endowment has a history of anchoring new funds.

A significant qualitative aspect of the Yale Model is not only that manager relationships are unusually long (averaging more than a dozen years), but that many of them start at or even before the beginning of a management firm itself, when [David] Swensen is tipped that a new organization of first-rate investors is being formed and would be well worth his consideration. Given these opportunities, Swensen has helped numerous new managers design themselves and their strategies.

Why is he able to anoint a new fund manager?

Close observers of the Yale Model of endowment management will appreciate that the core of it is both qualitative and personal: Swensen’s own career commitment to serving the institution Swensen loves, beginning with the obvious and substantial financial sacrifice of not making a large personal fortune. He goes farther, teaching a challenging and popular course to undergraduates and participating actively in university events and undergraduate activities.

Swensen is dedicated to the school, he has demonstrated it over three decades, and the school trusts his judgment in return.

By the way, Charley appeared twice on Capital Allocators and he talked about his experience working with David Swensen as a committee member.

Episode 8: Charley Ellis – Multiple Ways to Win

Episode 62: Charley Ellis - Indexing and Its Alternatives

Snowfall inside the Jonathan Edwards College courtyard at Yale.
Twitter @yalealumnimag

Post by Marcelino Pantoja


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