In my last blog posting, I listed numbers 6 through 10 of my top ten list of must-read books for Institutional Investors. Continuing the list:
5. Pioneering portfolio management.
When people talk about the “endowment model,” they are usually referring to a wide-ranging approach to investment. As well as, the liberal use of alternative assets from private equity to oil and gas partnerships to hedge funds to forestry and more. But it hasn’t always been that way. Fifty years ago, the investment practices of institutions, such as endowments and foundations, were dominated by legal restrictions and the avoidance of speculation (a brief history of this evolution is given here).
That the nonprofit sector’s approach is no longer seen as a byword for caution but rather as the most diverse of institutional investment approaches is the result of changing attitudes to risk and of lobbying by organizations such as the Ford Foundation. It was made possible by legislation such as UMIFA and UPIA.
No individual is more closely linked to the endowment model than David Swensen, the long-time Chief Investment Officer at Yale University. His 2000 book (updated in 2009) provides a first-hand description of his philosophy and approach. It qualifies as a must-read in part because of the extent to which this philosophy has shaped attitudes among investors today, not just in the nonprofit sector but across the institutional investment world. Although the book is subtitled “an unconventional approach to institutional investment,” the search for diversification has become a mainstream pursuit.
The book is valuable, too, for its insights into the challenges that exist when putting that philosophy into practice. Swensen takes care to point out a lot of what he does could not be done without the resources and the quality of the team available to him. It’s a thoughtful book and, despite its wide influence, some of the themes running through this book remain widely overlooked in the industry – the importance of agency issues, for example.
While few organizations (nonprofit or other) are truly comparable to the Yale endowment, the three themes throughout the book (“the importance of taking actions within the context of an analytically rigorous framework”; “the prevalence of agency issues that interfere with the successful pursuit of institutional goals”; and the challenges of active management) are of interest to all.