Cash Me If You Can

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Swensen disavows any responsibility for the troubles of other endowments that adopted the Yale model. He's heard the attacks, he says: "Sometimes it's me personally, or Yale. They put my name on it, or Yale's name on it, and criticize the approach."

Although other colleges may have embraced alternative investments without sufficient liquidity, he says, that's not his fault. "I never took the position liquidity wasn't important," he insists, just that it's generally overvalued. Yale's followers, he adds, may have lacked its expertise in picking outside managers and its access to premier funds. (His book did caution imitators that "playing follow the leader exposes institutional assets to substantial risk.") In any case, he says, other universities may be "overreacting a little"-rushing to sell commitments for fear of capital calls that may never come.

Yale, he emphasizes, won't budge. "It's hard to sell illiquid assets in a market that values liquidity above all else," he says. Instead, "we're actually looking at opportunities to pick up things in the secondary market."

He vigorously defends his approach: "It's wrong to say, on the basis of a few months, that the model is in question." The value of diversification, he predicts, will reemerge as the economy recovers. "My response to the argument that diversification has failed amid the crisis is that you're looking at too short a time horizon," he says. "I suspect, give us another couple of years, you'll see the benefits." As for liquidity, widely considered his model's vulnerable point, Swensen says that Yale was prepared and is deploying "every tool in its toolbox." For instance, it raises cash by selling Treasury bonds and notes on the so-called repo, or repurchase, market with an agreement to buy them back. He professes to be "pretty relaxed about Yale's situation."

Nevertheless, Yale has capped pay increases for faculty and professional staff and plans to cut the budget for nonfaculty 7.5 percent, largely through attrition. It also may be forced to postpone construction on two new residential colleges, which means that a Swensen College won't be christened anytime soon.

Swensen's fascination with finance and his competitive spirit emerged during his upbringing in the small town of River Falls, Wisconsin. The eldest of six children of Richard Swensen, then dean of arts and sciences at the University of Wisconsin's River Falls campus, and his wife, Grace, who would become a Lutheran minister, he used cash gifts from relatives for his church confirmation to buy shares in Kodak and AT&T.

It was a close-knit family: Although they were high achievers and could have had their choice of colleges, the children all stayed home and attended UW-River Falls. Sibling rivalries flourished, particularly between Swensen and the next oldest, Stephen. During one handball game, Swensen broke a finger but refused to quit. "He wasn't going to let his younger brother beat him," recalls Stephen, now director for quality at the Mayo Clinic.

Their one-upmanship has lasted into adulthood. After both became authors, Swensen liked to point out that his books outranked Stephen's in sales on Swensen would also describe his brother's medical texts, which contain scientific photos, as picture books. Stephen's standard retort was that his books were more expensive and therefore more important. "He is a very, very competitive person to this day," Stephen says.

Obsessive too. This past summer, the brothers hit the links at a family reunion in Minnesota. "While we were golfing," Stephen says, "he did tens of millions of dollars of rebalancing"-buying or selling to realign the endowment with its allocation targets. "It apparently didn't distract him from his game, because he still beat me."

After six years in exile on Wall Street, where he worked in corporate finance for Lehman Brothers and Salomon Brothers, Swensen returned to Yale in 1985 when his mentor, James Tobin, arranged his appointment as chief investment officer. As Swensen tells the story, he looked to other universities for guidance, since he had never managed a portfolio, and was surprised to find that 90 percent of their assets were invested in domestic stocks, bonds, or cash. He thought this approach didn't make a lot of sense-and the Yale model was born.

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