Cash Me If You Can

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Some of his counterparts at other universities say they made similar moves but Swensen hogged the credit. Asked if Swensen was a pioneer, the former head of another major endowment sniffs, "That's the title of his book." While praising Swensen as a "leading thinker in this area," former Duke chief investment officer Eugene McDonald says, "What he was doing out there, the rest of us were doing also.""Relative to Harvard, he's not a pioneer at all," says an industry source. "I wish he would back off on the personal credit thing and take recognition for having a tremendous investment record."Josh Lerner, a Harvard Business School professor who wrote case studies of the Yale investments office, says that Harvard and Yale "were more or less tracking each other."

Swensen disagrees. "There's no question Yale was substantially ahead of Harvard, Princeton, Stanford," he says. "They followed after a short lag, a year or two. I don't want to pound my chest about this, but it's pretty clear."

Even within Yale, Swensen wasn't a one-man show. It wasn't until his longtime friend Dean Takahashi joined the investments office in 1986-he's now senior director-that Yale began tilting toward alternatives. In his book, Swensen acknowledges that Yale's approach to investing represents their "joint intellectual property."

Whether Swensen was first or not, he was widely acknowledged as the best. His peers cite his uncanny talent not only for picking managers but also for structuring their fees to maximize incentives for high returns. "He's a great leader," Lerner says. "He's got a core of people who have stuck with him a long time. Like David himself, they could have made more money and gained more glory on Wall Street."

Swensen has kept Yale's returns on top despite a stressful domestic life. Alexander, the second of his three children, was stricken with lymphoma in 2000, at the age of 12. According to his uncle Stephen, Alex came "very close to death" and required a bone-marrow transplant. Then, in 2002, after 20 years of marriage, Swensen and his wife, Susan, separated and she filed for divorce.

The ensuing court battle, chiefly over the children's schooling and whether Susan could move them to Vermont, was bruising. The couple agreed to communicate only by email or voicemail; in 2004, Susan chided Swensen for forgetting her birthday and being "critical of everything I have done without playing an active role in the kids' lives." Swensen asserted in court documents that he "played a significant role" and coached his younger son Timothy's sports teams.

The divorce was finalized in 2005, with joint custody. Swensen was ordered to pay alimony of $35,000 a month-more than the salaries of all but three Yale employees: Swensen himself, the president, and the provost. Swensen, who earned $2.7 million in salary and deferred compensation in 2006, the last year for which Yale has reported data, is the school's highest-paid employee.

Swensen is happier now. According to his brother Stephen, he has a "lovely" long-term girlfriend with children from a prior marriage. Alex, considered cured, attends Clark University in Worcester, Massachusetts. Swensen's eldest child, Victoria, goes to Yale. And the financial crisis hasn't quelled Swensen's passion for his job.

"He has zero, zero, zero interest in ever doing anything except what he's doing," Stephen says. "He wants to die doing what he's doing."

Though he didn't mention the episode in his book, Swensen learned to take precautions to safeguard liquidity during the 1999-2000 tech boom. At the time, Yale's venture capital holdings included several internet firms that went public and soared to astronomical valuations. Worried that they were absurdly overvalued, Swensen hedged them. In the end, he was proved correct: The bubble burst, and Yale protected its prior gain. But in the short run, Swensen had to figure out how to raise cash to support the hedges, particularly when prices moved against Yale and it received margin calls. A person close to the endowment says that the hedging during the tech bubble served as a "liquidity fire drill."

The experience helps explain why Yale may face less of a cash squeeze now than some other endowments. Updates of a Harvard Business School case study of Yale's investments office convey a preoccupation with liquidity that would most likely surprise Pioneering Portfolio Management readers. "Swensen and Takahashi wondered about the risks and challenges that the coming years would pose to the Yale endowment," states the 2006 study. "One was the increasing illiquidity of the portfolio."

Swensen was as skeptical of the mortgage boom as he had been of the tech bubble. At his urging, one of his outside managers made what Swensen calls a "supersize" bet against subprime-?mortgage-?backed securities, which paid off when the real estate market collapsed. In December 2007, three months before the fire sale of investment bank Bear Stearns, Swensen moved Yale's operating funds from money markets into Treasury bills.

"That's a pretty extraordinary move," Swensen says. "We were saying we'd forgo normal income from cash because we were worried about the integrity of the system." His decision proved prescient in September, when the country's oldest money market fund "broke the buck"-meaning that its value dipped below a dollar for each dollar invested. "When will I go back into money market funds?" he asks. "When a sense of calm returns to the markets. We're a long way from that."

In contrast to Yale's cautious use of working capital, Harvard adopted a riskier strategy-and is now suffering for it. Under Harvard's decentralized, "every tub on its own bottom" governing structure, tuition and government grants are typically paid to individual schools-the undergraduate college, law, business, and so on-rather than to the university itself. The central administration borrows its working capital from the schools, paying them the Treasury-bill interest rate, and then pools most of the money-which amounts to several billion dollars a year-with Harvard's endowment. In boom times, it pockets the difference between the T-bill interest rate, typically 4 percent, and the endowment's higher return.

Over the years, Harvard told Cond� Nast Portfolio in a statement, this pooling has "generated additional monies that have allowed the university to fund centrally many projects for the common good," ranging from graduate housing to financial aid.Not this year. Harvard acknowledged that its "working capital pool has been negatively impacted by its exposure to the market downturn." The university has to cover its debt to the schools.

Since Harvard's endowment is weighted toward alternative investments-although not as much as Yale's is-the pooling of working capital with the endowment hurts the university's liquidity. Now the nation's richest university is looking to sell $1.5 billion in private equity and has retrenched more dramatically than Yale. Harvard has frozen faculty salaries and halted nearly all searches for tenure-track appointments. Its investment arm has announced plans to cut staff by 25 percent.

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