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Lessons from the endowment model

IN THE WEEKS following the stockmarket crash in October 1987, the investment committee of Yale University’s endowment fund convened two extraordinary meetings. Just after the crash its newish chief investment officer, David Swensen, had bought up stocks (which had become much cheaper) paid for by sales of bonds. Though in line with the fund’s agreed policy, this rebalancing appeared rash in the context of the market gloom—hence the meetings. One committee member said there would be “hell to pay” if Yale got it wrong. But the original decision stood. And it paid off handsomely.

A lot of investors say they have a long horizon. A new study by David Chambers, Elroy Dimson and Charikleia Kaffe, of Cambridge University’s Judge Business School, finds that America’s big endowment funds have lived up to the claim.* They have been pioneers in allocating to riskier assets, most notably to “alternatives” such as private equity. When others flee risk, they have embraced it. They are supposed to see the farthest, after all: their goal is to meet the needs of beneficiaries for generations.

Other investors seek to emulate the success of Yale and the other Ivy League endowments. Every other pension plan says it wants to plough more money into alternatives. Yet this is only one strut of the endowment model. It also requires smart people...

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