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The British Origins of the US Endowment Model

The US endowment model is an approach to investing popularized by Yale University that emphasizes diversification and active management of equity-oriented, illiquid assets. The writings of the British economist John Maynard Keynes were a considerable influence on the investment philosophy of Yale’s chief investment officer, David Swensen. How did Keynes gain these insights? We track Keynes’s experiences managing the King’s College, Cambridge, endowment and show how some of the lessons he learned remain relevant to endowments and foundations today. In recent years, much attention has been given to the so-called Yale model, an approach to investing practiced by the Yale University Investments Office in managing its US$24 billion endowment. The core of this model is an emphasis on diversification and on active management of equity-oriented, illiquid assets. Yale has generated annual returns of 13.9% per year over the last 20 years—well in excess of the 9.2% average return of US college and university endowments. Other leading US university endowments have followed this model; other types of investors have considered adopting it, either in part or in whole. In reflecting on the characteristics of the Yale model, it is clear that the writings of British economist John Maynard Keynes were a considerable influence on the investment philosophy of David Swensen, Yale’s chief investment officer. The central ideas that Swensen takes from Keynes are cited in his 2009 book Pioneering Portfolio Management: the importance of a long-term focus (p. 297); the benefits of an equity bias (p. 64); the futility of market timing (p. 64); the case for value investing (p. 89); the attractions of contrarianism (p. 92); the process of bottom-up security selection (p. 188); the excessive preoccupation with liquidity (p. 88); the challenges of active management (p. 246); and the difficulties inherent in group decision making, which push an investment organization toward a situation in which, in Keynes’s own words, “it is better for reputation to fail conventionally than to succeed unconventionally” (p. 298). A natural question to consider is, from where did Keynes gain these insights? In this article, we review how Keynes drew on his experiences managing the King’s College, Cambridge, endowment for more than a quarter of a century to provide lessons on long-horizon investing that are still relevant to endowments and foundations today.