Fund Lessons From David Swensen

NEW YORK ( TheStreet) -- David Swensen has made a name for himself as the head of Yale University's $16 billion-dollar endowment.

While his successful investing style involves holding assets that have traditionally been out of reach for the average investor, this has not stopped them from trying to mimic it. In fact, his method has become so well known it is now referred to simply as the "Yale Model."

Swensen, who received his BA and BS from the University of Wisconsin in 1975, wrote his dissertation for his PhD at Yale's school of Economics on the valuation of corporate bonds. The dissertation land a job on Wall Street with Salomon Brothers where he had gathered data for a team.

Swensen made Wall Street history in 1981 with Salomon by structuring the first-ever swap transaction. That led Lehman Brothers to hire him the next year to run the firm's swap group.

At Lehman, he was approached by Yale which was interested in hiring him to manage the university's endowment then valued at $1 billion. Although he had no prior experience managing an endowment and the new position would come with a big pay cut, he took the position and has remained there since.

In his 24 years at the helm he has returned average annual gains of 16.3%. This successful record was tainted recently when, in the midst of the worst of the global economic recession, the endowment reportedly lost nearly 25% of its value. This was largely due to its heavy exposure to energy and real estate.

Since then, Swensen and his team have been working diligently to regain the value. Today, even with the downturn, the Yale endowment is valued at over $16 billion and remains second only to Harvard.

Swensen's success running the Yale endowment can be attributed to his bold investing style known in the financial world as the "Yale Model." Some liken the popularity of the Yale Model to that of Warren Buffett's Value Investing approach. However, looking at the two methods, their popularity is one of the only things they have in common.

Before taking hold of the Yale endowment, the university's assets were invested very much like the average investor portfolio: across equities and fixed income. However, with Swensen came a new school of thinking. Rather than sticking to two asset classes, the newly appointed head decided to expand further by investing in five to six different asset classes. This quality became one of the hallmarks of the Yale Model.

While stocks and bonds still have their place in the endowment, Swensen decided to add exposure to previously untapped alternative asset classes. Today, classes including private equity, real assets and foreign equity account for a large percentage of the endowment's total holdings.

When Swensen's investing technique first started to gain popularity, it quickly become evident that many of his favorite asset classes were out of reach for the average investor. However, with the advent of exchange traded funds, the Yale Model has become an attainable investing technique. Today, it is relatively simple for an investor's portfolio to include the real estate, international markets and commodities exposure that earned Swensen his strong returns.

Investors looking for real estate can choose among numerous instruments including iShares Cohen & Steers Realty Majors ( ICF), Vanguard REIT ( VNQ) and SPDR Dow Jones REIT ( RWR).

International ETFs like Market Vectors Brazil Small Cap ETF ( BRF), Claymore/AlphaShares China Small Cap Index ETF ( HAO) and iShares MSCI United Kingdom Index Fund ( EWU) allow investors to easily gain exposure to foreign markets.

Commodities are more accessible than ever. An investor interested in futures contracts can hold instruments like PowerShares DB Commodity Index Tracking ( DBC) or UNG while those interested in baskets of commodity producing companies can choose First Trust ISE-Revere Natural Gas ( FCG), Jefferies-TR/J CRB Global Commodity Equity Index Fund ( CRBQ) or Market Vectors RVE Hard Assets Producers ETF ( HAP).

Today, Swensen's financial influence extends beyond Yale and has gained the notice of Washington's top officials. As a member of President Obama's economic advisory board he has a strong voice in the future success of ours and the world's economic recovery.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion did not hold any positions in the equities mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

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