David Swensen, the legendary chief investment officer of Yale’s $20 billion dollar endowment, recently appeared on Consuelo Mack’s WealthTrack for a two-part interview.

Swensen has literally transformed the way university endowments are managed all over the US. He has been so successful and influential that he has set a new standard for a wide array of institutional money managers from pension funds to foundations, and was recently named to President Obama’s new Economic Recovery Advisory Board.

His track record tells the story. Under his leadership Yale’s endowment generated 20 consecutive years of positive returns from 1988 until June of 2008, the end of its fiscal year. In the decade ended June of last year, the endowment had clocked an average annual return of 16.3%, versus 6.5% for the average college endowment and 2.9% for the S&P 500. That performance put Swensen in the top 1% of all institutional money managers and added an estimated $15 billion to Yale’s endowment. Yale did not escape last year’s market wrath. As of December, the portfolio lost about $6 billion or 26% of its value.

But how did he generate those long-term results? Swensen radically altered the instruments in which Yale’s endowment invests. From the traditional mix of domestic stocks, bonds and cash, he and his team switched to alternative investments. Their stake in private equity increased from under 4% to over 20%, real assets like timber and real estate increased from 8.5% to 29.3%, and hedge funds from zero to 25.1%. Meanwhile, the investment in domestic stocks and bonds plunged from over 70% to under 15%.

In this interview Swensen pulls no punches in his approach to investment strategy, Wall Street and the mutual fund industry. It rates as must-see viewing material.

Part 1

Click on the image below to view the first part of the interview and click here for a transcript of the discussion.

Part 2

In the second part of the interview, Swensen discusses the strategy behind the extraordinary long term track record of the Yale endowment, recent criticisms of the “Yale model” and his investment recommendations for individual investors.

Click here or on the image below for the second part of the interview.

Source: WealthTrack, May 22, 2009 (hat tip: GreenLightAdvisor).

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