What happens when you do the math

This is a story about money and slide rules.

Fifty-three years ago this past fall, a Yale student was sitting in his industrial engineering class, but not paying perfect attention to his professor. Instead, he was fooling around with his slide rule and considering the effects of different kinds of investment strategies on his college class’s 25th reunion gift to Yale. (It is safe to say that most Yale students, even those who, like him, have been elected to chair their class’s gift fund, don’t daydream about their class gift. This particular Yale student became a professional investor.)

In those years, Yale had an extremely conservative investment strategy. As John Levin ’60, ’63LLB—the student with the slide rule—explains, the standard procedure was for the classes to collect individual donations and invest them with insurance companies until their 25th reunion. It was a low-risk, low-return strategy. And in fact, the graph of Yale’s endowment from 1950 to the 1980s looks like an especially long tail of a bell-curve graph. The endowment barely grew at all during those inert years; as Marc Gunther ’73 has explained in these pages (“Yale’s $8 Billion Man,” July/August 2005), during the high-inflation years of 1968 to 1979 its purchasing power actually shrank by 45 percent.

Levin’s slide rule informed him that, if his class invested the money in equities instead of insurance, they could increase their gift by tens or even hundreds of thousands of dollars by the date of their 25th reunion. Undergraduates aren’t generally considered sound money managers, but Levin and his classmates managed to persuade both Yale’s fund-raising staff and the alumni gifts advisory committee to let them deviate from the usual course. Eventually, the class entrusted its donations to investment manager Joseph McNay ’56.

The results were huge. A 25th reunion gift for classes in those years might come in at $250,000. Not only did the class deliver over $500,000 more than expected, but succeeding classes followed its lead and also invested in equities. The total additional benefit to Yale, Levin says, might have exceeded $10 million.

The Class of 1960 was a precursor to the more famous Class of 1954. In 1979, at the class’s 25th reunion, Richard Gilder ’54 suggested that they handle the investment of their 50th reunion gift themselves. At the time, as now, the policy was for alumni to send their gifts directly to the university, and some at Yale saw the class’s proposal as too risky. But ’54, like ’60, invested with McNay. He turned their relatively modest fund into a staggering $114 million.

The Class of 1960’s approach was also, in its way, a precursor to Yale’s investment strategy today. It was in 1985, the year of the class’s 25th reunion, that the university was looking for a new endowment manager, after years of lackluster or outright failed performance. Economics professor William Brainard recommended a brilliant 31-year-old: David Swensen ’80PhD. Swensen and his deputy, Dean Takahashi ’80, ’83MPPM, introduced innovative methods and invested with high-quality asset managers, and the endowment—though it has been both down and up since the market crash of 2008—has become famously successful. At the end of June 2012 it was valued at $19.3 billion.

A final note: in allocating assets, Swensen and Takahashi have relied heavily on sophisticated quantitative analysis. They don’t need slide rules; they have computers. But they probably daydream from time to time about creative investment strategies.