Yale Chooses CIO from Within | Chief Investment Officer

The Yale Investments Office has long been an incubator for chief investment officers—and now it has grown its own, promoting Matthew S. T. Mendelsohn, a Yale graduate and venture capital (VC) director for the $31.2 billion endowment, to CIO roughly four months after former CIO David Swensen died following a nine-year battle with cancer.

In the past 10 years, the venture capital portfolio, which Mendelsohn directs, has returned 21.6% per year, well in excess of the S&P 500 and private equity benchmarks. It comprises more than 25% of Yale’s total endowment.

A Chartered Financial Analyst (CFA) charterholder, Mendelsohn joined the investment office upon graduating from Yale in 2007. According to the university, over the course of his tenure, he has contributed to the management of most of the asset classes in which Yale invests and has extensive experience with asset allocation, risk and liquidity management, and sourcing and developing relationships with Yale’s investment partners.

His predecessor, Swensen, who earned a Ph.D. in economics from Yale, joined the endowment in his 30s after working on Wall Street, and grew it from $1 billion to $31.2 billion over 36 years, averaging 9.9% over 20 years ending in 2020. He is credited with overhauling the endowment and changing investing methods for the entire industry by shifting away from a pure play of stocks and bonds to include alternatives. His approach became known as the “Yale Model.”

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Under his guidance, the endowment office has incubated such CIOs as Paula Volent of Rockefeller University and Andy Golden of Princeton. Others have gone onto CIO posts upon graduating from Yale’s school of management.

Former Yale provost Ben Polak, chair of the seven-member hiring committee said, “Matt shares David’s hallmark qualities: He’s analytically rigorous both in his disciplined approach to asset allocation and in his first-principles approach to specific investments; he has incredible insight into the character and dynamics of his team and of Yale’s outside managers; and he starts from the core belief that everyone involved with the Yale endowment must operate with complete honesty, integrity, and transparency. Ethical and steadfast, tough but kind, a leader and an example to all around him, Matt deeply understands the mission of the university. He appreciates why we’re all here.”

Mendelsohn, who lives in New Haven, Connecticut, with his wife, a 2013 Yale Ph.D. graduate, and their two children, said, “I couldn’t have asked for a better set of investors to learn from and work alongside for the past 14 years,” crediting Swensen, Dean Takahashi, and all of his current and former Investments Office colleagues and investment committee members.

He added, “Looking ahead, we will build on the office’s longstanding allegiance to ethical investment practices and develop a diverse team of internal and external investment managers as we seek to continue Yale’s legacy of investment success.”

Yale’s Swensen to Asset Managers: Hire More Women and Minorities

Dean Takahashi, Yale’s Robin to David Swenson’s Batman, Exiting Endowment

Tags: Alternatives, CIO, David Swensen, Endowments, Matt Mendelsohn, Yale, Yale Model

Do hedge funds know something we don’t? Amid a continuing bull market, they’re trimming ownership of a number of high-fliers, such as Walt Disney and Twitter, some of whom have wilted a bit of late.

According to Goldman Sachs, the stocks that fall out of hedge fund favor—a group the firm calls “Falling Stars”—have not fared well over time. “Changes in popularity with hedge fund investors can be strong signals for future stock performance,” a new Goldman study stated. Over the past 19 years, the stocks with the largest increase in hedge fund investors have typically outperformed sector peers in later quarters, the Wall Street house declared. But those with the largest falloff in the number of hedge owners “have subsequently underperformed peers by a similar magnitude.”

Disney has the dubious honor of occupying the No. 1 slot on Goldman’s losers list, with 29 hedge funds shedding its shares. The stock is down almost 2% this year. This comes after a fine 2020, when it recovered from its early swoon and went on to finish strong. The paradoxical part is that the entertainment giant reported an encouraging second quarter. Theme parks, which suffered badly during the shutdown last year, have had a remarkable comeback, albeit far from regaining their pre-pandemic levels. The key streaming segment also posted fine numbers, with revenue shooting up 57%, although it still had an operating loss.

Several Wall Street analysts still think it can climb its way out of scourge-induced problems, which plunged it into the red in 2020. Hedge funds don’t happen to agree.

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Microsoft is one of the tech giants that dominates the S&P 500, after the index recovered from a rotation into non-tech recovery stocks earlier this year. This stock is ahead 37% this year, about double the rise of the S&P 500. The software goliath reported a robust recent quarter, with revenue climbing 21% on the strength of its cloud operations and a new Office update, as well as the growing success of its Teams collaboration tools.

Then what’s not to like? Some on Wall Street are wondering whether Microsoft and some of its kin have reached peak valuation. With a trailing price/earnings (P/E) multiple of 38, Microsoft isn’t the priciest of this bunch. But a new rotation out of Big Tech, which we’ve seen not too long ago, could take some shine off it, the thinking goes.

Talk about high valuations. Twitter stock sits at a lofty 136 P/E. It delivered an impressive recent quarter and has ambitious plans to milk revenue from subscriptions to new services, which will gradually be unveiled up ahead. That said, skeptics wonder if the company will be able to keep on posting such excellent results, and thus be unable to justify its high multiple.

This isn’t to say that hedge funds see a downturn coming and are increasing their short selling to take advantage of it. On the contrary, Goldman observed that shorting has declined from already extremely low levels. The median S&P 500 stock now has dipped to only 1.5% of market cap. Still, Goldman goes on to point out, that matches the amount of short interest at the peak of the dot-com bubble in March 2000, which was the lowest on record. We know what happened next.

Hedge funds themselves have had a good first half, but posted a 0.6% drop last month, the Hedge Fund Research (HFR) Database shows. This comes amid increased uncertainty about the rate of economic recovery due to the onset of the Delta variant. Hedge funds nonetheless trailed the S&P 500 for the year’s first seven months, up 9.5%. One can argue whether that justifies their usefulness as a stock predictor.