Managing investments is one of the chief duties of boards. Yet, until recently, there have been few, if any, reference works with analytic solidity and a clear, approachable style. The nonprofit sector can be grateful to David F. Swensen, chief investment officer for Yale University for the past 17 years, for sharing his insights about successful portfolio management.

Swenson’s volume is important reading for anyone who has responsibility for, or is involved with, investments and endowments.

Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment is important reading for anyone who has responsibility for, or is involved with, investments and endowments both large and small—including trustees and board members, chief executive officers and staff—for Swensen lays out how any institution can generate, over time and with discipline, a successful investment program.

Acknowledged as a leader in his field, Swensen has compiled a remarkable record of investment performance. Concentrating on alternative asset classes rather than domestic marketable securities (hence “an unconventional approach”), Swensen’s focus on a range of less efficiently priced investment alternatives has produced a stellar 17% annualized rate of return for Yale since 1985, putting it in the top 1% of all institutional funds. Yale’s endowment was slightly higher than $1 billion upon his arrival from Wall Street; it was over $10.5 billion as of June 30, 2002. And during the past two years of rapidly declining capital markets, the value of Yale’s endowment increased 4%.

Swensen begins by discussing the fundamental purposes of endowments for educational institutions, suggesting that they allow greater institutional independence, provide operational stability and facilitate the achievement of educational excellence. He then turns to examining the goals for institutional portfolios, discussing the role of spending policies, purchasing power evaluation, spending sustainability, portfolio evaluation and the impact of gifts, observing that such goals supply an essential foundation for the process of funds management. He completes his description of the fundamentals by describing the role of asset allocation—the key decision regarding the distribution of a portfolio among different types of investment alternatives.

Swensen’s discussion of the management of a successful investment program is masterful. He presents situations where “real-world frictions” can impede the realization of portfolio objectives; gives a primer on asset class management; outlines a number of performance evaluation issues; and lays out his views on how to structure an effective decision-making process.

What makes Swensen’s volume a classic is the clarity and accessibility with which he explains highly complex and often technical matters. He is equally cogent in laying out the philosophical foundation for successful investment management and the fundamentals as he is in explaining strategic and tactical aspects of portfolio management. A wealth of concrete examples illustrate larger questions of investment goals and concepts, the impact of alternative courses of action that particular institutions have followed and narrower operational and management issues. Swensen’s volume is important reading for anyone who has responsibility for, or is involved with, investments and endowments. “If we’re going to prioritize, we’re going to need some priorities.”