Yale’s Swensen: sell government bonds, buy equities
Posted by: Michael Zhuang on: April 23, 2009
David Swensen told German newspaper Frankfurter Allgemeine Sonntagszeitung in an interview published on Sunday:
Now is a better time to buy equities than six months ago, one year ago or five years ago. One thing is certain: If I now had government bonds, I would consider selling them and invest the money in everything else.
Swensen mocks mutual fund industry: it is a marketing industry
Posted by: Michael Zhuang on: April 2, 2009
In a recent interview with Yale Alumni Magazine, David Swenen had this dialog with the reporter.
Yale Magazine: Unconventional Success delivered a scathing critique of the mutual-fund industry. You rightly pointed out that the vast majority of mutual funds charge high fees, trade too frequently, and under-perform the markets. How did the industry react?
Swensen: I’ve heard stories of people in the fund management business being irate about the book. That’s not surprising. The mutual fund industry is not an investment management industry. It’s a marketing industry. And if somebody interferes with your marketing, you’re not going to like that. So I was pleased to hear that there were senior people in the industry who were very, very unhappy with me and my book.
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David Swensen revises asset allocation for individual investors
Posted by: Michael Zhuang on: March 25, 2009
In his book Unconventional Success: A Fundamental Approach to Personal Investment, Swensen recommends the following allocations, for individual investors who want a “well-diversified, equity-oriented portfolio”:
30% Domestic stock funds
20% Real estate investment trusts
15% U.S. Treasury bonds
15% U.S. Treasury inflation-protected securities
15% Foreign developed-market stock funds
5% Emerging-market stock funds
In an interview with Yale magazine, Swensen said, economic conditions might call for a modest revision. He now recommends that investors have 15 percent of their assets in real estate investment trusts, and raise their investment in emerging-market stock funds to 10 percent.
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The following illustrates an implementation of the Swensen allocation with a strong small and value tilt. Despite having only 70% in equity, it has outperformed the benchmark S&P 500.
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What (not) to learn from Harvard and Yale endowments’ investment approach
Posted by: Michael Zhuang on: March 20, 2009
University endowments are important institutions. They play a critical role in maintaining the academic excellence of the universities that rely heavily on their income. Recently, these endowments have drawn much attention because of their superior investment returns compared to other institution investors, such as investment banks and insurance companies.
There is much diversity among university endowments. Ivy League endowments such as those of Yale and Harvard are well ahead of the pack in terms of investment returns.
Between 1994 and 2005, Ivy League endowments returned an average of 14.9% per year, compared to 11.7% for all university endowments and 9.7% for the S&P 500. Surprisingly, this high average return was achieved with less risk! The return volatility of Ivy League endowments was 8.8%, compared to 9% for all university endowments and 16.9% for the S&P 500. Clearly, these endowments have done something right!
Chart: Comparing the returns of Ivy League endowments, all university endowments and the S&P 500. “All Return” denotes the returns of all university endowments. “All Bench” denotes the returns of mimicking all university endowments using asset class indexes. “Ivy Return” denotes the returns of Ivy League university endowment. “All Bench” denotes the returns of mimicking Ivy League university endowment using asset class indexes.
Data source: Lerner, Schoar and Wang, 2008, “Secrets of Academic: The Driver of University Endowment Success.”
Ivy League endowments derive their superior returns from two sources: asset allocation and investment selection. Ordinary investors can mimic their asset allocation, which is public information, to some extent. If investors buy each asset class index fund in proportion to the Ivy League endowment allocation, they may be able to achieve the Ivy Benchmark Return of 9.8% with 12.1% volatility. This is clearly superior to the S&P 500.
Ordinary investors, however, should not attempt to mimic Ivy League endowments’ investment selection. They do not have the knowledge, rigorous investment process, and access to highly-skilled investment managers to be successful.
Qualitatively, what ordinary investors can learn from these endowments is, in the words of David Swensen, to have a strong decision marking process. Do you have one?
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Swensen decries “fee-ing frenzy” by financial firms
Posted by: Michael Zhuang on: February 27, 2009
David Swensen:
Avoid the fee-ing frenzy!
A woman banks at Wachovia. Let’s call her Marion. When Marion needs to rollover her 401(k) into an IRA account, she naturally asks a Wachovia financial advisor for help. He helps her open an account and recommends she buy the Evergreen Asset Allocation Fund (EAAFX). Is there anything wrong with this picture? Plenty!
First, the fund has a sales charge (front-end load) of 5.75%. Her 401(k) balance is $100,000. This means, the advisor takes $5,750 just for the act of opening the account for her.
Second, the fund has an expense ratio of 1.27%. This expense ratio includes a 12b-1 fee of 0.25%. This means the advisor will continue to collect about $250 every year for as long as Marion is invested in the fund. The fund manager will collect $1,020- every year!
Third, the fund is actually a fund of funds. Money in the fund is simply divided up and invested in a numbers of other funds, each of which has another layer of managers and fees ranging from 0.39% to 1.02%.
In fact, there are superb funds that don’t charge front-end load and have low expense ratios. But financial advisors who work on commission may never tell you about what’s a better choice for you. No wonder Jack Bogle, founder of the Vanguard Group laments, “Too much salesmanship and too little stewardship.”
Ninety percent of financial advisors are ‘product pushers’ on commission. Conflict of interest runs rampant. How can people like Marion, and people like you, protect themselves against what David Swensen calls a fee-ing frenzy? The answer is, by going with a fee-only advisor.
What is fee-only?
Fee-only means the advisor doesn’t take commissions, product incentives, or third-party payments as hidden compensation.
Why fee-only?
Just because someone is a fee-only advisor doesn’t make him or her automatically trustworthy. But fee-only advisors are more likely to be trustworthy and transparent in their dealings because they avoid conflict of interest.
David Swensen answers criticism of the Yale Model
Posted by: Michael Zhuang on: February 23, 2009
The Yale model is under intense criticism that it doesn’t work as advertised in the current market condition. Here is David Swensen‘s response in an interview with Seth Hettena, Special to ProPublica.
The first thing I’d say is it’s too short a time period over which to judge. If you want to have a fair assessment of any investment strategy, get through the crisis and then look back and see how things performed.
If you look back 10 years from June 30, 2008, Yale’s performance was 16.3 percent per annum. Bonds were 5 percent plus or minus, and stocks were 3 percent plus or minus. So what are you going to do? You’re going to give up that kind of performance to hold a lot of bonds to protect against the financial crisis? Where’s the alternative that performs so much better? 100 percent government bonds? Is that the alternative? Well, then what would have happened if you had held that the decade before? I don’t get it.
They’re not thinking about what happened the 10 years before and they’re not giving us time to get through this crisis and see how it plays out for the Yale model against a more traditional portfolio. That’s one of the really interesting things in these articles that have been critical of the Yale model and sometimes of me personally: Where’s the alternative? What’s the option? Yeah, the model fails. Well, relative to what?
Here is the source.
The Yale Model asset allocation
Posted by: Michael Zhuang on: February 17, 2009
Once upon a time, the Yale University Endowment invested like the rest of us, in just two asset classes: US equity and fixed income. After taking over the reins in 1987, David Swensen, the chief investment officer of Yale Endowment, moved aggressively into non-traditional and often illiquid asset classes like foreign equity, absolute return, real assets and private equity.
Chart: The Yale Model asset allocation
![[enable picture display to see this chart]](http://www.thedividendguyblog.com/wp-content/themes/leia-en/imagenes/2008/03/yale-asset-allocation.gif)
Picture credit: thedividendguyblog.com
His unconventional approach produced a 20-year unbroken record of positive returns, resulting in stellar growth of the endowment from $1b to $17b. No wonder rival school Harvard University studies him closely. Other institutional money managers trip over themselves trying to mimic him.
Yale’s six asset classes are defined by their different expected response to economic conditions, such as inflation, growth and interest rate. Here is my own simplified explanation and cautionary note about these asset classes in relation to us as individual investors. Read the rest of this entry »
A David Swensen lecture in Yale University
Posted by: Michael Zhuang on: February 3, 2009
David Swensen, Yale’s Chief Investment Officer and manager of the University’s endowment, discusses the tactics and tools that Yale and other endowments use to create long-term, positive investment returns. He emphasizes the importance of asset allocation and diversification and the limited effects of market timing and security selection.
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David Swensen’s Fox News interview
Posted by: Michael Zhuang on: January 7, 2009
This is based on an interview David Swensen done on Fox News Network.
David Swensen
1. Have a strong decision-marking process
Investing success requires sticking with decisions made uncomfortable by the variance of opinions. In his own words:
Think carefully how it is that you are gonna allocate your assets and stick with it. Too many individuals were excited about the equity market 18 months ago and were despairing 3 months ago. It should have been the other way around. They should have been concerned about valuation 18 months ago and excited about the opportunity to put money to work at lower prices 3 months ago.
2. Sell mania-induced excess, buy despair-driven value
On his favorite area of despair-driven value, David Swensen has this to say:
I think the most interesting area is the credit market. Bank loans are trading at extraordinary low value. High-grade corporate debts, below investment grade corporate debts associated with companies that are gonna survive this are extraordinarily cheap. It’s not the only place to find value, but that would be the top of my list.
3. Make decision based on thorough analysis
Know where you belong …
There are two ends of the continuum in the investment market. You should be in one extreme or the other. There is no room for success in the middle. At one end of the spectrum, you get investors who committed resources to do high quality jobs in active management … At the other end of the continuum are purely passive investment vehicles – index funds. The vast majority of players are in the middle and the vast majority of players end up failing. Be at one end or the other and almost all investors belong to the passive end.
4. Watch out for the “fee-ing frenzy”
This one should be obvious but ignored by many investors.
David Swensen portfolio for small investors
Posted by: Michael Zhuang on: October 27, 2008
In his book “Unconventional Success: A Fundamental Approach to Personal Investing,” David Swensen prescribes for retail investors an asset allocation markedly different from his management of Yale Endowment.
- Domestic Equity (30 percent) – Stocks in U.S.-based companies listed on U.S. exchanges.
- Emerging Market Equity (5 percent) – Stocks from emerging markets across the globe. Brazil, Russia, India, China, etc.
- Foreign Developed Equity (15 percent) – Stocks listed on major foreign markets in developed countries, such as the UK, Germany, France, and Japan.
- REITs or Real Estate Investment Trusts (20 percent) – Stocks of companies that invest directly in real estate through ownership of property.
- U.S. Treasury Notes and Bonds (15 percent) – These are fixed-interest U.S. government debt securities that mature in more than one year. Notes and bonds pay interest semi-annually. The income is only taxed at the federal level.
- TIPs or U.S. Treasury Inflation-Protection Securities (15 percent) – These are special types of Treasury notes that offer protection from inflation, as measured by the Consumer Price Index. They pay interest every six months and the principal when the security matures.
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Author
Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm applying David Swensen's insights for clients. He is also a regular contributor to Morningstar Advisor. To use his wealth management services, schedule a discovery meeting (phone call) with him.
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