David Swensen Insight

Archive for February 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. 


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.

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]
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 »

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.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.


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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