David Swensen Insight

Bloomberg: “Pimco plots asset strategy to mimic Yale without cash strain”

Posted on: September 3, 2009

Pimco mimicking Yale

Pimco mimicking Yale

Here is the second paragraph of the Bloomberg report:

“The richest colleges beat market indexes in the decade through June 2008 by loading up on hard-to-sell assets such as private equity and real estate, while cutting stocks and bonds, a style pioneered by Yale University’s David Swensen. Pimco is refining the model to appeal to investors who want more flexibility to sell assets quickly to raise cash.”

Students of David Swensen understand that the Master avoids liquid assets because “market players routinely overpay for liquidity.” Serious investors benefit by avoiding overpriced liquid securities. Instead, they locate bargains in less liquid markets. This wisdom is borne out by his track record over the last two decades.

Further more, the Master teaches that liquidity is never there when you need it. All these armchair quarterbacks are speaking as if cash strain could have been avoided if only the endowment investments had been in liquid assets. Not long ago, liquid assets were selling at 50% discount or more!

Cash strain isn’t a problem of the Yale model. It’s the result of the extraordinary financial meltdown we experienced during the last two years. Let’s put things into context. Fabled Wall Street powerhouses melted like a snow cone on a hot day, when the crisis hit! So big deal cash strain.

So now Pimco is out to fix a non-existent problem. And somehow, their “refined” model is able to generate endowment-sized outperformance—without illiquid assets?

I think this is just a marketing gimmick by Pimco, purveyed willingly by a non-critical press. What do you think? I’d like to hear you.

“The mutual fund industry in not an investment management industry, it’s a marketing industry.” I didn’t say that, David Swensen did.


1 Response to "Bloomberg: “Pimco plots asset strategy to mimic Yale without cash strain”"

I would agree. Mutual funds spend heaps of cash trying to find new resources for their activities whilst funds generated are invested with greed. Where is the mandate of responibility in all of this

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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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