David Swensen’s portfolio (from Unconventional Success)

DavidSwensen

“Individual investors should take control of their financial destinies, educate themselves, avoid sales pitches and invest in a well-diversified portfolio of low-cost index funds, like those offered by Vanguard, which operates on a not-for-profit basis Such a strategy reduces the fees paid to the parasitic mutual fund industry, leaving more money in the hands of the investing public. ” The Mutual Fund Merry-Go-Round – NY Times , August 13, 2011 .

David Swensen, investment manager of the Yale University Endowment Fund, has addressed how investors should set up and manage their investments in his book, Unconventional Success: A Fundamental Approach to Personal Investment.

Swensen recommends that investors should select not for profit mutual fund companies (such as Vanguard or TIAA-CREF) to minimize investment expenses and largely eliminate conflicts of interest.

The Swensen portfolio  consists of six core asset class allocations:

  • US equity:  30%
  • Foreign developed equity: 15%
  • Emerging market equity: 5%
  • US REITS: 20%
  • US Treasury bonds: 15%
  • US TIPS: 15%

 

Although the recommended portfolio splits its allocation with 70% equities/ 30% fixed income, the portfolio can be adjusted to reflect alternative equity/bond allocations.

In response to a query, Swensen indicates that the treasury bond duration should be set at the market duration (see David Swensen – US Treasury Bonds duration).  This post will use an intermediate treasury fund as the vehicle for the bond allocation.

 The charts below (click images to enlarge) show portfolio allocations.

Fund selections

The tables below show returns for the Swensen portfolios, using Vanguard investor shares for the asset class selections. The return series begins in 2001, when Vanguard initiated an inflation protected securities fund.

Investors with larger portfolios can cut expenses by using admiral shares. Investors with large treasury bond allocations might also consider substituting treasury bond ladders and treasury inflation protected bond ladders for the bond fund allocations.

The fund selections include:

Funds

Asset class Fund Investor shares Expense ratio Admiral shares Expense ratio
US equity Total market index VTSMX 0.17% VTSAX 0.05%
Developed market equity Developed market index VDVIX 0.20% VTMGX 0.09%
Emerging market equity Emerging markets index VEIEX 0.33% VEMAX 0.15%
US real estate REIT index VGSIX 0.24% VGSLX 0.10%
US treasury bond Intermediate treasury fund VFITX 0.20% VFIUX 0.10%
US TIPs Inflation protected securities fund VIPSX 0.20% VAIPX 0.10%

Returns

The tables below give annual returns, compound returns, and standard deviations for the Swensen portfolios, using returns for Vanguard investor share fund selections.  Keep in mind that past performance does not forecast future performance.

Annual returns

Year 70/30 60/40 40/60 20/80
2013 11.73% 9.26% 3.57% -1.22%
2012 13.51% 12.26% 9.77% 7.25%
2011 2.62% 3.65% 6.33% 8.93%
2010 15.01% 13.71% 11.61% 9.18%
2009 23.93% 21.49% 16.18% 10.37%
2008 -25.78% -21.47% -12.65% -3.71%
2007 5.22% 6.51% 7.83% 9.31%
2006 17.64% 15.26% 11.05% 6.42%
2005 8.56% 7.82% 6.23% 4.34%
2004 15.96% 14.40% 11.78% 8.47%
2003 28.07% 25.56% 20.39% 14.94%
2002 -4.99% -2.90% 2.08% 6.48%
2001 -2.67% 0.57% 1.69% 4.24%

Compound returns

Period 70/30 60/40 40/60 20/80
3yr CAGR 9.18% 8.33% 6.53% 4.89%
5yr CAGR 13.46% 11.92% 9.41% 6.82%
10yr CAGR 7.93% 7.64% 6.89% 5.86%
13yr CAGR 7.44% 7.32% 7.08% 6.45%

Standard deviation

Period 70/30 60/40 40/60 20/80
3yr standard deviation 5.84% 4.37% 3.10% 5.44%
5yr standard deviation 7.62% 6.53% 4.85% 4.67%
10yr standard deviation 13.64% 11.63 7.83% 4.79%
13yr standard deviation 14.04% 12.03% 8.07% 4.88%

All roads lead to Dublin

A commonplace principle of prudent investing is to adopt and stick to a long-term diversified investment program. The tables below show results for the Swensen 60/40 portfolio along with 60/40 allocations for the popular three-fund portfolio; a Ferri core four portfolio; the Coffeehouse portfolio; and the Bernstein “Coward’s” Portfolio.  Once again, recall  that past performance does not forecast future performance.

CAGR

60/40 Portfolio 3yr 5yr 10yr
Swensen CAGR 8.33% 11.92% 7.64%
Three-fund CAGR 9.26% 12.02% 7.11%
Core four CAGR 8.86% 11.92% 7.18%
Coffeehouse CAGR 9.48% 12.60% 7.51%
Coward’s CAGR 8.42% 11.67% 7.14%

Standard deviation

60/40 Portfolio 3yr 5yr 10yr
Swensen standard deviation 4.37% 6.53% 11.63%
Three-fund standard deviation 7.75% 7.44% 11.61%
Core standard deviation 6.79% 7.11% 11.60%
Coffeehouse standard deviation 6.71% 6.70% 11.57%
Coward’s standard deviation 8.05% 8.62% 12.20%

See David Swensen portfolio , google drive spreadsheet for return computations.

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