Swensen Endowment Portfolio Book

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
David Althaus
Posts: 267
Joined: Wed Feb 14, 2018 8:05 pm

Swensen Endowment Portfolio Book

Post by David Althaus »

Listened to David Swensen's Portfolio for Endowments book. Interesting in that:

1. He asserted 20% investment in total market outside US provides a currency hedge against the US dollar. Further, he said any more than 20% actually increases currency risk. I'll take on faith that what he says about it is true.
2. It occurred to me that about 95% of university endowments could benefit from becoming Bogleheads.

All the best
Day9
Posts: 992
Joined: Mon Jun 11, 2012 6:22 pm

Re: Swensen Endowment Portfolio Book

Post by Day9 »

David Althaus wrote: Wed Aug 28, 2019 7:45 am ...
2. It occurred to me that about 95% of university endowments could benefit from becoming Bogleheads.
...
I get the same sense yet they are supposed to be the "smart money / institutional investor" and we are supposed to be the "dumb money / retail investors" :|
I'm just a fan of the person I got my user name from
catalina355
Posts: 283
Joined: Sun Jun 10, 2018 6:46 pm

Re: Swensen Endowment Portfolio Book

Post by catalina355 »

David Althaus wrote: Wed Aug 28, 2019 7:45 am Listened to David Swensen's Portfolio for Endowments book. Interesting in that:

1. He asserted 20% investment in total market outside US provides a currency hedge against the US dollar. Further, he said any more than 20% actually increases currency risk. I'll take on faith that what he says about it is true.
2. It occurred to me that about 95% of university endowments could benefit from becoming Bogleheads.

All the best
Did he explain why more than 20% increases currency risk?
dkturner
Posts: 1608
Joined: Sun Feb 25, 2007 7:58 pm

Re: Swensen Endowment Portfolio Book

Post by dkturner »

catalina355 wrote: Wed Aug 28, 2019 12:52 pm
David Althaus wrote: Wed Aug 28, 2019 7:45 am Listened to David Swensen's Portfolio for Endowments book. Interesting in that:

1. He asserted 20% investment in total market outside US provides a currency hedge against the US dollar. Further, he said any more than 20% actually increases currency risk. I'll take on faith that what he says about it is true.
2. It occurred to me that about 95% of university endowments could benefit from becoming Bogleheads.

All the best
Did he explain why more than 20% increases currency risk?
No he doesn’t. In his 2005 book, “Unconventional Success”, he states: “Unless foreign currency positions constitute more than roughly one-quarter of portfolio assets, currency exposure serves to reduce overall portfolio risk. Beyond a quarter of portfolio assets, the currency exposure constitutes a source of unwanted risk.” Apparently, in his updated book for institutional investors he has reduced the magic number from 25% to 20%.
catalina355
Posts: 283
Joined: Sun Jun 10, 2018 6:46 pm

Re: Swensen Endowment Portfolio Book

Post by catalina355 »

dkturner wrote: Wed Aug 28, 2019 2:06 pm
catalina355 wrote: Wed Aug 28, 2019 12:52 pm
David Althaus wrote: Wed Aug 28, 2019 7:45 am Listened to David Swensen's Portfolio for Endowments book. Interesting in that:

1. He asserted 20% investment in total market outside US provides a currency hedge against the US dollar. Further, he said any more than 20% actually increases currency risk. I'll take on faith that what he says about it is true.
2. It occurred to me that about 95% of university endowments could benefit from becoming Bogleheads.

All the best
Did he explain why more than 20% increases currency risk?
No he doesn’t. In his 2005 book, “Unconventional Success”, he states: “Unless foreign currency positions constitute more than roughly one-quarter of portfolio assets, currency exposure serves to reduce overall portfolio risk. Beyond a quarter of portfolio assets, the currency exposure constitutes a source of unwanted risk.” Apparently, in his updated book for institutional investors he has reduced the magic number from 25% to 20%.
So that is 20% of assets and not 20% of stocks. Is that correct?
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Swensen Endowment Portfolio Book

Post by Steve Reading »

David Althaus wrote: Wed Aug 28, 2019 7:45 am 2. It occurred to me that about 95% of university endowments could benefit from becoming Bogleheads.
On the contrary. Unsuccessful University endowments invest too much like retail investors. Something like 60% stocks, 40% bonds.

Once Swensen took over Yale's, he drastically decreased the percentage in bonds and decreased to some degree the percentage in stocks. His success came from investments in alternatives, like hedge funds, private equity, venture capital, active management, real estate and timber (especially timber).

Other successful endowments like Harvard and MIT have done similar things.

Unfortunately, the retail investor can't buy entire forests, acres of Cambridge, MA or invest in dozens of hedge funds as part of a diversified portfolio
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
dkturner
Posts: 1608
Joined: Sun Feb 25, 2007 7:58 pm

Re: Swensen Endowment Portfolio Book

Post by dkturner »

catalina355 wrote: Wed Aug 28, 2019 2:22 pm So that is 20% of assets and not 20% of stocks. Is that correct?
As I understand it, yes. As a practical matter most international equity funds don’t hedge currency exposure and most international fixed income funds do, so it probably doesn’t matter whether you use a % of assets or a % of equity.
TN_Boy
Posts: 1881
Joined: Sat Jan 17, 2009 12:51 pm

Re: Swensen Endowment Portfolio Book

Post by TN_Boy »

305pelusa wrote: Wed Aug 28, 2019 2:37 pm
David Althaus wrote: Wed Aug 28, 2019 7:45 am 2. It occurred to me that about 95% of university endowments could benefit from becoming Bogleheads.
On the contrary. Unsuccessful University endowments invest too much like retail investors. Something like 60% stocks, 40% bonds.

Once Swensen took over Yale's, he drastically decreased the percentage in bonds and decreased to some degree the percentage in stocks. His success came from investments in alternatives, like hedge funds, private equity, venture capital, active management, real estate and timber (especially timber).

Other successful endowments like Harvard and MIT have done similar things.

Unfortunately, the retail investor can't buy entire forests, acres of Cambridge, MA or invest in dozens of hedge funds as part of a diversified portfolio
In Swenson's book for the individual investor (Unconventional Success) he states very clearly that retail investors should not try and use the sort of investments that Yale does.

I believe, though I cannot lay my hand on the reference right now, he has also said that smaller endowments shouldn't try and duplicate the Yale investment strategy either -- they lack the knowhow and resources to get the sort of active managers Yale uses. (Someone correct me if I am remembering wrongly here).
Day9
Posts: 992
Joined: Mon Jun 11, 2012 6:22 pm

Re: Swensen Endowment Portfolio Book

Post by Day9 »

305pelusa wrote: Wed Aug 28, 2019 2:37 pm
David Althaus wrote: Wed Aug 28, 2019 7:45 am 2. It occurred to me that about 95% of university endowments could benefit from becoming Bogleheads.
On the contrary. Unsuccessful University endowments invest too much like retail investors. Something like 60% stocks, 40% bonds.

Once Swensen took over Yale's, he drastically decreased the percentage in bonds and decreased to some degree the percentage in stocks. His success came from investments in alternatives, like hedge funds, private equity, venture capital, active management, real estate and timber (especially timber).

Other successful endowments like Harvard and MIT have done similar things.

Unfortunately, the retail investor can't buy entire forests, acres of Cambridge, MA or invest in dozens of hedge funds as part of a diversified portfolio
Furthermore they can recruit world class talent and pay their staff $100 million a year and that would amount to a 0.4% "Expense Ratio" (given the Yale Endowment is worth $25 billion, even more exaggerated with something like Norway's $1 trillion sovereign wealth fund). Multi millionaire individual investors on the other hand have to pay the high fees like 2/20 (2% AUM, 20% of profits) that is an industry standard for hedge funds.

But like the above poster states Swenson acknowledges this.
I'm just a fan of the person I got my user name from
aristotelian
Posts: 8077
Joined: Wed Jan 11, 2017 8:05 pm

Re: Swensen Endowment Portfolio Book

Post by aristotelian »

305pelusa wrote: Wed Aug 28, 2019 2:37 pm
David Althaus wrote: Wed Aug 28, 2019 7:45 am 2. It occurred to me that about 95% of university endowments could benefit from becoming Bogleheads.
On the contrary. Unsuccessful University endowments invest too much like retail investors. Something like 60% stocks, 40% bonds.

Once Swensen took over Yale's, he drastically decreased the percentage in bonds and decreased to some degree the percentage in stocks. His success came from investments in alternatives, like hedge funds, private equity, venture capital, active management, real estate and timber (especially timber).

Other successful endowments like Harvard and MIT have done similar things.

Unfortunately, the retail investor can't buy entire forests, acres of Cambridge, MA or invest in dozens of hedge funds as part of a diversified portfolio
I would not call Harvard successful. Harvard has underperformed recently due to failed land speculation in Brazil etc, while the top performing endowments (not to be confused with the biggest endowments) have used simple index funds:
https://www.bloomberg.com/news/articles ... ndex-funds

As a whole, university endowments have underperformed the market:
https://www.etf.com/sections/index-inve ... nopaging=1
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Swensen Endowment Portfolio Book

Post by Steve Reading »

aristotelian wrote: Wed Aug 28, 2019 7:35 pm I would not call Harvard successful. Harvard has underperformed recently due to failed land speculation in Brazil etc, while the top performing endowments (not to be confused with the biggest endowments) have used simple index funds:
https://www.bloomberg.com/news/articles ... ndex-funds
I'm sorry, what? Historically, the Harvard endowment (and especially under Meyer) absolutely pulverized the S&P 500. As in 10-20% higher returns per year, even during the crises.

Image

It (and Yale) were so incredibly successful, that they were a large reason for so many endowments shifting towards alternatives (which Larry talks about in that post).

They have underperformed the past decade, yes. But not by much (6% vs 4%). You can think of that as "they're not successful". I just think that's the nature of alternative investments. But their success was tremendous enough to create a paradigm shift in endowment investment styles all across the nation. I think that's undeniable.

And I certainly don't think they should just grab themselves a 3 Fund portfolio just because of the results this past decade.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
User avatar
abuss368
Posts: 21619
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Swensen Endowment Portfolio Book

Post by abuss368 »

Swensen is in a league of his own. I consider myself very fortunate that I was able to attend a lecture of his (and wrote an extensive thread on the forum). I learned much.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
abuss368
Posts: 21619
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Swensen Endowment Portfolio Book

Post by abuss368 »

I believe Rick Ferri penned an article online for Fortune titled "The Yale Effect" where it was proven that a lot of endowments could simply invest in a 60% stock and 40% bond (considering low fees) and would have performed much better.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
willthrill81
Posts: 20957
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Swensen Endowment Portfolio Book

Post by willthrill81 »

305pelusa wrote: Wed Aug 28, 2019 8:10 pm
aristotelian wrote: Wed Aug 28, 2019 7:35 pm I would not call Harvard successful. Harvard has underperformed recently due to failed land speculation in Brazil etc, while the top performing endowments (not to be confused with the biggest endowments) have used simple index funds:
https://www.bloomberg.com/news/articles ... ndex-funds
I'm sorry, what? Historically, the Harvard endowment (and especially under Meyer) absolutely pulverized the S&P 500. As in 10-20% higher returns per year, even during the crises.

Image

It (and Yale) were so incredibly successful, that they were a large reason for so many endowments shifting towards alternatives (which Larry talks about in that post).

They have underperformed the past decade, yes. But not by much (6% vs 4%). You can think of that as "they're not successful". I just think that's the nature of alternative investments. But their success was tremendous enough to create a paradigm shift in endowment investment styles all across the nation. I think that's undeniable.

And I certainly don't think they should just grab themselves a 3 Fund portfolio just because of the results this past decade.
The lag in performance over the last decade was significantly more than 2%. Compared to a 60/40 AA, it was 3.6% for Harvard. However, the Ivy endowments probably all have significant ex-U.S. equity exposure, which has definitely been a performance drag for the last decade.

Image
https://www.institutionalinvestor.com/a ... -Ten-Years

They also report that of all the Ivy leagues, Harvard has been at the bottom for a while.
The returns this year were similar to 2017, with Harvard’s performance still far behind its peers, at 10 percent. Harvard has spent seven years at or near the bottom of this group.
I agree that a decade of underperformance should not be enough to make them overhaul their strategy. I fully acknowledge that my own strategy may lag the market for a decade or more. But in the eyes of many, a decade of poor performance is just too much.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
User avatar
abuss368
Posts: 21619
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Swensen Endowment Portfolio Book

Post by abuss368 »

When I attended David Swensen’s lecture, he was very clear to state individual investors should not try to invest like Yale in particular or endowments in general.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
abuss368
Posts: 21619
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Swensen Endowment Portfolio Book

Post by abuss368 »

I would love for David Swensen to update “Unconventional Success” like he did with the endowment book.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
abuss368
Posts: 21619
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Swensen Endowment Portfolio Book

Post by abuss368 »

David Swensen and Jack Bogle wrote the forwards to each other books I believe. Mr. Bogle always spike so highly of him in interviews.
John C. Bogle: “Simplicity is the master key to financial success."
aristotelian
Posts: 8077
Joined: Wed Jan 11, 2017 8:05 pm

Re: Swensen Endowment Portfolio Book

Post by aristotelian »

305pelusa wrote: Wed Aug 28, 2019 8:10 pm
I'm sorry, what? Historically, the Harvard endowment (and especially under Meyer) absolutely pulverized the S&P 500. As in 10-20% higher returns per year, even during the crises.

It (and Yale) were so incredibly successful, that they were a large reason for so many endowments shifting towards alternatives (which Larry talks about in that post).

They have underperformed the past decade, yes. But not by much (6% vs 4%). You can think of that as "they're not successful". I just think that's the nature of alternative investments. But their success was tremendous enough to create a paradigm shift in endowment investment styles all across the nation. I think that's undeniable.

And I certainly don't think they should just grab themselves a 3 Fund portfolio just because of the results this past decade.
You answered your own question. Obviously we are talking about different timeframes. They lost billions of dollars speculating on land in Brazil. I don't see that as "just the nature of alternative investments".

A decade is a long time to underperform. At the very least you need to add some qualifications before making generalized claims about university endowments beating the market. I have no idea what, if anything, will outperform in the future.
Post Reply