Link - How to invest like Yale's David Swenson

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simba
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Link - How to invest like Yale's David Swenson

Post by simba »

Seekingalpha.com posted this article titled How to invest like Yale's David Swenson
In fact, Swensen's advice to those would emulate him is, simply, “Don't.” Swensen is an unabashed active investor, rebalancing his portfolio at least daily.
in his most recent book, Unconventional Success: A Fundamental Approach to Personal Investment, Swensen concludes the best thing investors can do for their portfolios is to steer clear of active management altogether. It's too expensive and most portfolio managers aren't very talented. Besides, individuals “tend to behave in ways that undermine the effects of active management,” writes Swensen. “You've got a lot of people crashing around doing dumb things.”
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Unconventional Success -- An investment gem

Post by Taylor Larimore »

Hi Simba:
David Swenson's book, "Unconventional Success," is in our Collection of Investment Gems which you posted in the Library Forum. This is a link to many of the book's valuable excerpts:

http://socialize.morningstar.com/NewSoc ... vSeq=43500

Best wishes.
Taylor
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Swensen's success was greatest in private equity

Post by dcbonnett »

Perhaps some of this was due to connections in the Yale 'old boy' network. His connections were major bank and corporate presidents. For most us it is engineers, doctors, shop keepers, middle managers and plumbers. d
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Re: Swensen's success was greatest in private equity

Post by Valuethinker »

dcbonnett wrote:Perhaps some of this was due to connections in the Yale 'old boy' network. His connections were major bank and corporate presidents. For most us it is engineers, doctors, shop keepers, middle managers and plumbers. d
I'm not sure if Yale grads are particularly well represented in Private Equity (Harvard Business School grads are, and Stanford Business School grads in venture capital).

I think it does Swensen an injustice. There are loads of well connected people out there. There are (no?) other endowment managers like David Swensen and his team (Harvard has done well, but they have changed the team).

He's typically ahead of the curve on asset allocation, shifting into equities, and then out, well ahead of the average endowment.

On PE funds, what Swensen knows, is the top quartile tend to stay top quartile, successive vintage of fund after vintage of fund. So he managed to get Yale in, early, to some of those funds. But he did show skill in identifying the right General Partners.

If you want access to those calibre of managers, at least in Europe, you can buy some of the UK quoted investment trusts (CEFs) that invest in private equity: 3i, Permira, HG Capital, Candover, Electra. (disclosure: I own some of those). Note on purely cyclical timing grounds, now is not the time to be making major new investments in them.
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Post by matt »

Valuethinker wrote:
He's typically ahead of the curve on asset allocation, shifting into equities, and then out, well ahead of the average endowment.
This is where the stupidity of many pension and endowment managers is revealed. They are just now trying to emulate what Swensen was doing 10 years ago. Meanwhile, Swensen is almost certainly out looking for new alternatives that the majority have not yet stumbled on or understand. I don't care too much what Swensen was doing back then, but I wouldn't mind knowing what he's doing right now.
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Post by grumel »

Yale also got a brand + the charity atribute as a reference customer that might help to get good conditions from pe/hedgefunds.

They also got economies of scale compared to other endownments with their billions.

A fair compare group would with similiar conditions would only consist of the maybe 5 other elite universities in Yales league. Plus its not just Swensen, there are the people that alowed him to do what he did. Its about superior organisations, not about single people.
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Post by Walleye »

You guys are correct about him being surrounded with quality people. I was out there visiting with them about a month ago and I can say that a captain is only as good as his crew. He has assembled a staff (mostly Yale undergrads) that understand and share his visions and their results speak for themselves.

As a diehard it is hard not to like David Swensen given the fact that he has told the story from the inside through his books which are both educational and straightforward on the mis-doings of the mutual fund industry.

The Yale model is not really about shifting to the next asset class that will underperform during the next cycle but it is about sticking to your allocations that have been carefully crafted out as part of the big plan. In Yale's case, that means devoting a significant amount of assets towards alternative investments such as LBO's, VC, Hedge Funds, Real Estate, Oil/Gas asset and Timber.

All that they are doing out there is just crafting a plan and sticking to it just as we try to do here as individual investors with our passive approach to investing. The big difference is that they look for active managers who are heavily scrutinized before Yale places money with a specific manager.

David Swensen has done much for the individual investor and in my mind deserves all of the praise that he has received and more!
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Post by mwgr5 »

As the previous poster mentioned Swensen's strategy relied on heavily on the use of alternative assets. A large amount of the portfolio was in real estate, natural resources, and there were also allocations to private equity and venture capital. Most of these investments are not pracitcale for the average investor.
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Post by CyberBob »

Image

When Swensen says 'Real Estate', does he actually mean all REIT's, or something more diverse involving direct ownership of physical property? (I read his book a long time ago, but don't recall).

Because except for that, the recommended retail portfolio seems quite straightforward and easy to construct at Vanguard with Total Stock Index, Developed Markets Index, Emerging Markets Index, and two low-cost bond funds.

Bob
Last edited by CyberBob on Fri Jul 20, 2007 4:52 pm, edited 1 time in total.
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brilliant man

Post by dcbonnett »

A brilliant man with top financial connections makes millions.

A brilliant man without these connections amazes his friends at the game of Trivial Pursuit. If he is a Diehard he'll make 8-14% on his investments each year based on his willingness to take risk.
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Post by simba »

CyberBob wrote:When Swensen says 'Real Estate', does he actually mean all REIT's, or something more diverse involving direct ownership of physical property? (I read his book a long time ago, but don't recall).

Because except for that, the recommended retail portfolio seems quite straightforward and easy to construct at Vanguard with Total Stock Index, Developed Markets Index, Emerging Markets Index, and two low-cost bond funds.
Bob,

That is Swenson's retail asset allocation and as you said can be easily constructed using Vanguard Funds. Paul Farrell tracks this portfolio in his Lazy portfolios articles at marketwatch. Although there is a difference (ST Treasury vs LT Treasury).

The Yale endowments allocation is
Image

This is hard to reconstruct and as per the article Swenson says "Don't!"
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Swensen

Post by Petrocelli »

Swensen is the patron saint for those of us who try to beat "the market."

Here's a guy who beat the market, and who's portfolio had a lower standard deviation than the market to boot.

However, he tells us not to beat the market because we are not as smart as him and most fund managers suck. However, if you ever met anyone at Yale, they all think everyone else is an idiot, so that explains that.

If he can do it, so can I....
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Post by richard »

CyberBob wrote:Image
Do you have a citation for this. Neither Swensen's book nor any interview I've seen includes a recommendation for short-term bonds.
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Post by grumel »

Google for yale and endowment and look at the latest anual report.
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Post by extra »

However, he tells us not to beat the market because we are not as smart as him and most fund managers suck.
I thought I read in his book not to try to do what the professionals do without the resources they have available to them. I believe that.

That doesn't mean that someone can't try. Anyone can get lucky; especially if they're smart.

extra
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Post by Valuethinker »

CyberBob wrote:Image

When Swensen says 'Real Estate', does he actually mean all REIT's, or something more diverse involving direct ownership of physical property? (I read his book a long time ago, but don't recall).
He actually talks about the TIAA fund, of which he is a board member.

The differences being:

- costs can be higher on REIT funds (at the individual company level)
- REITs use leverage
- REITs are much more highly correlated with the stock market

He notes there are very few ways for individuals to get direct access to real estate at reasonable cost (and, in fact, TIAA fund's expenses have risen significantly since he published).
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Post by Valuethinker »

grumel wrote:Yale also got a brand + the charity atribute as a reference customer that might help to get good conditions from pe/hedgefunds.
Actually when Swensen took on Yale, it was in a truly serious hole. I think the intro to his book (by someone else) covers this. They had let out the management to 'a Yale old boy' who had completely effed it up.
They also got economies of scale compared to other endownments with their billions.
They didn't then.

The big economy of scale is that they don't use Fund of Funds-- and they pay their people peanuts compared to what Wall Street would pay them.

Swensen himself makes a couple of million. His comp on Wall Street would be more like $20m.

Such is the Political Economy of Yale University that his salary is controversial ;-). Universities live in their own little world :).
A fair compare group would with similiar conditions would only consist of the maybe 5 other elite universities in Yales league. Plus its not just Swensen, there are the people that alowed him to do what he did. Its about superior organisations, not about single people.
Swensen built the organisation from scratch, though. And Yale has the top performing endowment (of all time, I think). Harvard has done pretty well. Not sure about Princeton...

Again that intro in the book shows just how far out in front Yale has been.
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Re: Swensen

Post by White Coat Investor »

Petrocelli wrote: If he can do it, so can I....
Hope springs eternal.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Post by 4th&Goal »

I have some questions about the Yale Endowment Asset Allocation Targets table posted by Simba. I understand foreign equity domestic equity, and fixed income. I would like some help understanding the other assets in the table:
Real Assets
Absolute Return
Private Equity

Thank you
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Post by DaveTH »

I would like some help understanding the other assets in the table:
Real Assets
Absolute Return
Private Equity
Not sure if you are looking for definitions/examples or something else.

Absolute Return - use traditional hedge fund techniques such as short-selling, futures contracts, options, derivatives, arbitrage, leverage, etc.

Private Equity - investment in companies that are not publicly traded (i.e. venture capital, leveraged buyouts)

Real Assets - differ from paper/financial assets (stocks & bonds). It includes things like direct investments in timber, precious metals, real estate and natural resources.
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Post by stratton »

Real Assets - differ from paper/financial assets (stocks & bonds). It includes things like direct investments in timber, precious metals, real estate and natural resources.
Real Assets can include commodiities futures such as what PCRIX manages versus commodity as oposed to commodity producers such as mining companies.

Might that be "Real Return Assets?" That would add TIPS and other inflation protected securities.

Paul
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Post by Petrocelli »

extra wrote:I thought I read in his book not to try to do what the professionals do without the resources they have available to them. I believe that.
My thoughts:

1. To some extent, we have a huge advantage over Swensen. If your portfolio goes South, you don't have a Board of Trustees screaming for your head.

2. The premise of TSM investing is that no one can beat the market, and those that do are lucky. Therefore, it should not matter whether you a crack staff of really smart guys from Yale. Supposedly, the markets are efficient, and other smarter guys from Harvard or Columbia or Princeton have access to the same information.

My point is this: At some point, we have to decide whether Swensen is a genius or simply the best coin-flipper. If you think he is a genius, then you have to admit the market can be exploited.
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Post by 4th&Goal »

Thanks Dave and Paul. Dave, could you provide some examples? How would small investors get access to these types of classes? You already mentioned PCRIX for commodities futures. Do you have ideas about the other classes?

Thank you
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Post by Lisbon Trackers »

Olá!

I posted this on the main board, but hopefully someone can shed some light on this matter.

Thanks!

-----------


One question that always came to mind when reading "Unconventional Success" by David Swensen, was the reason for omitting the existance of all the body of evidence / research pointing to the Size and Value factors or the extremely well structured DFA funds as an alternative to Vanguard (especially in Small Caps).

What's David Swensen's take on the 3 Factor Model and DFA as a valid alternative to normal tracker funds?

It allways struck me as odd that you can read the entire book without finding any reference to these widely spread theories, or even contesting them for that matter!

Did Dave lose at tennis with Gene, or something?... Just kidding!!! I have the utmost respect for both of them, but I just don't get this!

Cheers,

José M. Supico
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Post by DaveTH »

Real Assets can include commodiities futures such as what PCRIX manages versus commodity as oposed to commodity producers such as mining companies.
Not correct. Commodity futures are derivatives. An investor does not actually own the individual commodities.
Might that be "Real Return Assets?" That would add TIPS and other inflation protected securities.

Possibly, but there is a category of investments called "real" or "hard "assets which is what most endowments use.
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Re: Swensen

Post by Petrocelli »

EmergDoc wrote:
Petrocelli wrote: If he can do it, so can I....
Hope springs eternal.
I would guess that over the course of my investing career my returns on all investments, including real estate and stock private offerings is more than double that of Swensen's. Over the past 5 years, my Vanguard portfolio has returned 14.2%. In about 2000, I had almost all my portfolio in one stock (which was not even publicly traded) which I bought for $1 and sold 3 or 4 years later for around $4.20. Since last November, when I started tracking my FundX momentum portfolio, it has returned 17.3% versus 10.82% for the 500 Index. If you factor in all the returns from all these sources, I am going to guess that I have returned well over 20% a year.

I hate to shatter anyone's illusions, but we are all pretty smart and have a lot of leeway to "beat the market." It's not "hope," it's a fact.
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Post by richard »

Petrocelli wrote:If he can do it, so can I....
A large part of his returns are due to investments in private equity funds. These funds are not even open to retail investors. Not to mention the access to information he has and the resources he has available to analyze the information.

Only a relatively small amount of Yale's portfolio is in publicly traded securities.
Petrocelli wrote:2. The premise of TSM investing is that no one can beat the market, and those that do are lucky. Therefore, it should not matter whether you a crack staff of really smart guys from Yale. Supposedly, the markets are efficient, and other smarter guys from Harvard or Columbia or Princeton have access to the same information.
If markets are inefficient, then a low cost TSM index makes even more sense than if market are efficient. It's a lot easier to go wrong if markets are inefficient.

That markets are efficient does not mean that you can't beat the market, just that it is very hard to beat the market. The market for automobiles is rather efficient, but that does not mean that you can build cars in your garage and out-compete Toyota. Beating the market is a zero sum game and the competition has a lot of horsepower and resources.
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Re: Swensen

Post by richard »

Petrocelli wrote:I would guess that over the course of my investing career my returns on all investments, including real estate and stock private offerings is more than double that of Swensen's.
There are huge rewards available to those who can beat the market with any consistency. If you really believe you can consistently beat the market, you would be foolish to do anything other than devote full time to investing.
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Post by DaveTH »

Dave, could you provide some examples? How would small investors get access to these types of classes? You already mentioned PCRIX for commodities futures. Do you have ideas about the other classes?
Well, it's not as easy or efficient for most retail investors which is one of the reasons Swenson does not recommend them. But, here are some examples:

Absolute Return - Hussman Strategic Growth (HSGFX)
Private Equity - Powershares Listed Private Equity ETF (PSP)
Real Assets - Timber (PCL and RYN)
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Re: Swensen's success was greatest in private equity

Post by yobria »

Valuethinker wrote:I'm not sure if Yale grads are particularly well represented in Private Equity (Harvard Business School grads are, and Stanford Business School grads in venture capital).
I believe they are...here's the very tip of the iceberg:

http://mba.yale.edu/alumni/alumni_leade ... ital.shtml

And the Yale PE Conference is one of the best known in the country.
Valuethinker wrote:I think it does Swensen an injustice. There are loads of well connected people out there.
If you plot the returns of all those well connected people over n years, you'll get a normal-ish distribution. If you pick the extreme right tail value, and ignore the 10,000 points to the left, you're sure to find what looks like a genius.
Valuethinker wrote:He's typically ahead of the curve on asset allocation, shifting into equities, and then out, well ahead of the average endowment.
I haven't noticed a lot of shifting back and forth in the AA of the endowment....how do you mean?
Valuethinker wrote:On PE funds, what Swensen knows, is the top quartile tend to stay top quartile, successive vintage of fund after vintage of fund. So he managed to get Yale in, early, to some of those funds. But he did show skill in identifying the right General Partners.
Could be skill, luck, connections, or all three. But I think the fact that he's turned down 20X (or whatever) his current salary on Wall St. is telling.
Valuethinker wrote:If you want access to those calibre of managers, at least in Europe, you can buy some of the UK quoted investment trusts (CEFs) that invest in private equity: 3i, Permira, HG Capital, Candover, Electra.
Swensen of course would tell you to avoid these at all costs and stick with index funds.

Nick
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Post by extra »

I would guess that over the course of my investing career my returns on all investments, including real estate and stock private offerings is more than double that of Swensen's. Over the past 5 years, my Vanguard portfolio has returned 14.2%. In about 2000, I had almost all my portfolio in one stock (which was not even publicly traded) which I bought for $1 and sold 3 or 4 years later for around $4.20. Since last November, when I started tracking my FundX momentum portfolio, it has returned 17.3% versus 10.82% for the 500 Index. If you factor in all the returns from all these sources, I am going to guess that I have returned well over 20% a year.

I hate to shatter anyone's illusions, but we are all pretty smart and have a lot of leeway to "beat the market." It's not "hope," it's a fact.
Fantastic! More power to you! I admire people who can do this.
But I know that I can't do it, and I don't harbor any illusions.
So I do what I'm capable of. I earn a modest return as close to guaranteed as possible. I at least double Money Market without worry.
I never could play baseball with the big-leaguers, and by now I couldn't even play with amateurs.
I never held a high paying job in my life, but I'm doing OK now anyway. I can't afford a yacht, but I have pretty much what I desire.

extra
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Post by rich »

CyberBob wrote: When Swensen says 'Real Estate', does he actually mean all REIT's, or something more diverse involving direct ownership of physical property? (I read his book a long time ago, but don't recall).
What he says certainly includes REITS because he mentions REIT ETFs by name in the table on page 318.

He mentions RWR (Wilshire REIT) and ICF (Cohen & Steers). Just a reminder that his book was written before VWO (Vanguard) was offered.
Best regards, | Rich
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Post by rich »

richard wrote:
CyberBob wrote:Image
Do you have a citation for this. Neither Swensen's book nor any interview I've seen includes a recommendation for short-term bonds.
The short term bond piece is blatantly incorrect. I know because I wrote Swensen and asked him to clarify.

I posted this on the other board a while back in conversation 53479.



Thank you for your nice message - In response to your question about the bond portfolio, I would try to match the market characteristics - See the following chart -

Durations as of August 31, 2006:
Lehman US Treasury Index - 5.07
IShares 1-3 Treasury (SHY) - 1.67
IShares 7-10 Treasury (IEF) - 6.45
IShares 20+ Treasury (TLT) - 13.00

The easiest way to match the market would be to own some of the 1-3 Treasury (70%) and some of the 20+ Treasury (30%) so the weighted average duration matches the market's 5.07 years -

I hope this helps -

David Swensen
Best regards, | Rich
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Re: Swensen's success was greatest in private equity

Post by Valuethinker »

yobria wrote:
Valuethinker wrote:I'm not sure if Yale grads are particularly well represented in Private Equity (Harvard Business School grads are, and Stanford Business School grads in venture capital).
I believe they are...here's the very tip of the iceberg:

http://mba.yale.edu/alumni/alumni_leade ... ital.shtml

And the Yale PE Conference is one of the best known in the country.
On the former, that's not actually that impressive a list. Very few founders of major partnerships.

But that is Yale GSB, which is very different from Yale undergrad. I would expect to find quite a few from Yale undergrad. I do know a disproportionate share of the top VCs went to Stanford GSB (like about half) and in PE Harvard GSB is similarly (if not so highly) disproportionate. I just don't think that is necessarily the source of Swensen's access.

The reason Yale has a PE conference which is famous is because of Swensen and his team's success at PE investing, rather than because Yale alums are big in PE.

Valuethinker wrote:I think it does Swensen an injustice. There are loads of well connected people out there.
If you plot the returns of all those well connected people over n years, you'll get a normal-ish distribution. If you pick the extreme right tail value, and ignore the 10,000 points to the left, you're sure to find what looks like a genius.
Maybe Swensen is just lucky then? I think that's your argument? Ie the connections count for nothing?
Valuethinker wrote:He's typically ahead of the curve on asset allocation, shifting into equities, and then out, well ahead of the average endowment.
I haven't noticed a lot of shifting back and forth in the AA of the endowment....how do you mean?
It's old hat that institutions should be long alternative assets, long total return, and not hold bonds or much quote equities. 17 years ago, that was not received wisdom. Yale is still far out there on those asset classes against endowment averages, I believe.

Valuethinker wrote:On PE funds, what Swensen knows, is the top quartile tend to stay top quartile, successive vintage of fund after vintage of fund. So he managed to get Yale in, early, to some of those funds. But he did show skill in identifying the right General Partners.
Could be skill, luck, connections, or all three. But I think the fact that he's turned down 20X (or whatever) his current salary on Wall St. is telling.
He loves his job. He has total freedom. He contributes to an institution in which he believes. He recruits his team out of promising students he teaches there.

Valuethinker wrote:If you want access to those calibre of managers, at least in Europe, you can buy some of the UK quoted investment trusts (CEFs) that invest in private equity: 3i, Permira, HG Capital, Candover, Electra.
Swensen of course would tell you to avoid these at all costs and stick with index funds.
Nick
Yes although Yale is an investor in some of those funds. Yale might be on better fee terms though (don't know).
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Re: Swensen

Post by Petrocelli »

richard wrote:
Petrocelli wrote:I would guess that over the course of my investing career my returns on all investments, including real estate and stock private offerings is more than double that of Swensen's.
There are huge rewards available to those who can beat the market with any consistency. If you really believe you can consistently beat the market, you would be foolish to do anything other than devote full time to investing.
Unless, you make more money at your job than at investing. In that case, you shouldn't quit your day job.

In any event, can anyone explain to me why Swensen isn't simply the best coin-flipper? I know he has access to many investments which I do not have access to. However, numerous other money managers have access to these investments. Why does the coin-flipping analogy apply to mutual funds but not to those investing endowments?
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Re: Swensen

Post by Valuethinker »

Petrocelli wrote:
richard wrote:
Petrocelli wrote:I would guess that over the course of my investing career my returns on all investments, including real estate and stock private offerings is more than double that of Swensen's.
There are huge rewards available to those who can beat the market with any consistency. If you really believe you can consistently beat the market, you would be foolish to do anything other than devote full time to investing.
Unless, you make more money at your job than at investing. In that case, you shouldn't quit your day job.
In any event, can anyone explain to me why Swensen isn't simply the best coin-flipper? I know he has access to many investments which I do not have access to. However, numerous other money managers have access to these investments. Why does the coin-flipping analogy apply to mutual funds but not to those investing endowments?[/quote]

A pure Efficient Markets guy would say that. And the same of Warren Buffett.

I suppose even a pure EMT person though, would concede that the evidence on PE funds is quite strong, so if you can presume privileged ability to pick PE funds (and to *reinvest* in the subsequent funds of the same partnership) that would be a form of 'skill'.

Note even a pure EMT person would argue you could gain higher performance by investing in riskier asset classes like hedge funds, private equity and real assets-- as Yale does.
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Post by CyberBob »

richard wrote:
CyberBob wrote:Image
Do you have a citation for this. Neither Swensen's book nor any interview I've seen includes a recommendation for short-term bonds.
That particular chart is from the Seeking Alpha Article mentioned in the original post.
However, as you can see in Rich's post above, Swensen's direct reply to Rich was that he himself doesn't say 'short', but rather 'duration matching the overall market'.
I remember seeing a similar 'retail' approximation of Swensen's portfolio in a few other articles, including one on CBS Marketwatch, where short bonds were mentioned. The assumption error has undoubtedly just been transferred along to the new articles that have been written.
David Swensen responding to Rich wrote:Thank you for your nice message - In response to your question about the bond portfolio, I would try to match the market characteristics - See the following chart -

Durations as of August 31, 2006:
Lehman US Treasury Index - 5.07
IShares 1-3 Treasury (SHY) - 1.67
IShares 7-10 Treasury (IEF) - 6.45
IShares 20+ Treasury (TLT) - 13.00

The easiest way to match the market would be to own some of the 1-3 Treasury (70%) and some of the 20+ Treasury (30%) so the weighted average duration matches the market's 5.07 years -

I hope this helps -
Bob
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Post by Alex Frakt »

Swenson's success doesn't prove anything about the market, since only a fraction of what he invests is actually in the market. The majority of his holdings are direct ownership of businesses, real estate and direct commodity plays such as the ownership of oil fields and forests. No one ever said business opportunities don't exist for those with sufficient brains and resources.

If you don't have both the brains and the resources, it's pointless to try to invest like someone who does. The only way you can get into these things is through owning stock in publicly traded companies (i.e., participating in "the market") or by paying outlandish fees to private equity managers.

You'll note that the "If you can't beat the market, how do you explain xxx?" has traditionally been made about Warren Buffet. This is the same case, his alpha came from purchasing privately held businesses, managing them well, the extremely low cost of capital afforded to companies under his control (funded by the float from his insurance companies) and the occasional flier such as the cornering of the silver market.
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Re: Swensen

Post by richard »

Petrocelli wrote:
richard wrote:There are huge rewards available to those who can beat the market with any consistency. If you really believe you can consistently beat the market, you would be foolish to do anything other than devote full time to investing.
Unless, you make more money at your job than at investing. In that case, you shouldn't quit your day job.
Money managers who consistently beat the market are making many millions of dollars a year. You must have a very well paid day job.
Petrocelli wrote:In any event, can anyone explain to me why Swensen isn't simply the best coin-flipper? I know he has access to many investments which I do not have access to. However, numerous other money managers have access to these investments. Why does the coin-flipping analogy apply to mutual funds but not to those investing endowments?
See my post above the one you answered.
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Re: Swensen

Post by richard »

Valuethinker wrote:I suppose even a pure EMT person though, would concede that the evidence on PE funds is quite strong, so if you can presume privileged ability to pick PE funds (and to *reinvest* in the subsequent funds of the same partnership) that would be a form of 'skill'.
What evidence do you have? I don't believe that PE as a whole beats the market, certainly not on a risk adjusted basis. Some PE funds have done better than the market, most have not.

EMT 101 says you cannot beat the market. The graduate level course says beating the market is a competitive industry in which some may succeed, as in any competitive industry. However, the existence of market-beating skill does not really have any implications for you as an investor. GM was a skilled competitor and beat the market in car manufacturing for a while - look at it today. The odds of you being able to beat the market consistently approximate the odds of you beating Tiger Woods at a game of golf - possible but I wouldn't bet my retirement on it.
Valuethinker
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Re: Swensen

Post by Valuethinker »

richard wrote:
Valuethinker wrote:I suppose even a pure EMT person though, would concede that the evidence on PE funds is quite strong, so if you can presume privileged ability to pick PE funds (and to *reinvest* in the subsequent funds of the same partnership) that would be a form of 'skill'.
What evidence do you have? I don't believe that PE as a whole beats the market, certainly not on a risk adjusted basis. Some PE funds have done better than the market, most have not.
PE as a whole *with equivalent leverage* doesn't beat the SP500. Which given the fees that PE charges probably isn't too surprising (2 and 20 being a very deep hole to climb out of). I guess it would still have a diversification element (although I suspect statistical mirage: PE portfolios aren't marked to market, so their underlying volatility is likely closer to that of the SP500 than our data shows).

*but* the manager persistence effect is well known. The top quartile or so partnerships do, and successive partnerships run by the same managers do.

VC the situation is much more extreme. Almost all the excess performance of Venture Capital as an asset class over Nasdaq comes from the returns of about 10 partnerships in their successive funds.

Swensen talks about it in his book (not sure which one, possibly both) and if you look, eg at Josh Lerner's site at Harvard there are links to papers.

EMT 101 says you cannot beat the market.
Type I, Type II, Type III efficiency. Very few people think the market is Type III efficient: if you have non public information, you can beat the market.
The graduate level course says beating the market is a competitive industry in which some may succeed, as in any competitive industry.
The stuff I've seen says in mutual fund managers, they don't beat the market by enough to overcome the disadvantage of their fees. So there is manager skill, but not by enough.
However, the existence of market-beating skill does not really have any implications for you as an investor.
It does for Yale Endowment though ;-).
GM was a skilled competitor and beat the market in car manufacturing for a while - look at it today.
I'm not sure the appropriateness of that analogy? GM is not a Private Equity firm. Berkshire Hathaway would be the closest analogy out there-- it does behave much like a PE firm.
The odds of you being able to beat the market consistently approximate the odds of you beating Tiger Woods at a game of golf - possible but I wouldn't bet my retirement on it.
I think you started out by saying that Swensen had privileged access to Yale alumni who were in private equity, and that is why he outperforms in fund selection in that asset class?

Then you seemed to be saying that that it is actually random luck, he was just lucky in his choices of PE funds? And in his asset allocation in general? And that is why he turned down higher paid jobs, because he knew he was just lucky?

ie Yale's Endowment's success is simply the result of a coin toss. Some endowment had to be lucky, and it happened to be Yale.

It's a view ;-).
rwwoods
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Post by rwwoods »

Swensen recommends that the duration of our bond holdings equal the duration of the market. Is there some theory behind this recommendation such as max Sharpe Ratio, etc?
grok87
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Post by grok87 »

CyberBob wrote:
richard wrote:
CyberBob wrote:Image
Do you have a citation for this. Neither Swensen's book nor any interview I've seen includes a recommendation for short-term bonds.
That particular chart is from the Seeking Alpha Article mentioned in the original post.
However, as you can see in Rich's post above, Swensen's direct reply to Rich was that he himself doesn't say 'short', but rather 'duration matching the overall market'.
I remember seeing a similar 'retail' approximation of Swensen's portfolio in a few other articles, including one on CBS Marketwatch, where short bonds were mentioned. The assumption error has undoubtedly just been transferred along to the new articles that have been written.
David Swensen responding to Rich wrote:Thank you for your nice message - In response to your question about the bond portfolio, I would try to match the market characteristics - See the following chart -

Durations as of August 31, 2006:
Lehman US Treasury Index - 5.07
IShares 1-3 Treasury (SHY) - 1.67
IShares 7-10 Treasury (IEF) - 6.45
IShares 20+ Treasury (TLT) - 13.00

The easiest way to match the market would be to own some of the 1-3 Treasury (70%) and some of the 20+ Treasury (30%) so the weighted average duration matches the market's 5.07 years -

I hope this helps -
Bob
I find Swensen's advice fascinating, because obviously it would be much easier to match the market duration using SHY and IEF. But he deliberately barbells with SHY and TLT. I think this is consistent with his risk management approach. Barbelling reduces interest rate risk, assuming parallel yield curve shifts...

cheers
grok
joelesposito
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underwhelming

Post by joelesposito »

OK, its Uconv Success is a fine book for general public.
But for diehards...didnt you find this book underwhelming. I mean here is the guy who beat them all and he offered me no additional insight. Most of us could have written that book. No dicussion of any novel concepts or asset classes, value/size, commodities, intl realestate, some of the newer hedge like products or other alternative investments for individuals. No deep discussion of how he contructed the portfolio...
dex
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Re: Swensen

Post by dex »

Valuethinker wrote:
PE as a whole *with equivalent leverage* doesn't beat the SP500.
...

*but* the manager persistence effect is well known. The top quartile or so partnerships do, and successive partnerships run by the same managers do.
Here's a paper on private equity peformance persistence.
http://www.mit.edu/~aschoar/VCReturns15.pdf

Thanks to Valuethinker for responding to my PM request for additional information on PE performance, which lead me to this paper.
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