An hour with David Swensen at Council of Foreign Relations

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RNJ
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An hour with David Swensen at Council of Foreign Relations

Post by RNJ » Fri Nov 17, 2017 7:51 am

Swensen interviewed by Robert Rubin. A great hour. Wow.

https://www.cfr.org/event/conversation- ... -411901981

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Re: An hour with David Swensen at Council of Foreign Relations

Post by RNJ » Fri Nov 17, 2017 8:07 am

There is a transcript of the interview. Here is one of many great nuggets:

"You know, I have never been a big fan of quantitative approaches to investment. And the fundamental reason is that I can’t understand what’s in the black box. And if I don’t know what’s in the black box, and there’s underperformance, I don’t know if the black box is broken or if it’s out of favor. And if it’s broken, you want to stop. And if it’s out of favor, you want to increase your exposure.

And so I’m an old-fashioned guy that wants to sit across the table from somebody who’s done the analysis and understand why they own the position. And then if it goes against them, I can have another conversation and try and figure out whether the thesis was wrong and we should exit, or whether the thesis is intact and we should increase the position. And I don’t understand any other way to invest."

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Re: An hour with David Swensen at Council of Foreign Relations

Post by midareff » Fri Nov 17, 2017 8:12 am

RNJ wrote:
Fri Nov 17, 2017 8:07 am
There is a transcript of the interview. Here is one of many great nuggets:

"You know, I have never been a big fan of quantitative approaches to investment. And the fundamental reason is that I can’t understand what’s in the black box. And if I don’t know what’s in the black box, and there’s underperformance, I don’t know if the black box is broken or if it’s out of favor. And if it’s broken, you want to stop. And if it’s out of favor, you want to increase your exposure.

And so I’m an old-fashioned guy that wants to sit across the table from somebody who’s done the analysis and understand why they own the position. And then if it goes against them, I can have another conversation and try and figure out whether the thesis was wrong and we should exit, or whether the thesis is intact and we should increase the position. And I don’t understand any other way to invest."
Perfect!

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Re: An hour with David Swensen at Council of Foreign Relations

Post by rutrow2015 » Fri Nov 17, 2017 9:05 am

DS claims long term returns of better than 13% ... all while having a 'fixed income' position of between 15 to 35%.

Think on that and draw your own conclusions.

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Re: An hour with David Swensen at Council of Foreign Relations

Post by staustin » Fri Nov 17, 2017 9:12 am

returns juiced by private equity holdings apparently.

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Re: An hour with David Swensen at Council of Foreign Relations

Post by Ron Scott » Fri Nov 17, 2017 9:21 am

RNJ wrote:
Fri Nov 17, 2017 8:07 am
There is a transcript of the interview. Here is one of many great nuggets:

"You know, I have never been a big fan of quantitative approaches to investment. And the fundamental reason is that I can’t understand what’s in the black box. And if I don’t know what’s in the black box, and there’s underperformance, I don’t know if the black box is broken or if it’s out of favor. And if it’s broken, you want to stop. And if it’s out of favor, you want to increase your exposure.

And so I’m an old-fashioned guy that wants to sit across the table from somebody who’s done the analysis and understand why they own the position. And then if it goes against them, I can have another conversation and try and figure out whether the thesis was wrong and we should exit, or whether the thesis is intact and we should increase the position. And I don’t understand any other way to invest."
What he's describing is the security analysts' put down of technical analysts. He "sits across the table" and tries to understand the "thesis" of some other security analyst who "owns the position"? What a joke.

Technical analysts and security analysts are the twin guardians of Wall Street's money grabbing marketing play. (Give me 1% of your net worth and I'll promise you anything.) He works on the 48th floor and the technical guys work on the 49th. Ying and Yang.

Well, in response to the question I bolded above, I'll tell you another way to invest. Ignore the Wall Street marketers and put the equity portion of your portfolio in low-cost index funds, a total market fund or the S&P500, and hold for the long term.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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Re: An hour with David Swensen at Council of Foreign Relations

Post by nedsaid » Fri Nov 17, 2017 10:16 am

Ron Scott wrote:
Fri Nov 17, 2017 9:21 am
RNJ wrote:
Fri Nov 17, 2017 8:07 am
There is a transcript of the interview. Here is one of many great nuggets:

"You know, I have never been a big fan of quantitative approaches to investment. And the fundamental reason is that I can’t understand what’s in the black box. And if I don’t know what’s in the black box, and there’s underperformance, I don’t know if the black box is broken or if it’s out of favor. And if it’s broken, you want to stop. And if it’s out of favor, you want to increase your exposure.

And so I’m an old-fashioned guy that wants to sit across the table from somebody who’s done the analysis and understand why they own the position. And then if it goes against them, I can have another conversation and try and figure out whether the thesis was wrong and we should exit, or whether the thesis is intact and we should increase the position. And I don’t understand any other way to invest."
What he's describing is the security analysts' put down of technical analysts. He "sits across the table" and tries to understand the "thesis" of some other security analyst who "owns the position"? What a joke.

Technical analysts and security analysts are the twin guardians of Wall Street's money grabbing marketing play. (Give me 1% of your net worth and I'll promise you anything.) He works on the 48th floor and the technical guys work on the 49th. Ying and Yang.

Well, in response to the question I bolded above, I'll tell you another way to invest. Ignore the Wall Street marketers and put the equity portion of your portfolio in low-cost index funds, a total market fund or the S&P500, and hold for the long term.
Except Swenson isn't marketing to us, he runs the Yale Endowment. He is not part of the Wall Street hype machine.
A fool and his money are good for business.

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Re: An hour with David Swensen at Council of Foreign Relations

Post by Ron Scott » Fri Nov 17, 2017 10:38 am

nedsaid wrote:
Fri Nov 17, 2017 10:16 am


Except Swenson isn't marketing to us, he runs the Yale Endowment. He is not part of the Wall Street hype machine.
That approach DRIVES the rhetoric of the machine, the belief in "fundamentals" and security analysis as a predictor of performance.

The company I worked for currently trades at about $85. The 20 analysts who follow the stock each write extensive reports on it, with quarterly updates. The "consensus" PT is $90 with a range of 75-100. They're all over the place and the company has beaten their EPS and sales projections that only run a quarter out more times than not. In the broader market, the mutual funds driven by this approach do worse than the S&P.

People have created elaborate languages to explain what they do and even behave internally consistent with their theories but they do not beat the market over the long term.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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Re: An hour with David Swensen at Council of Foreign Relations

Post by nedsaid » Fri Nov 17, 2017 10:49 am

Ron Scott wrote:
Fri Nov 17, 2017 10:38 am
nedsaid wrote:
Fri Nov 17, 2017 10:16 am


Except Swenson isn't marketing to us, he runs the Yale Endowment. He is not part of the Wall Street hype machine.
That approach DRIVES the rhetoric of the machine, the belief in "fundamentals" and security analysis as a predictor of performance.

The company I worked for currently trades at about $85. The 20 analysts who follow the stock each write extensive reports on it, with quarterly updates. The "consensus" PT is $90 with a range of 75-100. They're all over the place and the company has beaten their EPS and sales projections that only run a quarter out more times than not. In the broader market, the mutual funds driven by this approach do worse than the S&P.

People have created elaborate languages to explain what they do and even behave internally consistent with their theories but they do not beat the market over the long term.
Wall Street is an expectations game. A big reason that many investors underperform is that they get caught up in the hype and overpay for their investments.

Years ago, I was watching Nightly Business Report with my father. Chrysler had a good earnings report and the stock went down! Dad couldn't believe it. I explained that it was all about expectations, the news was good but the market expected the good news to be even better.

Fundamentals are important, particularly earnings, hence the old saying that money follows earnings. It isn't the focus on fundamentals that is wrong, it is the short term orientation of the analysts. But if you don't create excitement, people won't buy. So you need the buzz. Wall Street needs to get people exciting about what they don't own and what they "need" to buy. Conversely, Wall Street also has to get you dissatisfied with what you already have in hopes that you will trade. Pretty much, if you don't have trading volume, the Wall Street firms can't make money.
A fool and his money are good for business.

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Re: An hour with David Swensen at Council of Foreign Relations

Post by lazyday » Fri Nov 17, 2017 4:08 pm

I struggled with his argument in Pioneering Portfolio Management against timing interest rates. So found this interesting:
if you looked at Yale’s bond portfolio 20 years ago, probably a market portfolio, market duration …. But as rate came down, we systematically reduced the duration of our bond portfolio. And today it’s probably nine months or a year. And so we don’t think there is any point in—hey, Marty. (Laughter.) My first boss from Salomon Brothers [gesturing to someone in audience] laughing because I told him I would never make any interest rate bets. And here I am, describing an interest rate bet to a room full of people. (Laughter.) We don’t see any point of owning 30-year Treasurys if the yield is 2 ½ percent.
Q starts at 37:20

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RNJ
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Re: An hour with David Swensen at Council of Foreign Relations

Post by RNJ » Fri Nov 17, 2017 5:35 pm

Ron Scott wrote:
Fri Nov 17, 2017 9:21 am
RNJ wrote:
Fri Nov 17, 2017 8:07 am
There is a transcript of the interview. Here is one of many great nuggets:

"You know, I have never been a big fan of quantitative approaches to investment. And the fundamental reason is that I can’t understand what’s in the black box. And if I don’t know what’s in the black box, and there’s underperformance, I don’t know if the black box is broken or if it’s out of favor. And if it’s broken, you want to stop. And if it’s out of favor, you want to increase your exposure.

And so I’m an old-fashioned guy that wants to sit across the table from somebody who’s done the analysis and understand why they own the position. And then if it goes against them, I can have another conversation and try and figure out whether the thesis was wrong and we should exit, or whether the thesis is intact and we should increase the position. And I don’t understand any other way to invest."

What he's describing is the security analysts' put down of technical analysts. He "sits across the table" and tries to understand the "thesis" of some other security analyst who "owns the position"? What a joke.

Technical analysts and security analysts are the twin guardians of Wall Street's money grabbing marketing play. (Give me 1% of your net worth and I'll promise you anything.) He works on the 48th floor and the technical guys work on the 49th. Ying and Yang.

Well, in response to the question I bolded above, I'll tell you another way to invest. Ignore the Wall Street marketers and put the equity portion of your portfolio in low-cost index funds, a total market fund or the S&P500, and hold for the long term.
Have you read his books?

grok87
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Re: An hour with David Swensen at Council of Foreign Relations

Post by grok87 » Fri Nov 17, 2017 5:38 pm

Great interview- thanks for posting.

Just a heads up that the transcript is not perfect. Pretty sure he said "absolute return portfolio" in this quote

"SWENSEN: No. Well, within the absence of return portfolio, a lot of the long/short managers or a lot of the other strategies have residual equity exposure. "
RIP Mr. Bogle.

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Re: An hour with David Swensen at Council of Foreign Relations

Post by TheAncientOne » Fri Nov 17, 2017 5:57 pm

Doing a quick search, I can't find an article that describes Yale's asset allocation but I recall that they have a very small portion in domestic equities. What Swenson did, and others managing large endowments have followed, is to put a large percentage of their portfolio in illiquid assets such as venture capital, private equity, and even farm and timber land. The theory is that the endowment does not need to have a high percentage of assets in liquid investments and can instead find investment opportunities that will compensate Yale for taking on illiquid positions.

A number of far smaller endowments have tried to emulate Yale's model with results that have ranged from mediocre to downright disastrous. A huge, high prestige endowment like Yale has access to the very best talent in fields like VC and PE, which is an incredible advantage in those fields. I do believe that Swenson has also said that the individual investor is best suited by low cost index funds.

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Re: An hour with David Swensen at Council of Foreign Relations

Post by Robert T » Sun Nov 19, 2017 7:03 am

.
Thanks for sharing - always good to hear what Swensen has to say. I found the part on uncorrelated assets interesting - here's an extract from the transcript.

  • One of the most important metrics that we look at is the percentage of the portfolio that’s in what we call uncorrelated assets. And that’s a combination of absolute return, cash, and short-term bonds. And those are the assets that would protect the endowment in the event of a market crisis. Prior to the downturn in 2008, we were probably about 30 percent in uncorrelated assets. But over the years subsequent to the crisis, we’ve rebuilt our uncorrelated assets position to an excess of 30 percent. And we’re currently targeting about 32 ½ percent, which is somewhat above the long-term goal. … We worked very hard to engineer absolute return to have as little correlation to market as possible.

From the 2016 Yale Endowment report the target allocation to absolute return, fixed income, and cash as of June 2016 was:
  • Absolute return = 22.5%
    Fixed Income = 5.0%
    Cash = 2.5%
    Total = 30.0% percent
Need to have significant faith in ability to select superior active managers with most of the 30% “uncorrelated assets” in Absolute Return (with little correlation to market i.e. zero beta).

10 yr Annualized Return (%) - 2007-2016 / 2008 return (%) / correlation with stocks (MSCI ACWI)
  • -0.7 / -13.1 / +0.65 = HFRX Absolute Return Index
    -0.4 / -1.2 / -0.14 = HFRX Equity Market Neutral Index
    +4.4 / +13.3 / -0.74 = Vanguard Intermediate Treasury
The less than zero % return on average for Absolute Return and Equity Market Neutral seems consistent with an efficient market i.e. zero net return from long plus shorts minus fees.

From above, best performer on 10 year returns, 2008 downside, and correlation with equities = fixed income (US treasuries). i.e. on average, the best “alternative investment” to stocks was bonds (US treasuries).

Robert
.

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Re: An hour with David Swensen at Council of Foreign Relations

Post by grok87 » Sun Nov 19, 2017 8:06 am

Robert T wrote:
Sun Nov 19, 2017 7:03 am
.
Thanks for sharing - always good to hear what Swensen has to say. I found the part on uncorrelated assets interesting - here's an extract from the transcript.

  • One of the most important metrics that we look at is the percentage of the portfolio that’s in what we call uncorrelated assets. And that’s a combination of absolute return, cash, and short-term bonds. And those are the assets that would protect the endowment in the event of a market crisis. Prior to the downturn in 2008, we were probably about 30 percent in uncorrelated assets. But over the years subsequent to the crisis, we’ve rebuilt our uncorrelated assets position to an excess of 30 percent. And we’re currently targeting about 32 ½ percent, which is somewhat above the long-term goal. … We worked very hard to engineer absolute return to have as little correlation to market as possible.

From the 2016 Yale Endowment report the target allocation to absolute return, fixed income, and cash as of June 2016 was:
  • Absolute return = 22.5%
    Fixed Income = 5.0%
    Cash = 2.5%
    Total = 30.0% percent
Need to have significant faith in ability to select superior active managers with most of the 30% “uncorrelated assets” in Absolute Return (with little correlation to market i.e. zero beta).

10 yr Annualized Return (%) - 2007-2016 / 2008 return (%) / correlation with stocks (MSCI ACWI)
  • -0.7 / -13.1 / +0.65 = HFRX Absolute Return Index
    -0.4 / -1.2 / -0.14 = HFRX Equity Market Neutral Index
    +4.4 / +13.3 / -0.74 = Vanguard Intermediate Treasury
The less than zero % return on average for Absolute Return and Equity Market Neutral seems consistent with an efficient market i.e. zero net return from long plus shorts minus fees.

From above, best performer on 10 year returns, 2008 downside, and correlation with equities = fixed income (US treasuries). i.e. on average, the best “alternative investment” to stocks was bonds (US treasuries).

Robert
.
Robert,
Thanks for posting the HFRX data. I agree that the returns have not been good for market-netural over the 2007-2016 period. Interestingly for market-neutral, 2009 was the worst year with -4.5% annual return. I suspect many market-netural funds got caught on the wrong side of the momentum trade- i.e. momentum reversed sharply in 2009.

Assuming fees of 2/20, gross CAGR for 2007-2016 would be about 2% or a gross-of-fees sharpe ratio of about 0.3%.

cheers,
grok
RIP Mr. Bogle.

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David Swensen Comments (Nov 2017)

Post by simplesauce » Thu Nov 23, 2017 6:12 pm

[merged this post into the existing thread - moderator prudent]

In a recent interview, David Swensen discussed his thoughts on investing internationally, and his thoughts on the US. I found them interesting:

https://www.cfr.org/event/conversation-david-swensen
SWENSEN: The types of questions that you need to ask with respect to where you’re investing are the bedrock for putting together your asset allocation. And when I look around the world, there are places that we just won’t invest; Russia. If the rule of law is not followed, then you know whether or not you own anything. And if you don’t know whether or not you own it, then why would you put—why would you put your funds there?

And as we look around the world, in spite of the problems that we face in the United States, this is one of the best environments in which to invest. I think that the breadth of emerging markets that we were interested in 20 years ago has narrowed dramatically, which I think is incredibly unfortunate. You would have hoped that you’d have 20 years of progress instead of enormous amounts of backsliding in many of the markets that we once found attractive.

And there are some very interesting things going in Japan, one of the places I’m most optimistic about. It seems like capitalism might actually be taking root, making progress there. And, you know, selectively in Europe we’re seeing some opportunities. But the United States is still, I think, the market in which we’re most comfortable, our current political problems notwithstanding.

RUBIN: How do you feel about China?

SWENSEN: China is an area that makes me incredibly nervous, but at the same time we’re heavily committed there. And I have had great relationships with a handful of managers in China that have produced extraordinary returns. But the party’s commitment to capitalism doesn’t seem as steadfast as I might have thought five or 10 years ago. And that makes me nervous.

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Re: David Swensen Comments (Nov 2017)

Post by grok87 » Fri Nov 24, 2017 5:55 am

simplesauce wrote:
Thu Nov 23, 2017 6:12 pm
[merged this post into the existing thread - moderator prudent]

In a recent interview, David Swensen discussed his thoughts on investing internationally, and his thoughts on the US. I found them interesting:

https://www.cfr.org/event/conversation-david-swensen
SWENSEN: The types of questions that you need to ask with respect to where you’re investing are the bedrock for putting together your asset allocation. And when I look around the world, there are places that we just won’t invest; Russia. If the rule of law is not followed, then you know whether or not you own anything. And if you don’t know whether or not you own it, then why would you put—why would you put your funds there?

And as we look around the world, in spite of the problems that we face in the United States, this is one of the best environments in which to invest. I think that the breadth of emerging markets that we were interested in 20 years ago has narrowed dramatically, which I think is incredibly unfortunate. You would have hoped that you’d have 20 years of progress instead of enormous amounts of backsliding in many of the markets that we once found attractive.

And there are some very interesting things going in Japan, one of the places I’m most optimistic about. It seems like capitalism might actually be taking root, making progress there. And, you know, selectively in Europe we’re seeing some opportunities. But the United States is still, I think, the market in which we’re most comfortable, our current political problems notwithstanding.

RUBIN: How do you feel about China?

SWENSEN: China is an area that makes me incredibly nervous, but at the same time we’re heavily committed there. And I have had great relationships with a handful of managers in China that have produced extraordinary returns. But the party’s commitment to capitalism doesn’t seem as steadfast as I might have thought five or 10 years ago. And that makes me nervous.
Thanks, always good to get an update on Swensen's views on international investing. In unconventional success he explicitly argued for emerging markets. His total international stock allocation was 40% of total stocks. Vanguard has come around to his view.

If we compare the prospective PE ratios of EM, the US and japan, as per morningstar we see

EM = 15
US= 21
japan = 15

http://portfolios.morningstar.com/fund/summary?t=VWO

Cheers
Grok
RIP Mr. Bogle.

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Re: An hour with David Swensen at Council of Foreign Relations

Post by Stick5vw » Sun Dec 31, 2017 9:30 am

The question I always have when reading about the Yale portfolio, or the portfolio of many other large institutional investors, is how can a regular investor like me access such investments, given the portfolios heavily skew towards PE and such?

These guys are presumably the "smart money" (although not all the time!) and will have access to deals and investment opportunities that I'll never see.

I've not read Swensen's books but mentally I just can't see how I'd ever be able to build such a portfolio or apply many of these principles. Is there a way for us to do this, or is the best guidance still to focus on a few index funds and call it a day?

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Re: An hour with David Swensen at Council of Foreign Relations

Post by Whiggish Boffin » Sun Dec 31, 2017 10:12 am

Stick5vw --

Swensen's book for individual investors is Unconventional Success. The preface says:
When I began my work on Unconventional Success, I contemplated writing a different book... Pioneering Portfolio Management [his book for institutional investors] describes an equity-oriented, broadly diversified, actively-managed investment program. I expected that Unconventional Success would resemble Pioneering Portfolio Management, adjusting only for differences between the resources and instruments available to institutions and to individuals.

... the data clearly pointed to the failure of active management by profit-seeking mutual fund managers to produce satisfactory results for individual investors. Following the evidence, I concluded that individuals fare best by constructing equity-oriented, broadly diversified portfolios without the active-management component. Instead of pursuing ephemeral promises of market-beating strategies, individuals benefit from adopting the ironclad reality of market-mimicking portfolios managed by not-for-profit investment organizations.
Chapter 4 is Non-Core Asset Classes -- the things you shouldn't own:
Corporate bonds
Junk bonds
Tax-exempt bonds
Asset-backed securities
Foreign bonds
Hedge funds
Leveraged buyouts
Venture capital
The Yale endowment does own some of these classes. Swensen holds that individual investors do not have enough money to get decent, or even non-predatory, deals in these classes as the endowment can.

So, "Don't try this at home!" He likes Vanguard, and recommends an index-fund portfolio with a big slice of REITs: 30% US stock, 20% int'l stock, 20% real estate, 15% Treasury bonds, 15% TIPS. (He's made small shifts since then -- 5% less real estate, 5% more international). Rebalance to those targets. On nearing retirement, put about 5 years' living expenses into bonds and 2 years' into cash.

This is a pretty Bogleheadish portfolio, and not very much like what he does at work for Yale.

(Edited for typos.)
Last edited by Whiggish Boffin on Mon Jan 01, 2018 11:17 am, edited 1 time in total.

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Re: An hour with David Swensen at Council of Foreign Relations

Post by afan » Sun Dec 31, 2017 12:13 pm

Remember it is not just that giant endowments have so much more money that they can access investments not available to individuals. The institutions they serve are also different than people. Yale plans to be around forever. It will never "retire". It will continue to generate income from tuition, grants and philanthropy. In future severe downturns Yale can cut expenses as much as required. Most prominent universities in the country manage to operate with nothing approaching the level of endowment support that Yale enjoys. It can layoff staff and economize in many ways. It will never face the individual equivalent of being homeless or starving.

It can tolerate illiquid investments better than wealthy individuals. If the rest if us could access quality private equity or direct investment in diversified real estate for it is not clear we would want to.

Yale's model may suit a huge endowment but individual investors are so different in our needs that we may not want the same risk profile.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: An hour with David Swensen at Council of Foreign Relations

Post by grok87 » Mon Jan 01, 2018 9:47 am

Whiggish Boffin wrote:
Sun Dec 31, 2017 10:12 am
Stick5vw --

Swensen's book for individual investors is Unconventional Success. The preface says:
When I began my work on Unconventional Success, I contemplated writing a diferent book... Pioneering Portfolio Management [his book for institutional investors] describes an equity-oriented, broadly diversified, actively-managed investment program. I expected that Unconventional Success would resemble Pioneering Portfolio Management, adjusting only for differences between the resources and instruments available to institutions and to individuals.

... the data clearly pointed to the failure of active management by profit-seeking mutual fund managers to produce satisfactory results for individual inveators. Following the evidnce, I concluded that individuals fare best by constructing equity-oriented, broadly diversified portfolios without the active-management component. Instead of pursuing ephemeral promises of market-beating strategies, individuals benefit from adopting the ironclad reality of market-mimicking portfolios managed by not-for-profit investment organizations.
Chapter 4 is Non-Core Asset Classes -- the things you shouldn't own:
Corporate bonds
Junk bonds
Tax-exempt bonds
Asset-backed securities
Foreign bonds
Hedge funds
Leveraged buyouts
Venture capital
The Yale endowment does own some of these classes. Swensen holds that individual investors do not have enough money to get decent, or even non-predatory, deals in these classes as the endowment can.

So, "Don't try this at home!" He likes Vanguard, and recommends an index-fund portfolio with a big slice of REITs: 30% US stock, 20% int'l stock, 20% real estate, 15% Treasury bonds, 15% TIPS. (He's made small shifts since then -- 5% less real estate, 5% more international). Rebalance to those targets. On nearing retirement, put about 5 years' living expenses into bonds and 2 years' into cash.

This is a pretty Bogleheadish portfolio, and not very much like what he does at work for Yale.
good summary.

my recollection is that Swensen is a bit less opposed to muni bonds. yes he doesn't like them. but i think he says something like he "wanted to like them" or something like that. it makes me wonder if there are certain segments of the muni bond market he might think are acceptable for individual investors.

regarding foreign bonds, i am not a fan either but in fairness swensen wrote his book before vanguard came out with their cheap foreign bond hedged index funds. i wonder what he would think now...
RIP Mr. Bogle.

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Re: An hour with David Swensen at Council of Foreign Relations

Post by simplesauce » Mon Jan 01, 2018 11:50 am

grok87 wrote:
Mon Jan 01, 2018 9:47 am
Whiggish Boffin wrote:
Sun Dec 31, 2017 10:12 am
Stick5vw --

Swensen's book for individual investors is Unconventional Success. The preface says:
When I began my work on Unconventional Success, I contemplated writing a diferent book... Pioneering Portfolio Management [his book for institutional investors] describes an equity-oriented, broadly diversified, actively-managed investment program. I expected that Unconventional Success would resemble Pioneering Portfolio Management, adjusting only for differences between the resources and instruments available to institutions and to individuals.

... the data clearly pointed to the failure of active management by profit-seeking mutual fund managers to produce satisfactory results for individual inveators. Following the evidnce, I concluded that individuals fare best by constructing equity-oriented, broadly diversified portfolios without the active-management component. Instead of pursuing ephemeral promises of market-beating strategies, individuals benefit from adopting the ironclad reality of market-mimicking portfolios managed by not-for-profit investment organizations.
Chapter 4 is Non-Core Asset Classes -- the things you shouldn't own:
Corporate bonds
Junk bonds
Tax-exempt bonds
Asset-backed securities
Foreign bonds
Hedge funds
Leveraged buyouts
Venture capital
The Yale endowment does own some of these classes. Swensen holds that individual investors do not have enough money to get decent, or even non-predatory, deals in these classes as the endowment can.

So, "Don't try this at home!" He likes Vanguard, and recommends an index-fund portfolio with a big slice of REITs: 30% US stock, 20% int'l stock, 20% real estate, 15% Treasury bonds, 15% TIPS. (He's made small shifts since then -- 5% less real estate, 5% more international). Rebalance to those targets. On nearing retirement, put about 5 years' living expenses into bonds and 2 years' into cash.

This is a pretty Bogleheadish portfolio, and not very much like what he does at work for Yale.
good summary.

my recollection is that Swensen is a bit less opposed to muni bonds. yes he doesn't like them. but i think he says something like he "wanted to like them" or something like that. it makes me wonder if there are certain segments of the muni bond market he might think are acceptable for individual investors.

regarding foreign bonds, i am not a fan either but in fairness swensen wrote his book before vanguard came out with their cheap foreign bond hedged index funds. i wonder what he would think now...
He also wrote this book before the 2008-2009 crisis. I wonder how he would have written it differently.

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Hayden
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Re: An hour with David Swensen at Council of Foreign Relations

Post by Hayden » Mon Jan 01, 2018 1:46 pm

He said his bonds were short term, and he favored Treasuries to corporate bonds. Do that mean he does not agree with the Boglehead approach of buying Total Bond Fund?

grok87
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Re: An hour with David Swensen at Council of Foreign Relations

Post by grok87 » Mon Jan 01, 2018 2:39 pm

Hayden wrote:
Mon Jan 01, 2018 1:46 pm
He said his bonds were short term, and he favored Treasuries to corporate bonds. Do that mean he does not agree with the Boglehead approach of buying Total Bond Fund?
correct he does not.

in unconventional success he views bonds not as sources of good long term returns but as diversifiers.

i personally was a bit surprised by his comment in the interview that he favored short term treasuries because he didn't like the risk/return of longer term treasuries...

in unconventional success i think he is fairly neutral about duration.

in his earlier book pioneering portfolio managment, he makes the case that long term treasuries provide the best diversification...
RIP Mr. Bogle.

Fclevz
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Re: An hour with David Swensen at Council of Foreign Relations

Post by Fclevz » Tue Jan 02, 2018 12:29 pm

Whiggish Boffin wrote:
Sun Dec 31, 2017 10:12 am
On nearing retirement, put about 5 years' living expenses into bonds and 2 years' into cash.
Is that a Swensen suggestion or quote?
In Unconventional Success he mentions moving more money to cash as the time you need it approaches, while leaving the core portfolio intact as to stock/bond ratio. Is he now recommending the 5 years bonds/2 years cash somewhere for retirees? I didn't see it in the interview linked above. Or did I miss it? :D

Cheers,
Fred

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Whiggish Boffin
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Re: An hour with David Swensen at Council of Foreign Relations

Post by Whiggish Boffin » Tue Jan 02, 2018 2:27 pm

Fred--

That was my too-brief summary of Unconventional Success Chapter 3, Portfolio Construction, and Figure 3.1: Investors Reduce Their Risk As Time Horizon Shortens.

Swensen's figure is the well-known return vs. risk graph from modern portfolio theory, with the Markowitz bullet giving the efficient frontier, and the capital-market line, tangent to the bullet and intersecting the riskless rate of return. He says that money for expenses 10 years or more away should be on the bullet, at the tangent point. As the expense draws nearer, move down the capital-market line by putting more money into the riskless asset, and be all-riskless when the expense is due.
"For periods of one to two years or less, investors ought to favor bank deposits, money-market funds, or short-term bond funds.
...
The investor with a long-term horizon [> 10 years] begins with a portfolio composed entirely of risky assets. Then, as the investment horizon contracts [10 down to 2 years] , the investor moves assets from high-risk to low-risk positions. Ultimately, when one or two years remain before expenditure of the funds, the portfolio consists entirely of low-risk positions."
So, for ongoing living expenses in retirement, if you do that shift continuously for each year's expenses, you'll have about five years' expenses in bonds and cash outside of the risky-asset portfolio.

Swensen applies this shift to any expected expense, not just ongoing living expenses, but also big lump sums like kids' college, new house, or world cruise. I simplified those away.

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