Yale & Swensen

Ótimo artigo sobre a performance de Swensen na administração da fundação de Yale.

Long View: Yale puts academic theory of investment into practice

(From FT.com, provided by LexisNexis) | 9 June 2007 Saturday 1:45 AM GMT

Yale University is a privileged institution. Its graduates go on to great power. George W. Bush was educated there, as were his predecessor Bill Clinton, his father George H.W. Bush, vice-president Dick Cheney and the man he beat in 2004, Senator John Kerry.

An Ivy League institution, it has long been one of the world's most prestigious universities. But maybe its greatest privilege is to have David Swensen as the manager of its endowment fund.

When he took over the endowment in 1985, it was worth slightly more than $1bn. By June 30 last year it had reached $18bn. The best-performing US endowment in that time, it has easily beaten the S&P 500, with staggeringly low volatility.

During the bear market of 2001-02, Peter Bernstein reports in his recently published book Capital Ideas Evolving, Yale rose 10 per cent while the S&P dropped 30 per cent.

The way Swensen made his returns is revolutionising the fund management industry. Only 4 per cent is in fixed income. And only 27 per cent is in public equities.

All the rest is in alternative assets, which are not readily marketable: 25 per cent is in "absolute return" hedge funds, which attempt to generate returns uncorrelated to the market; 17 per cent is in private equity; and 27 per cent in "real assets" property, oil fields and forestry.

This apparently bizarre mixture, which Swensen calls an "uninstitutional portfolio", inspired the booms in private equity and hedge funds, and the rush to offer hedge fund-like products to retail investors.

Nobody bar Warren Buffett commands more attention from the fund management industry. So I was glad to hear him speak on home turf last weekend, when I accompanied my wife, a Yale graduate, to her 20th anniversary reunion.

The returning students, who graduated just as Swensen was taking over, were stunned by the dramatic improvements to what had been a threadbare campus. He gave a brief, very modest speech to explain to them how it was done.

"Investment management is a simple business," he said. It came down to two principles. First, equities are best for the long run (as proved by many surveys). "With a portfolio like Yale's, with a time horizon measured in centuries, everyone would come to the same conclusion: it's far better to have equities in your portfolio than bonds or cash." By equity, he means any asset where there is a potential upside that can be taken by the investor.

His second principle is simpler: "Diversification is important."

The economist James Tobin, who once taught Swensen at Yale, summed up the idea that won him a Nobel prize with the words: "Don't put all your eggs in one basket." Swensen has aggressively applied the diversification concepts of the capital asset pricing model (CAPM) that Tobin helped to develop.

In 1985 the endowment Swensen inherited had 40 per cent in bonds and 10 per cent in a smattering of alternatives. "That made no sense," he told alumni.

When rebuilding the portfolio, he said, three tools were open to him asset allocation, market timing and security selection.

The first, as the model told him, was most important. CAPM also led him to deride attempts to time the market. If asset prices go on a "random walk", the theory says, then market timing is impossible.

But some experts regard his asset allocation as a form of market timing. He adjusts regularly to keep in line with his target allocation. If equities have risen, he sells enough to bring them down to the target percentage.

This led him to buy equities to the discomfort of his trustees after the Black Monday crash of 1987, when most endowments were selling. That turned out to be great timing.

What of security selection? CAPM suggests this is a mug's game. If prices adjust to include all known information, good stock-picking can be done only by luck.

His solution was to buy assets outside the public markets that are not so efficient. Assets such as private equity and timber have the added advantage that they are uncorrelated.

Is this something you should try at home? Swensen thinks not. "I know it's necessary to be humble," he told the gathered alumni, "but I think Yale is set up to make high-quality active management decisions." It has a staff of 20, and its time horizon means it can buy illiquid investments such as forestry.

Alternatively, he says, "you are in the category in which most investors find themselves, where they aren't set up to make quality active asset allocation decisions. They should manage their portfolio passively, through low-cost index funds."

This is the logic of CAPM. By the same logic that led him to forests and hedge funds, most of us should buy index funds.

Endowments can all learn from Yale's experience. Swensen is on Cambridge University's investment committee. Many others should follow his example.

As for my wife and her fellow alumni, they were suitably impressed. Too bad Swensen's wealth came too late for them.