Tuesday, January 13, 2009

The WSJ Interviews David Swensen

The Wall Street Journal interviews David Swensen, the influential portfolio manager for the Yale endowment.  Swensen is pitching a revised copy of his book, Pioneering Portfolio Management.
WSJ: Does the poor performance of most assets last year suggest you need to tinker with the endowment's portfolio to better withstand another year like 2008?

Mr. Swensen: I don't think it makes sense for an institutional investor with as long an investment horizon as Yale's to structure a portfolio to perform well in a period of financial crisis. That would require moving away from equity-oriented investments that have served institutions with long time horizons well.
He's a smart guy, with good ideas.  An endowment like Yale has unique and different objectives then most investors.  Everyone says they are in it for the long term, but an endowment is in a different category then individuals or most institutions.  

Yale has some huge advantages.  It's big enough to afford the best resources.  Yet it is "only" $30 billion or so.  The reason I use the word "only" is that it is roughly 1/10 the size of CALPERS  and there are real limits of scale when dealing with a lot of alternative assets.  Just how much money can be put to work in Timber, for example?  Not much.  Real estate doesn't seem t me to be an asset class per se.  It's easy to say now, but it isn't "exposure" to real estate that one should be looking for.  Rather it is exposure to a real estate strategy that offers more then just loading up on a commodity.

Based on my earlier post and the endowment interested in total return, time diversification is not, in and of itself, an advantage.  This would argue for the type of diversification sought by Swensen.

However, this year the winning alternatives all fell apart in the fall and it suddenly seemed a lot less smart.  Emerging markets, betting against the dollar, commodities, etc.  

If there really is "excess alpha" out there, Yale is going to be at the front of the line.  I'm not sure it exists -- but if it does exist, there isn't a lot of it

I haven't read the book, but the idea of pension funds trying to square the circle by letting investment firms sell them a canned version of Yale's strategy is obviously a fundamentally bad idea.  

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