Swenson on Consuelo Mack -- Part Two

A must see and must read the transcript when it comes out.

At beginning of the program Consuelo posts a board and says it too:

Yale Endowment Asset Mix
Domestic Stocks & Bonds
Decreased from 71.9% to 14.1%

This is either in error, or it means Swensen has greatly further lowered his US equities and bonds from what he said in his first interview with her in May. Click on my label "Swensen" to see the transcript from that interview.

The following indicates it is not in error:
Yale’s Swensen Recommends TIPS to Hedge ‘Substantial Inflation’
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By Gillian Wee
May 23 (Bloomberg) -- David Swensen, the top-ranked college endowment manager in the
past decade, said individual investors should own inflation-protected Treasuries
because U.S. economic recovery efforts may lead to an increase in consumer
prices.
“We’ve had this massive fiscal stimulus, massive monetary stimulus,
and it’s hard to see how that doesn’t translate into pretty substantial
inflation, or at least pretty substantial risk of inflation,” Swensen, Yale
University’s investment chief, said in an interview on the “Consuelo Mack WealthTrack” television show that aired
yesterday. Treasury Inflation- Protected Securities “should be in every
investor’s portfolio," he said.
President Barack Obama’s administration on May 11 raised its estimate for
this year’s federal deficit by 5 percent to a record $1.84 trillion as the
recession reduces tax receipts and increases the costs of propping up the
economy. U.S. consumer prices may rise 1.6 percent in 2010, according to the
median forecast of 57 economists in a Bloomberg News survey.
That compares
with a median decline of 0.7 percent forecast for this year. Inflation averaged
2.9 percent in the past three years.
‘‘The stimulus, the significant
government actions in the last six months have focused the heads of a lot of
investors on potential inflation,” James Platz, a fund manager at American Century Investments in
Mountain View, California, said in an interview. The firm oversees $24 billion
in fixed-income assets, including TIPS.
Treasury Inflation-Protected
Securities, known as TIPS, pay a lower coupon than nominal Treasuries because
investors receive an inflation adjustment to the principal to reflect the change
in consumer prices. Regular Treasuries have lost 3.9 percent including interest
payments this year, while TIPS have returned 3.6 percent, according to Merrill
Lynch & Co. bond indexes.
Harvard vs. Yale
Swensen, 55, has managed
the New Haven, Connecticut, school’s investments since April 1985. The endowment
was valued at $17 billion in December, a decline of 25 percent since June 30.
It’s the second-largest U.S. college fund after Harvard University’s, which
stood at $28.8 billion in December after losing 22 percent since June.
Yale’s endowment produced an average annual return of 16.3 percent in the 10 years ended June 30, compared
with 13.8 percent for Harvard, which is in Cambridge, Massachusetts. The average
for U.S. and Canadian schools was 6.5 percent, according to the Washington-based
National Association of College and University Business Officers.
Tom
Conway, a spokesman for Yale, said Swensen declined to be interviewed by
Bloomberg News.
Guiding Principle
Swensen boosted returns by cutting the
fund’s holdings of stocks and bonds and buying more real estate, private equity
and hedge funds, a strategy that has been copied by endowment managers across
the nation. His guiding principle, outlined in his 2000 book “Pioneering
Portfolio Management: A Unconventional Approach to Institutional Investment,” is
that the best stock and bond pickers don’t outperform bottom-rated managers by
much.
The biggest performance gap comes in “less efficient” markets such as
private equity and natural resources, he wrote.
What’s more, he wrote, those
assets aren’t highly correlated, meaning they don’t move lock-step with stock
and bond markets. That provides diversification and protects against loss when
public markets decline.
Swensen, in the television interview, said his
approach to diversification can’t prevent losses during market declines such as
the one that slashed the value of the Standard & Poor’s 500 Index by 54
percent from start of 2008 through the market nadir on March 9, 2009.
Illiquidity Pays
“I’m not sure that the crisis has caused us to conclude
that we would do things differently, but it certainly highlighted the importance
of liquidity,” Swensen said, according to a transcript of the interview provided
by the show.
“One of the things that I’ve said consistently, and I still
continue to believe to be true, is that investors get paid unreasonable amounts
for accepting illiquidity in their portfolios,” he said.
Individuals, who
can’t invest with the best managers available to Yale, need to take a different
approach, Swensen wrote in his second book, “Unconventional Success: A
Fundamental Approach to Personal Investment” (2005). Instead, he recommends
passive index funds because they provide diversification at a relative low cost.
Swenson told Mack that equity-oriented investors should allocate 30 percent
of their money to U.S. stocks, 15 percent to Treasury bonds and 15 percent to
TIPS. He recommended putting 15 percent into real-estate investment
trusts, 15 percent into equities in non-U.S. developed markets and 10
percent into emerging markets.
Stocks More Attractive
“It’s certainly a
better time to put money in the stock market than a year ago, or three years ago
or five years ago,” Swensen said. “You’ve got a much more attractive entry
point.”
Yale had 10 percent of its assets allocated to U.S. stocks, bonds
and cash as of June, compared with 75 percent in 1988, according to the school’s
annual report. Real assets such as oil, gas, timber and real estate, seen as a
hedge against inflation, made up 29 percent of the portfolio. Twenty-five
percent was devoted to absolute-return strategies such as hedge funds, with 20
percent in private equity. The remainder of the portfolio was held in stocks
outside the U.S.
Endowment income is one of the main revenue sources for
colleges and universities, along with tuition, public financing and gifts. In
the year starting in July, Yale plans to cut endowment spending by 6 percent,
while Cornell University will scale back by 15 percent and Harvard by 8 percent.
Yale’s endowment supports 44 percent of the university budget this fiscal
year, up from 18 percent in 1998. The school plans to cut salaries and benefits
for non-faculty staff by 7.5 percent in fiscal 2010, deeper than the 5 percent
the school had planned in December.
Crisis Thinking
Swensen, who updated
his first book in January, said the collapse of the real estate markets and
ensuing financial market losses has required him to broaden his investment
analysis.
“The crisis forces you to think top-down in ways that would, I
think, be unproductive in normal circumstances, or absolutely necessary in the
midst of a crisis,” Swensen said. “You have to think about the functioning of
the credit system. You have to think about the potential impact of monetary
policy on markets over the next five or 10 or 15 years.”
To contact the
reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net; Last Updated: May 23, 2009 00:01 EDT

Buy new issue TIPS. Only buy new issue TIPS. That protects you from inflation. That protects you against deflation. Very complex reasoning. But pay attention.

The profit motive wins (for the money manager). Read Jack Bogle's book, other books. Do not believe you can pass repsonsibility to a trained professional. That's not the way the world works.