Tonight Cramer recommended 20% of one's stock portfolio be invested in foreign stocks because of what he sees as the impending falling dollar. If so, that puts him in the Swensen camp which now limits American stocks and bonds to 15% of ones portfolio, I believe.
Monday's night's show highlights: Cramer's New Foreign Legion Picks... Buy CPL and CIG!
Monday, August 3, 2009
Jim:
If you think that our nation is going down the wrong course… or you are just sick of hearing about how bad things are here… and tired of watching America get pants-ed by none other than the ChiComms… it is time for you to take an investing vacation over seas… tonight I am creating "the Mad Money foreign legion"… That is right, we are going traveling… and every night this week we will be enlisting new stocks… because right now I think that it is just irresponsible not to have some international exposure in your portfolio… why… we need to add some foreign stocks to the mix as insurance against the dollar getting weaker… something that I believe will happen… or at least inflation coming our way… something that I am less scared of because of Cramer fave Ben Bernanke...
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But just because I think that is less scary… that does not mean that you should not have some protection from it… where can we find more security… not just foreign stocks, but foreign dividend payers… only the best companies can be admitted to Cramer’s foreign legion… and just like at Fort Zimmerton, in Cramer fave “Beau Geste”… every stock dead or alive must do its part to make you money… you know how much we love high yielders on this show… and that goes just as much for companies overseas as home grown ones.We ran a screen to start… that means that we looked at all of the stocks that we could… what was our criteria… we were looking for ADR’s, American Depository Receipts, stocks that trade here on the New York Stock Exchange and the Nasdaq… and we wanted them with market capitalization over a billion dollars… and yields over 3%… then I whittled down the list further… keeping only companies where I liked the fundamentals… the results… we will unveil them throughout the week as we create a foreign diversified dividend portfolio… I would count putting 20% of your portfolio in foreign stocks as protection against weakness in the United States… and a recognition that we are simply no longer in control of our destiny… as much as we once were… because of our massive budget deficit, our low growth, and yes our potentially higher tax regime. The first area that I like…Brazil… Brazilian utilities… where I found not just one, but two stocks that I believe are worth owning for some high yielding international exposure right now… regardless of what happens with the Brazilian economy… this quickly developing nation is going to need a lot of power… that makes Brazilian utilities a stable source of revenue and cash… allowing them to pay solid dividends… that is what we want… and at the same time having more growth than any American utility that I could find… including Dominion Resources Inc. (D), Consolidated Edison Inc. (ED), including Exelon Corp. (EXC)… plus they are linked to Brazilian fundamentals… a weaker dollar means a stronger Brazilian real… which leads to higher prices for Brazilian ADR’s, just because the currency translation… hey, how about some layman terms… it means that the business is only so-so for these Brazilian things that I am going to highlight… as long as the dollar keeps getting weaker, these companies could go higher...
Read more from this segment
Read all of Monday night's complete recap
Lightning Round Picks:
Carnival (CCL)Jim: You know... it is okay… I cannot rave about it… why can’t I rave about it, because it is up a lot… it is certainly doing better than the other one... Royal Caribbean… I am not going to get behind Carnival when I can recommend a much more stable situation… one that I recommend in Stay Mad For Life where you buy one share for a kid… Disney (DIS)… Disney, what a great franchise… that stock holds up well.
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Showing posts with label david f swensen. Show all posts
Showing posts with label david f swensen. Show all posts
Monday, August 3, 2009
Saturday, August 1, 2009
Consuelo Mack -- David Swensen Transcript Part II
Consuelo Mack WealthTrack - July 24, 2009
CONSUELO MACK: This week on WealthTrack: in a television exclusive, Yale's legendary financial wizard David Swensen zaps the mutual fund industry and his endowment model critics and casts his magic spell on diversification, asset allocation and contrarian investing. Next on Consuelo Mack WealthTrack. Hello and welcome to this Great Investors edition of WealthTrack. I'm Consuelo Mack. Back in May we devoted an entire program to David Swensen, the legendary chief investment officer of Yale's endowment. Now the response to that rare interview was impressive- traffic to WealthTrack's website doubled in the weeks thereafter. We've decided to broadcast a second part of the Swensen interview that has never aired. Yale's David Swensen is an important figure in the financial world. He has literally transformed the way big university endowments are managed all over the country and he was recently named to President Obama's new economic recovery advisory board. Swensen's track record is full of superlatives. Since joining Yale 24 years ago at the tender age of 31, Yale has led all university endowments in average annual returns, becoming the nation's second largest behind Harvard. Under his leadership, Yale's endowment generated 20 consecutive years of positive returns from 1988 until June of 2008, the end of its fiscal year. In the decade ending June of last year, the endowment had clocked average annual returns of 16.3% vs. 6.5% for the average college endowment and a mere 2.5% for the S&P 500. That performance put Swensen in the top 1% of all institutional money managers and added an estimated $15 billion to Yale's endowment. Yale did not escape the past year's market wrath. Yale has been projecting a decline of 25% for the fiscal year, which ended on June 30, 2009. How did Swensen generate such market-beating long-term results? He and his team radically altered what Yale's endowment invests in: from the traditional mix of stocks, bonds and cash, they switched heavily to alternative investments and dramatically reduced their positions in domestic stocks and bonds from over 70% to under 15% of the portfolio. Swensen has literally written the book on university endowment management. His recently revised edition of Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment is considered to be the bible for institutional money managers, and he has taken his message to individual investors with his book Unconventional Success: A Fundamental Approach to Personal Investment. In my interview, I asked Swensen whether he had seen the financial crash coming.
DAVID SWENSEN: In some ways, you could say that we saw this coming -- in the end of 2007, we took all of Yale's cash and put it into Treasuries. This was well before Bear Stearns failure and Lehman's failure.
CONSUELO MACK: Now where are we? What's your assessment of how far we've gone in repairing the financial system?
DAVID SWENSEN: Well, actually, you ask, I guess, first how it was that we got here, and I think that Jack Bogle gave a fascinating speech a few months ago where he talked about moving from the ownership society to an agency society, and about the need to move from the agency society to a fiduciary society. It really resonated with me. If you look at the investment banking world that I joined in 1979- I spent six years on Wall Street before I went to Yale, I spent three years at Lehman Brothers, three years at Salomon Brothers. They were private partnerships. The partners sat on the trading floor and knew what the exposures were because they owned the companies. So that was Jack Bogle's ownership society. And then you look at the absolutely insane capital structures that evolved in the intervening years; you saw way, way too much leverage in the financial system. Investment banks were the worst, but commercial banks were over-levered as well, and you looked at the character and quality of the assets, and the assets, I think, by and large were on their way to someplace else, but of course, when the music stops they don't get to go someplace else, so they're there.
CONSUELO MACK: Right.
DAVID SWENSEN: And it was other people's money because they were publicly traded entities, right? And so it was "heads I win, tails you lose" in terms of compensation for the individuals at these financial institutions. And the trick is getting away from this agency society - this set of financial institutions that are dealing with other people's money.
CONSUELO MACK: With no skin in the game.
DAVID SWENSEN: Yeah, or no skin or inadequate skin in the game, and then move to a fiduciary society.
CONSUELO MACK: How do we do that?
DAVID SWENSEN: I think it's a very, very difficult question, but if you think about commercial banking, for example, I think that it would be great if we ended up with a set of very simple, deposit-gathering balance-sheet lenders, and the deal would be that if you get government insurance on the deposits, you have to accept the high degree of regulation, and as part of the deal, it could be that when you generate loans, and these highly regulated deposit-gathering, balance-sheet-lending banks would only provide basic financial services.
CONSUELO MACK: Are these like the old S&L's?
DAVID SWENSEN: Actually, like the Bailey Brothers savings and loan of "it's a wonderful life," that's exactly what they're like, and you could require that they keep a large part of what it is that they originate on their balance sheet. Doesn't mean you can't have some securitization, you can't have some syndication, but you have to eat your own cooking. You have to live with the consequences of your actions.
CONSUELO MACK: What about regulation? Because you have some actually pretty big ideas about needing a much more-- broader, comprehensive regulation. So what is it?
DAVID SWENSEN: One of the pauses of the problems that we find ourselves facing is that there was this religion of deregulation, or this cultish belief that the market was always going to get you to the right solution. CONSUELO MACK: Right. Self-governing.
DAVID SWENSEN: Right, and Alan Greenspan was right at the top of the list of those who were advocating that position, that general attitude, and it turns out that that was an incredibly naive approach, because what the deregulation led to was this huge overleveraging and this incredible lack of quality control among our large financial institutions. We need to have much stronger regulation, much higher quality, we need to devote far more resources to the regulation of our financial system, broadly defined. I'm certainly not just talking about banks and securities firms. I think it's absolutely obvious that hedge funds need to be regulated. Long-term capital, 1998, $5 billion of equity, $150 billion of positions on the balance sheet, $1.2 trillion of derivative positions.
CONSUELO MACK: That was one institution.
DAVID SWENSEN: One institution.
CONSUELO MACK: That could have brought the system down.
DAVID SWENSEN: Could have brought the system down. Why is it that we are more than 10 years later, we haven't come to the conclusion that we need to regulate entities that could pose a threat to the system? I think it's absolutely obvious that any institution that could pose a threat to the system should be under the regulatory umbrella.
CONSUELO MACK: You have talked about the new reality -- PIMCO refers to it as the new normal. So what is the new reality that we're living in now as far as the investment climate, the economic climate, looking at the big picture? What do you think the new reality is that we should expect?
DAVID SWENSEN: I think that at least for the near term, we have to have more modest expectations about what it is that our investment portfolios are going to generate for us.
CONSUELO MACK: For instance, what is more modest -- Yale delivered 16.3% returns in the Yale endowment over a 10-year period.
DAVID SWENSEN: That was a pretty good run.
CONSUELO MACK: That was a terrific run.
DAVID SWENSEN: And I think stocks over that period were up a little bit more than 3% per annum and bonds somewhere between 4 and 5% per annum, so there was just a huge gap between what the portfolio produced and what you could have generated from marketable securities. If we think that equities over long periods of time--
CONSUELO MACK: 11% --
DAVID SWENSEN: 11, 12% returns, that's exactly the number I was going to come up with. I think we have just gone through a period where the economy took a more substantial hit than I think any of us--
CONSUELO MACK: Anticipated. And I guess than we have in, like, 50 years.
DAVID SWENSEN: Right. And we're still in a position where the financial markets, which were broken a few months ago, have yet to heal completely, and so I would say that at least for the intermediate term, you have to have lower expectations with respect to equities and maybe all other financial assets. Bonds- starting out with 3, 3.5, 4% coupon on Treasuries. That's a very, very, very low starting point.
CONSUELO MACK: Corporate bonds. We've had several guests on who were investing in corporate bonds, and they just said the returns are pretty exceptional. Are you at all attracted to the distressed bond market? Are you at all attracted to the corporate bonds or high-yield junk bonds, those kinds of securities?
DAVID SWENSEN: It depends on what hat I'm wearing. If I'm wearing my Yale hat, I think there are some extraordinary opportunities in the credit markets. If I'm wearing my individual investor hat, I don't think that there are high quality vehicles that individuals can tap into.
CONSUELO MACK: Because you don't want individuals to lose money, in other words -- you don't think individuals should take the kind of risks that you can take at Yale or -
DAVID SWENSEN: Well, I think if the right investment vehicle were there then I could recommend that an individual take those kinds of risks because one of the things that has come out of these broken credit markets are some very attractive risk-adjusted opportunities. But the corporate bond market is very, very tough. You need to have the same kind of analytical capabilities that you have to analyze equities, and on top of that you have to understand call provisions. It's incredibly complicated, and the mutual funds that specialize in this area generally are high cost and do a poor job of dealing with these incredibly complicated issues.
CONSUELO MACK: There are some hedge-fund managers who have come out with mutual funds, and we've had a couple on our show -- Cliff Asness from AQR and Andrew Lo, who you probably know from MIT, and again, it's in the spirit of portfolio diversification, they're giving an individual an opportunity to invest in arbitrage or to replicate some hedge-fund returns. What do you think about those kind of options for individuals that I'm sure we're going to see more of in the years ahead?
DAVID SWENSEN: I believe that there are a handful of high quality managers and -- I think Cliff Asness and Andy Lo are really impressive guys, and there are also some impressive guys on the equity side and in the mutual-fund world, but it's a handful among the thousands of mutual funds, and individuals, by and large, aren't well equipped to separate the wheat from the chaff.
CONSUELO MACK: Right.
DAVID SWENSEN: And when the probabilities are overwhelming that they'll end up with the not-so-good managers or the bad managers or the terrible managers as opposed to this tiny handful of high-quality managers. I think the only reasonable advice that I can give is to stay on the passive end of the spectrum. Put together a portfolio that you can implement using index funds.
CONSUELO MACK: It seems so unfair. So you think that individuals are always going to be, essentially, at a disadvantage, so the best that we can hope for is to have market returns and to have a portfolio that has some noncorrelated assets? Is that --
DAVID SWENSEN: Yeah, it seems unfair in a sense, but most everybody has something that they do with their lives other than studying financial markets.
CONSUELO MACK: Right.
DAVID SWENSEN: And I know how hard it is to beat the markets. They're actually quite efficient. And so I've got an incredibly highly qualified, wonderfully motivated group of colleagues at Yale, and we work really, really hard to put together these market-beating portfolios.
CONSUELO MACK: And the market-beating portfolios, our viewers should know -- you're not investing the money yourself.
DAVID SWENSEN: No.
CONSUELO MACK: You outsource.
DAVID SWENSEN: With outside stock managers.
CONSUELO MACK: Right. So is there one or two things that you insist upon in choosing a manager? I mean, what are the things that you look for in choosing a good investment manager? Criteria.
DAVID SWENSEN: If we talked about this 20 years ago, I probably would have come up with a list of objective criteria.
CONSUELO MACK: And now?
DAVID SWENSEN: And now, I just say it's all about the people. You want to have really high quality people, great integrity, very intelligent, hard-working, people that have found an edge that they can exploit.
CONSUELO MACK: In their particular niche.
DAVID SWENSEN: In their particular niche. And I would say it's people first, people second, people third. You just want to be partners with great people.
CONSUELO MACK: But size counts too, right? You don't like to invest with funds that get too big?
DAVID SWENSEN: Size is the enemy of performance. So the people that we invest with -- I like to say have a screw loose because they don't define winning by amassing as large a pool of assets as they possibly can, because if they did that, they would invariably make more money because it's asset-based fees, and they sometimes get a carry on the performance so the bigger the pile of money, the more money they're going to make and that's one of the big problems with the mutual-fund industry. It's not about creating great investment returns, it's about amassing these huge piles of assets because that's the way that the fund companies generate greater profits. But the managers that we're with are actually being good fiduciaries to the university because almost invariably they'll limit the size of assets under management so they can produce great investment returns, and they define winning by having a great investment record as opposed to the greatest degree of fee income that they can possibly generate.
CONSUELO MACK: Assets under management. Haven't you been tempted to leave Yale and the not-for-profit sector and make more than a paltry couple million a year?
DAVID SWENSEN: I get paid incredibly well for what I do, and I love being part of an academic community. I love being part of the economics department at Yale. I have been teaching since 1980, even longer than I have been working at Yale. I love the students. I like the idea that I'm supporting one of the world's great institutions.
CONSUELO MACK: So this is something you want to continue to do.
DAVID SWENSEN: As long as they'll have me.
CONSUELO MACK: I'm sure they'll have you for a long time. I should end it there but I'm not going to. What about your kids' portfolios? How do you invest -- I've got a 21-year-old son and you have got three children. So how are you investing their portfolios?
DAVID SWENSEN: I've got a combination of index funds and some closed-end funds trading at a discount. I guess that's kind of the one asterisk that I would put by the purely passive approach. I love what Jack Bogle has written. I love what Charley Ellis has written. I love what Burton Malkiel has written. They're fans of index funds. But Burt Malkiel has also written about buying closed-end funds at a discount and I think that's an interesting strategy for individuals to pursue if they just can't stand having a purely indexed portfolio.
CONSUELO MACK: And at this point in the economy and in the markets, are there one or two areas that you would emphasize over others that you think are going to do extremely well over the next five years, let's say?
DAVID SWENSEN: TIPS are interesting, because if the fiscal stimulus and the monetary stimulus work, it's hard to see an environment where we're not dealing with substantial inflation. If they don't work, the fiscal stimulus and the monetary stimulus, then I think you have to worry about deflationary pressures, and if you buy new-issue TIPS, you have the protection of getting your principal back, and so new-issue TIPS- not the ones that have accredited to above par because of the passive inflationary adjustments- new-issue TIPS are actually instruments that could help you in an inflationary environment and in a deflationary environment.
CONSUELO MACK: And not TIPS funds. You buy the new-issue TIPS because then you hold them to maturity and you get the principal back at maturity.
DAVID SWENSEN: Yeah. And to get the deflation protection, you have to keep in the new issues, because if you are in an inflationary period, the value of the principal goes up along with inflation, and then you've got something that you can lose before you get back to par. I guess the other thing that I think people should pay attention to in their portfolios that they probably by and large don't pay enough attention to would be emerging-markets exposure. I'm not sure where I come out on the decoupling issue, but you could certainly imagine a circumstance where China and India and Brazil, maybe some of the other big emerging-markets countries perform substantially better than some of the developed economies where you see the direct impact of the clots of the financial system.
CONSUELO MACK: What is it that we should know about your unconventional approach, that individuals should take to heart?
DAVID SWENSEN: I think that the sad fact is that the game is really stacked against the individual, that almost any provider of financial services to individuals, whether it's a stock broker or a mutual-fund manager, has a conflict between the fiduciary responsibility that's owed to the client and the profit motive. And when you see that conflict, the profit motive more often than not wins, and so the only way that an individual is going to end up with a reasonable outcome is to educate themselves, and I think the only reasonable way to do that is to read books, and you can read Charley Ellis's book or Jack Bogle's book -
CONSUELO MACK: Winning The Loser's Game, or Enough, Jack Bogle has written a lot of books. I might add your books, Unconventional Success.
DAVID SWENSEN: And you've just got to take control of your financial destiny, and not believe that you can pass responsibility off to a trained professional and that you'll end up with a good outcome, unfortunately, that just isn't the way that the world works.
CONSUELO MACK: I have a suggestion for you, David Swensen, and that is you should start a mutual fund, and take your fiduciary responsibility and make it accessible to the rest of us. At any rate, that's a dream, I'm sure, but thank you so much for being with us on WealthTrack and spending so much time with us.
DAVID SWENSEN: Thank you.
CONSUELO MACK: For those of you who would like to hear more from Yale's David Swensen, next week we'll be repeating part one of our wide-ranging interview with him as we continue our Great Investors series. If you would like to watch this program again, just go to our website, wealthtrack.com starting on Monday. You can see it as streaming video. Thanks for visiting with us and make the week ahead a profitable and a productive one.
© 2009 WealthTrack.com All rights reserved.contact Powered by OfficeThug
CONSUELO MACK: This week on WealthTrack: in a television exclusive, Yale's legendary financial wizard David Swensen zaps the mutual fund industry and his endowment model critics and casts his magic spell on diversification, asset allocation and contrarian investing. Next on Consuelo Mack WealthTrack. Hello and welcome to this Great Investors edition of WealthTrack. I'm Consuelo Mack. Back in May we devoted an entire program to David Swensen, the legendary chief investment officer of Yale's endowment. Now the response to that rare interview was impressive- traffic to WealthTrack's website doubled in the weeks thereafter. We've decided to broadcast a second part of the Swensen interview that has never aired. Yale's David Swensen is an important figure in the financial world. He has literally transformed the way big university endowments are managed all over the country and he was recently named to President Obama's new economic recovery advisory board. Swensen's track record is full of superlatives. Since joining Yale 24 years ago at the tender age of 31, Yale has led all university endowments in average annual returns, becoming the nation's second largest behind Harvard. Under his leadership, Yale's endowment generated 20 consecutive years of positive returns from 1988 until June of 2008, the end of its fiscal year. In the decade ending June of last year, the endowment had clocked average annual returns of 16.3% vs. 6.5% for the average college endowment and a mere 2.5% for the S&P 500. That performance put Swensen in the top 1% of all institutional money managers and added an estimated $15 billion to Yale's endowment. Yale did not escape the past year's market wrath. Yale has been projecting a decline of 25% for the fiscal year, which ended on June 30, 2009. How did Swensen generate such market-beating long-term results? He and his team radically altered what Yale's endowment invests in: from the traditional mix of stocks, bonds and cash, they switched heavily to alternative investments and dramatically reduced their positions in domestic stocks and bonds from over 70% to under 15% of the portfolio. Swensen has literally written the book on university endowment management. His recently revised edition of Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment is considered to be the bible for institutional money managers, and he has taken his message to individual investors with his book Unconventional Success: A Fundamental Approach to Personal Investment. In my interview, I asked Swensen whether he had seen the financial crash coming.
DAVID SWENSEN: In some ways, you could say that we saw this coming -- in the end of 2007, we took all of Yale's cash and put it into Treasuries. This was well before Bear Stearns failure and Lehman's failure.
CONSUELO MACK: Now where are we? What's your assessment of how far we've gone in repairing the financial system?
DAVID SWENSEN: Well, actually, you ask, I guess, first how it was that we got here, and I think that Jack Bogle gave a fascinating speech a few months ago where he talked about moving from the ownership society to an agency society, and about the need to move from the agency society to a fiduciary society. It really resonated with me. If you look at the investment banking world that I joined in 1979- I spent six years on Wall Street before I went to Yale, I spent three years at Lehman Brothers, three years at Salomon Brothers. They were private partnerships. The partners sat on the trading floor and knew what the exposures were because they owned the companies. So that was Jack Bogle's ownership society. And then you look at the absolutely insane capital structures that evolved in the intervening years; you saw way, way too much leverage in the financial system. Investment banks were the worst, but commercial banks were over-levered as well, and you looked at the character and quality of the assets, and the assets, I think, by and large were on their way to someplace else, but of course, when the music stops they don't get to go someplace else, so they're there.
CONSUELO MACK: Right.
DAVID SWENSEN: And it was other people's money because they were publicly traded entities, right? And so it was "heads I win, tails you lose" in terms of compensation for the individuals at these financial institutions. And the trick is getting away from this agency society - this set of financial institutions that are dealing with other people's money.
CONSUELO MACK: With no skin in the game.
DAVID SWENSEN: Yeah, or no skin or inadequate skin in the game, and then move to a fiduciary society.
CONSUELO MACK: How do we do that?
DAVID SWENSEN: I think it's a very, very difficult question, but if you think about commercial banking, for example, I think that it would be great if we ended up with a set of very simple, deposit-gathering balance-sheet lenders, and the deal would be that if you get government insurance on the deposits, you have to accept the high degree of regulation, and as part of the deal, it could be that when you generate loans, and these highly regulated deposit-gathering, balance-sheet-lending banks would only provide basic financial services.
CONSUELO MACK: Are these like the old S&L's?
DAVID SWENSEN: Actually, like the Bailey Brothers savings and loan of "it's a wonderful life," that's exactly what they're like, and you could require that they keep a large part of what it is that they originate on their balance sheet. Doesn't mean you can't have some securitization, you can't have some syndication, but you have to eat your own cooking. You have to live with the consequences of your actions.
CONSUELO MACK: What about regulation? Because you have some actually pretty big ideas about needing a much more-- broader, comprehensive regulation. So what is it?
DAVID SWENSEN: One of the pauses of the problems that we find ourselves facing is that there was this religion of deregulation, or this cultish belief that the market was always going to get you to the right solution. CONSUELO MACK: Right. Self-governing.
DAVID SWENSEN: Right, and Alan Greenspan was right at the top of the list of those who were advocating that position, that general attitude, and it turns out that that was an incredibly naive approach, because what the deregulation led to was this huge overleveraging and this incredible lack of quality control among our large financial institutions. We need to have much stronger regulation, much higher quality, we need to devote far more resources to the regulation of our financial system, broadly defined. I'm certainly not just talking about banks and securities firms. I think it's absolutely obvious that hedge funds need to be regulated. Long-term capital, 1998, $5 billion of equity, $150 billion of positions on the balance sheet, $1.2 trillion of derivative positions.
CONSUELO MACK: That was one institution.
DAVID SWENSEN: One institution.
CONSUELO MACK: That could have brought the system down.
DAVID SWENSEN: Could have brought the system down. Why is it that we are more than 10 years later, we haven't come to the conclusion that we need to regulate entities that could pose a threat to the system? I think it's absolutely obvious that any institution that could pose a threat to the system should be under the regulatory umbrella.
CONSUELO MACK: You have talked about the new reality -- PIMCO refers to it as the new normal. So what is the new reality that we're living in now as far as the investment climate, the economic climate, looking at the big picture? What do you think the new reality is that we should expect?
DAVID SWENSEN: I think that at least for the near term, we have to have more modest expectations about what it is that our investment portfolios are going to generate for us.
CONSUELO MACK: For instance, what is more modest -- Yale delivered 16.3% returns in the Yale endowment over a 10-year period.
DAVID SWENSEN: That was a pretty good run.
CONSUELO MACK: That was a terrific run.
DAVID SWENSEN: And I think stocks over that period were up a little bit more than 3% per annum and bonds somewhere between 4 and 5% per annum, so there was just a huge gap between what the portfolio produced and what you could have generated from marketable securities. If we think that equities over long periods of time--
CONSUELO MACK: 11% --
DAVID SWENSEN: 11, 12% returns, that's exactly the number I was going to come up with. I think we have just gone through a period where the economy took a more substantial hit than I think any of us--
CONSUELO MACK: Anticipated. And I guess than we have in, like, 50 years.
DAVID SWENSEN: Right. And we're still in a position where the financial markets, which were broken a few months ago, have yet to heal completely, and so I would say that at least for the intermediate term, you have to have lower expectations with respect to equities and maybe all other financial assets. Bonds- starting out with 3, 3.5, 4% coupon on Treasuries. That's a very, very, very low starting point.
CONSUELO MACK: Corporate bonds. We've had several guests on who were investing in corporate bonds, and they just said the returns are pretty exceptional. Are you at all attracted to the distressed bond market? Are you at all attracted to the corporate bonds or high-yield junk bonds, those kinds of securities?
DAVID SWENSEN: It depends on what hat I'm wearing. If I'm wearing my Yale hat, I think there are some extraordinary opportunities in the credit markets. If I'm wearing my individual investor hat, I don't think that there are high quality vehicles that individuals can tap into.
CONSUELO MACK: Because you don't want individuals to lose money, in other words -- you don't think individuals should take the kind of risks that you can take at Yale or -
DAVID SWENSEN: Well, I think if the right investment vehicle were there then I could recommend that an individual take those kinds of risks because one of the things that has come out of these broken credit markets are some very attractive risk-adjusted opportunities. But the corporate bond market is very, very tough. You need to have the same kind of analytical capabilities that you have to analyze equities, and on top of that you have to understand call provisions. It's incredibly complicated, and the mutual funds that specialize in this area generally are high cost and do a poor job of dealing with these incredibly complicated issues.
CONSUELO MACK: There are some hedge-fund managers who have come out with mutual funds, and we've had a couple on our show -- Cliff Asness from AQR and Andrew Lo, who you probably know from MIT, and again, it's in the spirit of portfolio diversification, they're giving an individual an opportunity to invest in arbitrage or to replicate some hedge-fund returns. What do you think about those kind of options for individuals that I'm sure we're going to see more of in the years ahead?
DAVID SWENSEN: I believe that there are a handful of high quality managers and -- I think Cliff Asness and Andy Lo are really impressive guys, and there are also some impressive guys on the equity side and in the mutual-fund world, but it's a handful among the thousands of mutual funds, and individuals, by and large, aren't well equipped to separate the wheat from the chaff.
CONSUELO MACK: Right.
DAVID SWENSEN: And when the probabilities are overwhelming that they'll end up with the not-so-good managers or the bad managers or the terrible managers as opposed to this tiny handful of high-quality managers. I think the only reasonable advice that I can give is to stay on the passive end of the spectrum. Put together a portfolio that you can implement using index funds.
CONSUELO MACK: It seems so unfair. So you think that individuals are always going to be, essentially, at a disadvantage, so the best that we can hope for is to have market returns and to have a portfolio that has some noncorrelated assets? Is that --
DAVID SWENSEN: Yeah, it seems unfair in a sense, but most everybody has something that they do with their lives other than studying financial markets.
CONSUELO MACK: Right.
DAVID SWENSEN: And I know how hard it is to beat the markets. They're actually quite efficient. And so I've got an incredibly highly qualified, wonderfully motivated group of colleagues at Yale, and we work really, really hard to put together these market-beating portfolios.
CONSUELO MACK: And the market-beating portfolios, our viewers should know -- you're not investing the money yourself.
DAVID SWENSEN: No.
CONSUELO MACK: You outsource.
DAVID SWENSEN: With outside stock managers.
CONSUELO MACK: Right. So is there one or two things that you insist upon in choosing a manager? I mean, what are the things that you look for in choosing a good investment manager? Criteria.
DAVID SWENSEN: If we talked about this 20 years ago, I probably would have come up with a list of objective criteria.
CONSUELO MACK: And now?
DAVID SWENSEN: And now, I just say it's all about the people. You want to have really high quality people, great integrity, very intelligent, hard-working, people that have found an edge that they can exploit.
CONSUELO MACK: In their particular niche.
DAVID SWENSEN: In their particular niche. And I would say it's people first, people second, people third. You just want to be partners with great people.
CONSUELO MACK: But size counts too, right? You don't like to invest with funds that get too big?
DAVID SWENSEN: Size is the enemy of performance. So the people that we invest with -- I like to say have a screw loose because they don't define winning by amassing as large a pool of assets as they possibly can, because if they did that, they would invariably make more money because it's asset-based fees, and they sometimes get a carry on the performance so the bigger the pile of money, the more money they're going to make and that's one of the big problems with the mutual-fund industry. It's not about creating great investment returns, it's about amassing these huge piles of assets because that's the way that the fund companies generate greater profits. But the managers that we're with are actually being good fiduciaries to the university because almost invariably they'll limit the size of assets under management so they can produce great investment returns, and they define winning by having a great investment record as opposed to the greatest degree of fee income that they can possibly generate.
CONSUELO MACK: Assets under management. Haven't you been tempted to leave Yale and the not-for-profit sector and make more than a paltry couple million a year?
DAVID SWENSEN: I get paid incredibly well for what I do, and I love being part of an academic community. I love being part of the economics department at Yale. I have been teaching since 1980, even longer than I have been working at Yale. I love the students. I like the idea that I'm supporting one of the world's great institutions.
CONSUELO MACK: So this is something you want to continue to do.
DAVID SWENSEN: As long as they'll have me.
CONSUELO MACK: I'm sure they'll have you for a long time. I should end it there but I'm not going to. What about your kids' portfolios? How do you invest -- I've got a 21-year-old son and you have got three children. So how are you investing their portfolios?
DAVID SWENSEN: I've got a combination of index funds and some closed-end funds trading at a discount. I guess that's kind of the one asterisk that I would put by the purely passive approach. I love what Jack Bogle has written. I love what Charley Ellis has written. I love what Burton Malkiel has written. They're fans of index funds. But Burt Malkiel has also written about buying closed-end funds at a discount and I think that's an interesting strategy for individuals to pursue if they just can't stand having a purely indexed portfolio.
CONSUELO MACK: And at this point in the economy and in the markets, are there one or two areas that you would emphasize over others that you think are going to do extremely well over the next five years, let's say?
DAVID SWENSEN: TIPS are interesting, because if the fiscal stimulus and the monetary stimulus work, it's hard to see an environment where we're not dealing with substantial inflation. If they don't work, the fiscal stimulus and the monetary stimulus, then I think you have to worry about deflationary pressures, and if you buy new-issue TIPS, you have the protection of getting your principal back, and so new-issue TIPS- not the ones that have accredited to above par because of the passive inflationary adjustments- new-issue TIPS are actually instruments that could help you in an inflationary environment and in a deflationary environment.
CONSUELO MACK: And not TIPS funds. You buy the new-issue TIPS because then you hold them to maturity and you get the principal back at maturity.
DAVID SWENSEN: Yeah. And to get the deflation protection, you have to keep in the new issues, because if you are in an inflationary period, the value of the principal goes up along with inflation, and then you've got something that you can lose before you get back to par. I guess the other thing that I think people should pay attention to in their portfolios that they probably by and large don't pay enough attention to would be emerging-markets exposure. I'm not sure where I come out on the decoupling issue, but you could certainly imagine a circumstance where China and India and Brazil, maybe some of the other big emerging-markets countries perform substantially better than some of the developed economies where you see the direct impact of the clots of the financial system.
CONSUELO MACK: What is it that we should know about your unconventional approach, that individuals should take to heart?
DAVID SWENSEN: I think that the sad fact is that the game is really stacked against the individual, that almost any provider of financial services to individuals, whether it's a stock broker or a mutual-fund manager, has a conflict between the fiduciary responsibility that's owed to the client and the profit motive. And when you see that conflict, the profit motive more often than not wins, and so the only way that an individual is going to end up with a reasonable outcome is to educate themselves, and I think the only reasonable way to do that is to read books, and you can read Charley Ellis's book or Jack Bogle's book -
CONSUELO MACK: Winning The Loser's Game, or Enough, Jack Bogle has written a lot of books. I might add your books, Unconventional Success.
DAVID SWENSEN: And you've just got to take control of your financial destiny, and not believe that you can pass responsibility off to a trained professional and that you'll end up with a good outcome, unfortunately, that just isn't the way that the world works.
CONSUELO MACK: I have a suggestion for you, David Swensen, and that is you should start a mutual fund, and take your fiduciary responsibility and make it accessible to the rest of us. At any rate, that's a dream, I'm sure, but thank you so much for being with us on WealthTrack and spending so much time with us.
DAVID SWENSEN: Thank you.
CONSUELO MACK: For those of you who would like to hear more from Yale's David Swensen, next week we'll be repeating part one of our wide-ranging interview with him as we continue our Great Investors series. If you would like to watch this program again, just go to our website, wealthtrack.com starting on Monday. You can see it as streaming video. Thanks for visiting with us and make the week ahead a profitable and a productive one.
© 2009 WealthTrack.com All rights reserved.contact Powered by OfficeThug
Two Absolutely Sensational Programs Last Night: Cramer Last Night; Bill Moyers
Cramer had one of his Classics last night, not related to yesterday's market. Five things that the Pros do that the Amateurs don't do.
And Bill Moyers interviewed, for the full hour, a former executive of Cigna who was sensational. Health case being the topic, of course.
And I'm now going to check on Consuelo Mack's website to see if last Saturday's trasncript (Swensen Part II) is ready.
And Bill Moyers interviewed, for the full hour, a former executive of Cigna who was sensational. Health case being the topic, of course.
And I'm now going to check on Consuelo Mack's website to see if last Saturday's trasncript (Swensen Part II) is ready.
Saturday, July 25, 2009
And Read Aaron Pressman on David Swensen
I think Pressman is basically stupid on this topic:
http://www.businessweek.com/investing/insights/blog/archives/2009/03/yale_investing.html
http://www.businessweek.com/investing/insights/blog/archives/2009/03/yale_investing.html
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’
Share Email
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.
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’
Share Email
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.
Sunday, July 19, 2009
Consuelo Mack -- Must Read
My "transcript" from listening on line to yesterday's show:
Sunday, July 19, 2009
Consuelo Mack from Yesterday
Prior Interviews of Peter Bernstein
Died this summer. June. Age of 90.
Recognized expert on risk.
Against the Gods
Weighing of the Waters
2005 interview
Pascal’s Wager, 1654
French mathematician; compulsive gambler
He invented probability
Very religious man; a nut
Life of sin
Then Retired to a monastery
Is there a God? Can’t reason this.
If I believe in God and lead a virtuous life
I can decide how to lead my life. If I lead a bad life of sin and lust, and there is a God, I’m in bad trouble.
Very often you have to forget the probabilities because the consequences are so serious.
Doesn’t always mean you make the cautious decision. Woman…in airplane crash.$100,000 settlement. All she had in the world. Young, in her 20’s. We would put ½ in bonds, with the other ½ we would shoot the moon. She didn’t have enough anyway and if she lost it she was a goner anyhow.
Late 1970’s when bonds were yielding 15-16%. Inflation also 15-16%
Take a big position in bonds. (Early ‘80’s).
2005 interview (continued)
In a low-return environment…
Believe in diversification.
US is worked over as an investment opportunity.
You should not be “comfortable” with everything you own.
Go overseas.
Disagrees with mantra re US stocks.
No more than ½ in assets in US at most if I were starting fresh.
Etfs -- Will offer a whole big piece.
Ishares, msci
All the world stocks except the us.
Similarly bonds outside the US. Similarly Gold.
2005 interview (continued)
Dividends matter.
Still matter. Cash in your pocket. You know what it is.
Tax rate is same as on capital gains now. Payouts are so low. Dividends will increase faster than earnings.
Optimist…problems do get solved.
A lot of youth in this country.
Vitality you get in the equity markets. Outside the us. I’m a big believer in funds. If people manage that money themselves I know they would have done worse.
2007 interview
Wrote book: “Capital Ideas”
Academics. Most never owned a share in their lives. Risk.
Methods to try to maximize the trade-off between risk and return. Overwhelming importance of diversification. Reduces your risk.
How much risk do I want to take? Really think that question through.
Can I live with volatility.
The efficient markets hypothesis. Mark Hulbert. A five or 10-year
track record means a lot more than…
Own index funds too.
Cost of doing it. Management fee. Jack Bogel.
I won no actively-managed mutual funds. Only index funds. A lot in index funds.
Decisions that human beings are making now that repr opportunity or risk.
Risk is the centerpiece. We can’t manage returns; we can manage our risk.
How much can I stand the heat of the oven.
Harry Markowitz. “But I have to think about risk as well as return.”
Yale: if everything goes wrong, what will the effect be on Yale, etc.
Individuals should do the same.
Once you have it made it’s silly to take more risk. Risk means you might lose.
2007 interview (continued)
…shoot the moon.
International, commodities.
Thing that worries me the most is the dollar. Foreigners will say “enough is enough.”
Very easy to move out of the currency to somewhere else.
Odds are small but the consequences are enormous.
Own securities denom in other currencies. Short term treasuries. Gold. Very expensive to own but a little goes a long way.
Sunday, July 19, 2009
Consuelo Mack from Yesterday
Prior Interviews of Peter Bernstein
Died this summer. June. Age of 90.
Recognized expert on risk.
Against the Gods
Weighing of the Waters
2005 interview
Pascal’s Wager, 1654
French mathematician; compulsive gambler
He invented probability
Very religious man; a nut
Life of sin
Then Retired to a monastery
Is there a God? Can’t reason this.
If I believe in God and lead a virtuous life
I can decide how to lead my life. If I lead a bad life of sin and lust, and there is a God, I’m in bad trouble.
Very often you have to forget the probabilities because the consequences are so serious.
Doesn’t always mean you make the cautious decision. Woman…in airplane crash.$100,000 settlement. All she had in the world. Young, in her 20’s. We would put ½ in bonds, with the other ½ we would shoot the moon. She didn’t have enough anyway and if she lost it she was a goner anyhow.
Late 1970’s when bonds were yielding 15-16%. Inflation also 15-16%
Take a big position in bonds. (Early ‘80’s).
2005 interview (continued)
In a low-return environment…
Believe in diversification.
US is worked over as an investment opportunity.
You should not be “comfortable” with everything you own.
Go overseas.
Disagrees with mantra re US stocks.
No more than ½ in assets in US at most if I were starting fresh.
Etfs -- Will offer a whole big piece.
Ishares, msci
All the world stocks except the us.
Similarly bonds outside the US. Similarly Gold.
2005 interview (continued)
Dividends matter.
Still matter. Cash in your pocket. You know what it is.
Tax rate is same as on capital gains now. Payouts are so low. Dividends will increase faster than earnings.
Optimist…problems do get solved.
A lot of youth in this country.
Vitality you get in the equity markets. Outside the us. I’m a big believer in funds. If people manage that money themselves I know they would have done worse.
2007 interview
Wrote book: “Capital Ideas”
Academics. Most never owned a share in their lives. Risk.
Methods to try to maximize the trade-off between risk and return. Overwhelming importance of diversification. Reduces your risk.
How much risk do I want to take? Really think that question through.
Can I live with volatility.
The efficient markets hypothesis. Mark Hulbert. A five or 10-year
track record means a lot more than…
Own index funds too.
Cost of doing it. Management fee. Jack Bogel.
I won no actively-managed mutual funds. Only index funds. A lot in index funds.
Decisions that human beings are making now that repr opportunity or risk.
Risk is the centerpiece. We can’t manage returns; we can manage our risk.
How much can I stand the heat of the oven.
Harry Markowitz. “But I have to think about risk as well as return.”
Yale: if everything goes wrong, what will the effect be on Yale, etc.
Individuals should do the same.
Once you have it made it’s silly to take more risk. Risk means you might lose.
2007 interview (continued)
…shoot the moon.
International, commodities.
Thing that worries me the most is the dollar. Foreigners will say “enough is enough.”
Very easy to move out of the currency to somewhere else.
Odds are small but the consequences are enormous.
Own securities denom in other currencies. Short term treasuries. Gold. Very expensive to own but a little goes a long way.
Thursday, May 28, 2009
Swensen Transcript on Consuelo Mack Saturday
http://www.wealthtrack.com/transcript_05-22-2009.php
Consuelo Mack WealthTrack - May 22, 2009
CONSUELO MACK: This week on WealthTrack: in a television exclusive, Yale's legendary financial wizard David Swensen zaps the mutual fund industry and his endowment model critics and casts his magic spell on diversification, asset allocation, and contrarian investing, next on Consuelo Mack WealthTrack. Hello, and welcome to this edition of WealthTrack. I'm Consuelo Mack. We are breaking precedent on WealthTrack this week and devoting the entire program to one guest, and what a guest we have for you. It's a WealthTrack television exclusive with David Swensen, the truly legendary chief investment officer of Yale's endowment who, you will discover in a moment, pulls no punches in his approach to investment strategy, Wall Street, the mutual fund industry, and just about every other topic you engage him in. Swensen has literally transformed the way university endowments are managed all over the country. He has been so successful and influential that he has set a new standard for a wide array of institutional money managers from pension funds to foundations, and he was recently named to President Obama's new Economic Recovery Advisory Board. How did he do this? His track record tells the story. Under his leadership Yale's endowment generated 20 consecutive years of positive returns from 1988 until June of 2008, the end of its fiscal year. In the decade ended June of last year, the endowment had clocked an average annual return of 16.3%, versus 6.5% for the average college endowment and 2.9% for the S&P 500. That performance put Swensen in the top 1% of all institutional money managers and added an estimated $15 billion to Yale's endowment. Yale did not escape last year's market wrath. As of December, the portfolio lost about $6 billion or 26% of its value. But how did he generate those long-term results? Swensen radically altered what Yale's endowment invests in. From the traditional mix of domestic stocks, bonds, and cask, he and his team switched to alternative investments- their stake in private equity increased from under 4% to over 20%. Real assets like timber and real estate, the allocation increased from 8.5% to 29.3%; and in hedge funds from zero to 25.1%. Meanwhile, the investment in domestic stocks and bonds plunged from over 70% to under 15%. Swensen has literally written the book on university endowment management. His recently revised edition of Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment is considered the bible for institutional money managers. And luckily he has brought his message to individual investors with his book Unconventional Success: A Fundamental Approach to Personal Investment. What should our investment approach be? We're going to ask David Swensen next on Consuelo Mack WealthTrack. We are delighted to welcome in a WealthTrack television exclusive, the Chief Investment Officer of Yale's endowment, David Swensen. It's great to you have here on WealthTrack, thanks for joining us.
DAVID SWENSEN: It's my pleasure, thank you.
CONSUELO MACK: Let me ask you about what you've done at Yale. 24 years ago you arrived at Yale at the tender age of 31, and their endowment was then $1 billion. As I just said, it went up to $22.9 billion and is now down to around $17 billion. But you decided to make some really radical changes in the mix of the portfolio. What was wrong with the old mix? What was it when you got there, and why did you decide to make those changes?
DAVID SWENSEN: So when I arrived at Yale, it was April 1, 1985. There's an April Fool's joke there somewhere.
CONSUELO MACK: Perhaps, yeah.DAVID SWENSEN: I was totally unencumbered with formal investment management experience, and the first thing I did was to look around and see how it was that other institutions invested their funds.
CONSUELO MACK: Right.
DAVID SWENSEN: I saw colleges and universities had, on average, 50% of their portfolio in U.S. stocks, 40% in U.S. bonds and cash, and 10% in a smattering of alternatives. If you think about that, both from a common sense perspective and from a finance theoretical perspective, it doesn't make any sense. First of all, diversification is a great thing.
CONSUELO MACK: And it was even known back then in 1985 that diversification was a great thing.
DAVID SWENSEN: Even in 1985. Harry Markowitz, probably the father of modern portfolio theory, says diversification is a free lunch. We teach our students in introductory economics, there ain't no such thing as a free lunch, but diversification is, for a given level of risk, you can generate higher returns if you diversify.
CONSUELO MACK: And diversification means a lot of different things to a lot of different people. So in 1985 at Yale and a lot of other endowments, they thought they were diversified, right, or maybe they didn't?
DAVID SWENSEN: Maybe they were diversified when you looked at their holdings of domestic equities and maybe they were diversified if you took a look at their holdings of the bonds, but there's no way that you can argue, having 50% of your assets in a single asset class - U.S. stocks - or having 90% of your assets in U.S. marketable securities represent diversification. The portfolio's simply failed that test.
CONSUELO MACK: So how did you get from you just described to what I just described in my opening remarks, a radically different portfolio, and why did you go the direction that you went? You're really vastly under-weighting the domestic stocks and bonds that you just talked about.
DAVID SWENSEN: There's one other important element that underpins the strategy. And that's that if you have a long investment horizon...
CONSUELO MACK: Which an endowment does.
DAVID SWENSEN: Which an endowment does. And which we do when we when we start our careers, and it becomes increasingly shorter as we get older, but this principle applies to a great many individual investors as well, with a long time horizon you should have an equity orientation.
CONSUELO MACK: An equity orientation because?
DAVID SWENSEN: Because over longer period of time, equities are going to deliver better results. If they don't, then capitalism isn't working. And we could well be at a point where investments and equities are going to produce returns going forward that are higher than what we've seen in the past five or ten years, and we could well be in the position where bonds are priced to produce lower returns. When you see Treasuries with coupons of two, two and a half or three percent, that doesn't really bode well for prospective returns.
CONSUELO MACK: So a lot of people listening out there are going to say, "So what does David Swensen think the returns we are going to get are going to be from equities?" So what do you think, equity returns - what should we expect in returns from equities, in the next 5, 10, 20 years?
DAVID SWENSEN: Those are questions that are really impossible to answer.
CONSUELO MACK: Okay.
DAVID SWENSEN: And one of the difficulties of this current crisis is that we have to think about securities markets more from the top-down basis or a macro basis than is the case when we're not facing the type of crisis that we've lived through in the past six or nine months or a year.
CONSUELO MACK: Right. Is that what you're doing now? Are you looking at the process through a macro screen, essentially? And if so, take us - take us through that process.
DAVID SWENSEN: I'm religiously bottom-up in everything that we do.
CONSUELO MACK: Bottom bottom-up, not top-down.
DAVID SWENSEN: Bottom-up, not top-down. But the crisis forces to you thinktop-down in ways that would, I think, be unproductive in normal circumstances, or absolutely necessary in the midst of a crisis. 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 5 or 10 or 15 years. And I guess this is kind of a long way of cycling back to your question about what kind of returns do we expect from equities and perhaps other asset classes going forward, and, you know, I would say with today as a starting point, you could expect over reasonable periods of time to be rewarded for equity exposure. 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 because you've got a much more attractive entry point.
CONSUELO MACK: Let me ask you about what we were talking about before as well. You looked at the endowment as it was invested in 1985 and you saw that it really wasn't well diversified, and all the studies, you are absolutely right, show that broad diversification pays off over long periods of time, so, and this is a question you've had many times, but a lot of people are saying now, diversification didn't pay off. And in fact the Yale endowment was down 25% from June to December of last year. You have an answer for that, and that answer is?
DAVID SWENSEN: Well, that I think in the first instance, diversification isn't going to help in the midst of a financial crisis, or at least the type of diversification that you see in institutional portfolios like Yale's. Diversification failed in 1987. It failed in 1998. And it failed again in this current crisis, because in these panics that we experienced in '87 and '98 and the one that we're experiencing currently, only two things matter - risk and safety. And people move away from risk, and they move toward the safety of holdings of Treasury securities. And that causes the price of all risky assets to go down simultaneously. And it also causes the price of Treasuries to go up dramatically. It happened in '87, it happened in '98, and it's happening today in a way that's far more pervasive and far more profound. And you have to move beyond the time, the immediate time of the crisis to see the benefits of diversification.
CONSUELO MACK: So were there any lessons that you learned in the financial crisis that we've just come through and we're still kind of clawing our way out of, investment lessons, anything that you would now do differently in the future than you did you in the past?
DAVID SWENSEN: 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. 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.
CONSUELO MACK: So hedge funds, private equity funds, right.
DAVID SWENSEN: And even if you look in the government bond market, there are illiquid Treasury securities where you get a substantial premium relative to Treasuries that are liquid or on the run. And then beyond that, there are full faith and credit instruments of the U.S. government that aren't standard Treasury securities that pay you even more. And it's solely a function of liquidity. So almost everywhere in the investment world, you can find illiquid alternatives that will pay a premium rate of return, but you've got to be able to manage the portfolio through a period of crisis, and make sure that you generate the liquidity that you need to support, in this case Yale University, and you've got to be in a position to generate the liquidity that you need to support your portfolio management activities.
CONSUELO MACK: I want to bring this back to the individual as well because I know you're very interested in helping the rest of us, and in Unconventional Success, which is your book for individuals, you stress asset allocation, diversification, how important that is, a couple of major principles. So tell us a little bit about - give us a thumbnail sketch of why diversification for individuals is so important and how we can figure out the appropriate asset allocation as well, which strikes me as difficult.
DAVID SWENSEN: So I think the same basic principles apply to institutions and individuals in terms of the importance of asset allocation and having a diversified and equity-oriented portfolio. When I started writing Unconventional Success what I wanted to do, was take Pioneering Portfolio Management and essentially translate it into a book for individuals that would follow the same type of strategy that we pursued at Yale. But I knew that there would have to be different investment tools.
CONSUELO MACK: Yes.
DAVID SWENSEN: That would be available to individuals because much of what we do at Yale was in vehicles that are only open to institutions. And I was really disappointed to find that I couldn't translate what we do at Yale directly to the portfolios that individuals hold.
CONSUELO MACK: And because you couldn't find the kind of active management available to individuals that you can find, obviously, at Yale.
DAVID SWENSEN: That's exactly it. You couldn't find high-quality active management for all the various asset classes that we've got at Yale for the individual investor. And so I came to the conclusion that the individual has to have a radically different portfolio. I actually came to the conclusion that in the investment world, you need to be on either one end of the continuum or the other end of the continuum. You either need to be very, very active and we are at Yale. I've got 20 investment professionals in the investments office who are devoting their careers to finding these high-quality active management opportunities. Or you should be on the other end of the spectrum, and you should be completely passive.
CONSUELO MACK: And that's where most of us, including myself, you think I belong. But why can't I hire 20 terrific, you know, mutual fund managers, just buy different mutual funds and allocate them among the different asset allocation classes. Why doesn't that work for me but it works for you?DAVID SWENSEN: The problem is the quality of the management in the mutual fund industry is not particularly high, and you pay an extraordinarily high price for that not-very-good management. I cited a study by Rob Arnott in my book and he looks at 20 years worth of mutual fund returns and comes to the conclusion that you have about a 15% chance, 15% chance of beating the market after fees and after taxes. And his study suffers from what all studies suffer from, something called survivor bias. You only get to look at the funds that have been in business for 20 years. But the mortality rate is stunning. There's a center for research and security prices survivorship-free database that has 30,000 mutual funds in it. Well, 20,000 of them are alive and kicking and10,000 of them are dead.
CONSUELO MACK: Why is it in the investment world - we try to, on WealthTrack, try to interview the top investment managers, and many of them are mutual fund managers, the kind of the crème de la crème. Why is it that I can't as an individual pick kind of the best mutual fund managers, just like I would pick the best doctor and best lawyer, in the financial world? Why doesn't it work?
DAVID SWENSEN: Well, there are a number of ways that you can answer the question. So we say after fees, after taxes. Well, fees are too high, right. So that's something that you see throughout the entire industry. And of course we're not talking about the index funds because index funds are--
CONSUELO MACK: Where you think we should be.
DAVID SWENSEN: They're a low-cost way of getting exposure to the market. Why are the tax bills so high? Because turnover's too high. The mutual fund managers are trading the portfolios as if taxes don't matter, and taxes do matter. And they're trading the portfolios as if transaction cost and market impact don't matter, and they do matter, and as they trade the portfolios, basically what's happening is that Wall Street is siphoning off its slice of the pie, and I guess that's a mixed metaphor. Sorry about that. And, you know, that's at the expense of the investor. But even if you end up finding that needle in a haystack, that mutual fund that is going to outperform over a long period of time, you as an investor- and I'm not just talking about individuals, this, unfortunately, is true of institutions as well- are likely to be motivated not by a pure, analytical, rational calculus, but by fear and by greed. Morningstar did a study which I think is absolutely fascinating, 10 years worth of returns for every one of the 17 categories of equity funds that they've got. And they compared dollar-weighted returns to time-weighted returns. Time-weighted returns are the returns you see in the prospectus. They're the returns you see in the advertisements. Dollar-weighted returns take into account investor cash flows. In every one of those 17 categories, dollar-weighted returns were less than the time-weighted returns, which meant that individuals got in after good performances and got out after bad performance. And so they were buying high and selling low. So they take this mutual fund industry, which produces a bunch of products that are not great to start with, and then they screw it up by chasing hot performance and selling after things turn cold.
CONSUELO MACK: It's definitely a problem with individuals.
DAVID SWENSEN: And institutions, too.
CONSUELO MACK: So your recommendation for individuals basically is to invest in index funds?
DAVID SWENSEN: Yup.
CONSUELO MACK: And your recommended asset allocation at this point would be for an equity-oriented investor, would be what?
DAVID SWENSEN: 30% in U.S. stocks. 15% in Treasury bonds. 15% in Treasury Inflation-Protected Securities. And then in my book, I talk about 20% in REITs. I've got a 15% allocation to foreign developed equities, and a 5% allocation to emerging markets.
CONSUELO MACK: Which I think you upped to 10%, right, in emerging markets?
DAVID SWENSEN: I think I would probably put some more in emerging markets. Maybe move that from 5 to10 and take the REITs and move it from 20 to 15.
CONSUELO MACK: But that would be a basic equity-oriented, growth-oriented portfolio that you think would provide the diversification you need. Another question, a lot of our viewers are older, either in retirement or nearing retirement. So how does that change the equation? How defensive should we get as we get closer to retirement?
DAVID SWENSEN: So I think that the best way to deal with getting older and moving from, let's say, the accumulation phase to the consumption phase, is simply to keep that risky portfolio intact but have a portfolio that's a blend of the risky portfolio and a riskless asset like cash or treasury inflation protected securities or something like that. And so, you know, when you're in your 30s or 40s or 50s, and you're saving for retirement, it should probably be 100% in the risky portfolio. But then as you grow older and get to the point where you're going to be actually consuming what it is that you've accumulated, to move out of the risky portfolio gradually into a combination of the risky portfolio and cash or Treasuries.
CONSUELO MACK: All right, that's very helpful. So David Swensen, I'm going to have to ask you now for the One Investment, the one thing we should all own some of in a long-term diversified portfolio. What would it be?
DAVID SWENSEN: So we talked earlier about the notion that this current crisis is causing up to think more top-down.
CONSUELO MACK: Yes.
DAVID SWENSEN: And this is an investment that addresses some of the concerns that I have coming out of this crisis. 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.
CONSUELO MACK: Down the road at some point.
DAVID SWENSEN: Down the road at some point. So Treasury Inflation-ProtectedSecurities would be the One Investment that I would put on the table that should be in every investor's portfolio.
CONSUELO MACK: And another portfolio diversifier as well. Double duty...
DAVID SWENSEN: Absolutely. It does double duty in another way. If you own new-issue Treasury Inflation-Protected Securities they can actually protect you against deflation as well because you're guaranteed that you'll get your principle back. So new issue, Treasury Inflation-Protected Securities can do double duty in the portfolio.
CONSUELO MACK: So David Swensen, Yale's Chief Investment Officer, thank you so much for joining us on WealthTrack.
DAVID SWENSEN: Thank you.
CONSUELO MACK: And we have to conclude this edition of WealthTrack. To watch this program again, just go to our website, wealthtrack.com. Starting on Monday you can see it as a podcast or as streaming video. And in addition, if you want to hear my extended interview with David Swensen, it will be available to our newsletter subscribers early next week. All you have to do is go to wealthtrack.com and sign up. It is all free. Thanks so much for visiting with us, and make the week ahead a profitable and a productive one.
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Consuelo Mack WealthTrack - May 22, 2009
CONSUELO MACK: This week on WealthTrack: in a television exclusive, Yale's legendary financial wizard David Swensen zaps the mutual fund industry and his endowment model critics and casts his magic spell on diversification, asset allocation, and contrarian investing, next on Consuelo Mack WealthTrack. Hello, and welcome to this edition of WealthTrack. I'm Consuelo Mack. We are breaking precedent on WealthTrack this week and devoting the entire program to one guest, and what a guest we have for you. It's a WealthTrack television exclusive with David Swensen, the truly legendary chief investment officer of Yale's endowment who, you will discover in a moment, pulls no punches in his approach to investment strategy, Wall Street, the mutual fund industry, and just about every other topic you engage him in. Swensen has literally transformed the way university endowments are managed all over the country. He has been so successful and influential that he has set a new standard for a wide array of institutional money managers from pension funds to foundations, and he was recently named to President Obama's new Economic Recovery Advisory Board. How did he do this? His track record tells the story. Under his leadership Yale's endowment generated 20 consecutive years of positive returns from 1988 until June of 2008, the end of its fiscal year. In the decade ended June of last year, the endowment had clocked an average annual return of 16.3%, versus 6.5% for the average college endowment and 2.9% for the S&P 500. That performance put Swensen in the top 1% of all institutional money managers and added an estimated $15 billion to Yale's endowment. Yale did not escape last year's market wrath. As of December, the portfolio lost about $6 billion or 26% of its value. But how did he generate those long-term results? Swensen radically altered what Yale's endowment invests in. From the traditional mix of domestic stocks, bonds, and cask, he and his team switched to alternative investments- their stake in private equity increased from under 4% to over 20%. Real assets like timber and real estate, the allocation increased from 8.5% to 29.3%; and in hedge funds from zero to 25.1%. Meanwhile, the investment in domestic stocks and bonds plunged from over 70% to under 15%. Swensen has literally written the book on university endowment management. His recently revised edition of Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment is considered the bible for institutional money managers. And luckily he has brought his message to individual investors with his book Unconventional Success: A Fundamental Approach to Personal Investment. What should our investment approach be? We're going to ask David Swensen next on Consuelo Mack WealthTrack. We are delighted to welcome in a WealthTrack television exclusive, the Chief Investment Officer of Yale's endowment, David Swensen. It's great to you have here on WealthTrack, thanks for joining us.
DAVID SWENSEN: It's my pleasure, thank you.
CONSUELO MACK: Let me ask you about what you've done at Yale. 24 years ago you arrived at Yale at the tender age of 31, and their endowment was then $1 billion. As I just said, it went up to $22.9 billion and is now down to around $17 billion. But you decided to make some really radical changes in the mix of the portfolio. What was wrong with the old mix? What was it when you got there, and why did you decide to make those changes?
DAVID SWENSEN: So when I arrived at Yale, it was April 1, 1985. There's an April Fool's joke there somewhere.
CONSUELO MACK: Perhaps, yeah.DAVID SWENSEN: I was totally unencumbered with formal investment management experience, and the first thing I did was to look around and see how it was that other institutions invested their funds.
CONSUELO MACK: Right.
DAVID SWENSEN: I saw colleges and universities had, on average, 50% of their portfolio in U.S. stocks, 40% in U.S. bonds and cash, and 10% in a smattering of alternatives. If you think about that, both from a common sense perspective and from a finance theoretical perspective, it doesn't make any sense. First of all, diversification is a great thing.
CONSUELO MACK: And it was even known back then in 1985 that diversification was a great thing.
DAVID SWENSEN: Even in 1985. Harry Markowitz, probably the father of modern portfolio theory, says diversification is a free lunch. We teach our students in introductory economics, there ain't no such thing as a free lunch, but diversification is, for a given level of risk, you can generate higher returns if you diversify.
CONSUELO MACK: And diversification means a lot of different things to a lot of different people. So in 1985 at Yale and a lot of other endowments, they thought they were diversified, right, or maybe they didn't?
DAVID SWENSEN: Maybe they were diversified when you looked at their holdings of domestic equities and maybe they were diversified if you took a look at their holdings of the bonds, but there's no way that you can argue, having 50% of your assets in a single asset class - U.S. stocks - or having 90% of your assets in U.S. marketable securities represent diversification. The portfolio's simply failed that test.
CONSUELO MACK: So how did you get from you just described to what I just described in my opening remarks, a radically different portfolio, and why did you go the direction that you went? You're really vastly under-weighting the domestic stocks and bonds that you just talked about.
DAVID SWENSEN: There's one other important element that underpins the strategy. And that's that if you have a long investment horizon...
CONSUELO MACK: Which an endowment does.
DAVID SWENSEN: Which an endowment does. And which we do when we when we start our careers, and it becomes increasingly shorter as we get older, but this principle applies to a great many individual investors as well, with a long time horizon you should have an equity orientation.
CONSUELO MACK: An equity orientation because?
DAVID SWENSEN: Because over longer period of time, equities are going to deliver better results. If they don't, then capitalism isn't working. And we could well be at a point where investments and equities are going to produce returns going forward that are higher than what we've seen in the past five or ten years, and we could well be in the position where bonds are priced to produce lower returns. When you see Treasuries with coupons of two, two and a half or three percent, that doesn't really bode well for prospective returns.
CONSUELO MACK: So a lot of people listening out there are going to say, "So what does David Swensen think the returns we are going to get are going to be from equities?" So what do you think, equity returns - what should we expect in returns from equities, in the next 5, 10, 20 years?
DAVID SWENSEN: Those are questions that are really impossible to answer.
CONSUELO MACK: Okay.
DAVID SWENSEN: And one of the difficulties of this current crisis is that we have to think about securities markets more from the top-down basis or a macro basis than is the case when we're not facing the type of crisis that we've lived through in the past six or nine months or a year.
CONSUELO MACK: Right. Is that what you're doing now? Are you looking at the process through a macro screen, essentially? And if so, take us - take us through that process.
DAVID SWENSEN: I'm religiously bottom-up in everything that we do.
CONSUELO MACK: Bottom bottom-up, not top-down.
DAVID SWENSEN: Bottom-up, not top-down. But the crisis forces to you thinktop-down in ways that would, I think, be unproductive in normal circumstances, or absolutely necessary in the midst of a crisis. 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 5 or 10 or 15 years. And I guess this is kind of a long way of cycling back to your question about what kind of returns do we expect from equities and perhaps other asset classes going forward, and, you know, I would say with today as a starting point, you could expect over reasonable periods of time to be rewarded for equity exposure. 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 because you've got a much more attractive entry point.
CONSUELO MACK: Let me ask you about what we were talking about before as well. You looked at the endowment as it was invested in 1985 and you saw that it really wasn't well diversified, and all the studies, you are absolutely right, show that broad diversification pays off over long periods of time, so, and this is a question you've had many times, but a lot of people are saying now, diversification didn't pay off. And in fact the Yale endowment was down 25% from June to December of last year. You have an answer for that, and that answer is?
DAVID SWENSEN: Well, that I think in the first instance, diversification isn't going to help in the midst of a financial crisis, or at least the type of diversification that you see in institutional portfolios like Yale's. Diversification failed in 1987. It failed in 1998. And it failed again in this current crisis, because in these panics that we experienced in '87 and '98 and the one that we're experiencing currently, only two things matter - risk and safety. And people move away from risk, and they move toward the safety of holdings of Treasury securities. And that causes the price of all risky assets to go down simultaneously. And it also causes the price of Treasuries to go up dramatically. It happened in '87, it happened in '98, and it's happening today in a way that's far more pervasive and far more profound. And you have to move beyond the time, the immediate time of the crisis to see the benefits of diversification.
CONSUELO MACK: So were there any lessons that you learned in the financial crisis that we've just come through and we're still kind of clawing our way out of, investment lessons, anything that you would now do differently in the future than you did you in the past?
DAVID SWENSEN: 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. 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.
CONSUELO MACK: So hedge funds, private equity funds, right.
DAVID SWENSEN: And even if you look in the government bond market, there are illiquid Treasury securities where you get a substantial premium relative to Treasuries that are liquid or on the run. And then beyond that, there are full faith and credit instruments of the U.S. government that aren't standard Treasury securities that pay you even more. And it's solely a function of liquidity. So almost everywhere in the investment world, you can find illiquid alternatives that will pay a premium rate of return, but you've got to be able to manage the portfolio through a period of crisis, and make sure that you generate the liquidity that you need to support, in this case Yale University, and you've got to be in a position to generate the liquidity that you need to support your portfolio management activities.
CONSUELO MACK: I want to bring this back to the individual as well because I know you're very interested in helping the rest of us, and in Unconventional Success, which is your book for individuals, you stress asset allocation, diversification, how important that is, a couple of major principles. So tell us a little bit about - give us a thumbnail sketch of why diversification for individuals is so important and how we can figure out the appropriate asset allocation as well, which strikes me as difficult.
DAVID SWENSEN: So I think the same basic principles apply to institutions and individuals in terms of the importance of asset allocation and having a diversified and equity-oriented portfolio. When I started writing Unconventional Success what I wanted to do, was take Pioneering Portfolio Management and essentially translate it into a book for individuals that would follow the same type of strategy that we pursued at Yale. But I knew that there would have to be different investment tools.
CONSUELO MACK: Yes.
DAVID SWENSEN: That would be available to individuals because much of what we do at Yale was in vehicles that are only open to institutions. And I was really disappointed to find that I couldn't translate what we do at Yale directly to the portfolios that individuals hold.
CONSUELO MACK: And because you couldn't find the kind of active management available to individuals that you can find, obviously, at Yale.
DAVID SWENSEN: That's exactly it. You couldn't find high-quality active management for all the various asset classes that we've got at Yale for the individual investor. And so I came to the conclusion that the individual has to have a radically different portfolio. I actually came to the conclusion that in the investment world, you need to be on either one end of the continuum or the other end of the continuum. You either need to be very, very active and we are at Yale. I've got 20 investment professionals in the investments office who are devoting their careers to finding these high-quality active management opportunities. Or you should be on the other end of the spectrum, and you should be completely passive.
CONSUELO MACK: And that's where most of us, including myself, you think I belong. But why can't I hire 20 terrific, you know, mutual fund managers, just buy different mutual funds and allocate them among the different asset allocation classes. Why doesn't that work for me but it works for you?DAVID SWENSEN: The problem is the quality of the management in the mutual fund industry is not particularly high, and you pay an extraordinarily high price for that not-very-good management. I cited a study by Rob Arnott in my book and he looks at 20 years worth of mutual fund returns and comes to the conclusion that you have about a 15% chance, 15% chance of beating the market after fees and after taxes. And his study suffers from what all studies suffer from, something called survivor bias. You only get to look at the funds that have been in business for 20 years. But the mortality rate is stunning. There's a center for research and security prices survivorship-free database that has 30,000 mutual funds in it. Well, 20,000 of them are alive and kicking and10,000 of them are dead.
CONSUELO MACK: Why is it in the investment world - we try to, on WealthTrack, try to interview the top investment managers, and many of them are mutual fund managers, the kind of the crème de la crème. Why is it that I can't as an individual pick kind of the best mutual fund managers, just like I would pick the best doctor and best lawyer, in the financial world? Why doesn't it work?
DAVID SWENSEN: Well, there are a number of ways that you can answer the question. So we say after fees, after taxes. Well, fees are too high, right. So that's something that you see throughout the entire industry. And of course we're not talking about the index funds because index funds are--
CONSUELO MACK: Where you think we should be.
DAVID SWENSEN: They're a low-cost way of getting exposure to the market. Why are the tax bills so high? Because turnover's too high. The mutual fund managers are trading the portfolios as if taxes don't matter, and taxes do matter. And they're trading the portfolios as if transaction cost and market impact don't matter, and they do matter, and as they trade the portfolios, basically what's happening is that Wall Street is siphoning off its slice of the pie, and I guess that's a mixed metaphor. Sorry about that. And, you know, that's at the expense of the investor. But even if you end up finding that needle in a haystack, that mutual fund that is going to outperform over a long period of time, you as an investor- and I'm not just talking about individuals, this, unfortunately, is true of institutions as well- are likely to be motivated not by a pure, analytical, rational calculus, but by fear and by greed. Morningstar did a study which I think is absolutely fascinating, 10 years worth of returns for every one of the 17 categories of equity funds that they've got. And they compared dollar-weighted returns to time-weighted returns. Time-weighted returns are the returns you see in the prospectus. They're the returns you see in the advertisements. Dollar-weighted returns take into account investor cash flows. In every one of those 17 categories, dollar-weighted returns were less than the time-weighted returns, which meant that individuals got in after good performances and got out after bad performance. And so they were buying high and selling low. So they take this mutual fund industry, which produces a bunch of products that are not great to start with, and then they screw it up by chasing hot performance and selling after things turn cold.
CONSUELO MACK: It's definitely a problem with individuals.
DAVID SWENSEN: And institutions, too.
CONSUELO MACK: So your recommendation for individuals basically is to invest in index funds?
DAVID SWENSEN: Yup.
CONSUELO MACK: And your recommended asset allocation at this point would be for an equity-oriented investor, would be what?
DAVID SWENSEN: 30% in U.S. stocks. 15% in Treasury bonds. 15% in Treasury Inflation-Protected Securities. And then in my book, I talk about 20% in REITs. I've got a 15% allocation to foreign developed equities, and a 5% allocation to emerging markets.
CONSUELO MACK: Which I think you upped to 10%, right, in emerging markets?
DAVID SWENSEN: I think I would probably put some more in emerging markets. Maybe move that from 5 to10 and take the REITs and move it from 20 to 15.
CONSUELO MACK: But that would be a basic equity-oriented, growth-oriented portfolio that you think would provide the diversification you need. Another question, a lot of our viewers are older, either in retirement or nearing retirement. So how does that change the equation? How defensive should we get as we get closer to retirement?
DAVID SWENSEN: So I think that the best way to deal with getting older and moving from, let's say, the accumulation phase to the consumption phase, is simply to keep that risky portfolio intact but have a portfolio that's a blend of the risky portfolio and a riskless asset like cash or treasury inflation protected securities or something like that. And so, you know, when you're in your 30s or 40s or 50s, and you're saving for retirement, it should probably be 100% in the risky portfolio. But then as you grow older and get to the point where you're going to be actually consuming what it is that you've accumulated, to move out of the risky portfolio gradually into a combination of the risky portfolio and cash or Treasuries.
CONSUELO MACK: All right, that's very helpful. So David Swensen, I'm going to have to ask you now for the One Investment, the one thing we should all own some of in a long-term diversified portfolio. What would it be?
DAVID SWENSEN: So we talked earlier about the notion that this current crisis is causing up to think more top-down.
CONSUELO MACK: Yes.
DAVID SWENSEN: And this is an investment that addresses some of the concerns that I have coming out of this crisis. 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.
CONSUELO MACK: Down the road at some point.
DAVID SWENSEN: Down the road at some point. So Treasury Inflation-ProtectedSecurities would be the One Investment that I would put on the table that should be in every investor's portfolio.
CONSUELO MACK: And another portfolio diversifier as well. Double duty...
DAVID SWENSEN: Absolutely. It does double duty in another way. If you own new-issue Treasury Inflation-Protected Securities they can actually protect you against deflation as well because you're guaranteed that you'll get your principle back. So new issue, Treasury Inflation-Protected Securities can do double duty in the portfolio.
CONSUELO MACK: So David Swensen, Yale's Chief Investment Officer, thank you so much for joining us on WealthTrack.
DAVID SWENSEN: Thank you.
CONSUELO MACK: And we have to conclude this edition of WealthTrack. To watch this program again, just go to our website, wealthtrack.com. Starting on Monday you can see it as a podcast or as streaming video. And in addition, if you want to hear my extended interview with David Swensen, it will be available to our newsletter subscribers early next week. All you have to do is go to wealthtrack.com and sign up. It is all free. Thanks so much for visiting with us, and make the week ahead a profitable and a productive one.
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Saturday, May 23, 2009
David F. Swensen
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A must, must, program on Consuelo Mack this morning. Here's what's available now, with full transcript coming soon:
And here's an analysis which I do not find very good, in seekingalpha.com from a year and a half ago:
Sunday, March 15, 2009
David Swensen -- Listen-Up
David Swensen, Yale's in-house Warren Buffet, answers questions posed by Marc Gunther.
I will be posting a lot on this article by Marc Gunther. So far it is not on the web. So I will "Nuance" it from time to time and post the verbatims. Correction, here it is!
http://www.yalealumnimagazine.com/issues/2009_03/swensen.html
Note that Swensen does not say "bond funds."
The article was written by Marc Gunther '73, a contributing writer to Fortune magazine, who blogs at marcgunther.com
Wednesday, January 14, 2009
David Swensen of Yale
What an investment performance for a university!
http://www.yalealumnimagazine.com/issues/2005_07/swensen.html
http://www.yalealumnimagazine.com/issues/2005_07/swensen.html
Thursday, February 21, 2008
Cramer v. Yale's Swensen
From the article on Swensen I blogged yesterday.
He is obviously correct, but so is Cramer in his own way.
“Most people do not have the resources and time to pick market-beating managers” of hedge funds, private equity funds or funds of funds, he said. And he said that the techniques used by hedge funds often result in higher taxes than those of index funds.
So he advocates another approach, which he outlined in the book “Unconventional Success: A Fundamental Approach to Personal Investment” (Free Press, 2005). He proposes a portfolio of 30 percent domestic stocks, 15 percent foreign stocks, and 5 percent emerging-market stocks, as well as 20 percent in real estate and 15 percent each in Treasury bonds and Treasury inflation-protected securities, or TIPS.
The real estate investment can be made through real estate index funds. Though the real estate market has declined and your portfolio is below its target allocation to it, he said, don’t try to time the market. Go ahead and rebalance because no one really knows where the market’s bottom is.
Diversification will buffer a portfolio from declines in specific asset classes. For example, he said: “If the dollar declines dramatically, you have foreign and emerging-market equities. And a declining dollar may well be associated with inflation, but a diversified portfolio would include TIPS,” to provide a hedge. “That means if any of these scenarios play out, an investor has sizable chunks of his portfolio that protect against them,” Mr. Swensen said.
When possible, he said, rebalancing should be done in a tax-sheltered account, like an I.R.A. or a 401(k), to avoid tax liabilities. “When you are putting fresh money to work,” he said, “you put it in an asset class where you are underweight and take money out of a class that is overweight.”
He says it is fruitless for individual investors to pick stocks. “There is no way that an individual can go out there and compete with all these highly qualified and compensated professionals,” Mr. Swensen said.
HE criticized the approach of Jim Cramer, the CNBC host, who encourages investors to trade stocks in strategies that Mr. Swensen says cost heavily in commissions and taxes.
“There is nothing that Cramer says that can help people make intelligent decisions,” Mr. Swensen said. “He takes something that is very serious and turns it into a game. If you want to have fun, go to Disney World.”
Brian Steel, a spokesman for CNBC, responding on behalf of Mr. Cramer, said Mr. Cramer “had a long history of success as a trader and fund manager.” He added that Mr. Cramer is a proponent of long-term investing and thorough research.
Mr. Swensen says investors should forget market timing entirely. Once an individual sets up a program, it should be rebalanced quarterly or semiannually, he said, “but it should be disciplined.”
When the markets decline, try not to pay attention, he said. “Let yourself off the hook,” he said. “If you pursue the sensible long-term policy, look at it over a 5- to 10-year period. Don’t look at five months.”
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