Saturday, July 10, 2010

VIDEO TOP 5 ASSET ALLOCATION - Contribution 4: David Swensen (Yale) about a structured investment process


David Swensen, the Chief Investment Officer of the Yale Endowment in the USA, is a remarkable asset manager. Swensen literally added billions of dollars of value to the Endowment Fund of the Ivy League university. 

 David Swensen: 
The Man who added billions of dollars to the value of the Yale Endowment Fund

Swensen is characterized by:

a) A very structured approach to investing; and
b) The guts to deviate not just from long-term strategic weights and benchmarks if required; and
c) The mindset to do so even when others are going totally different ways.

Point c) is an ability that most investors say they have, but when panic strikes only a few are capable of sticking to their 'process'. Put another way: When the market climate is good thousands of investors are willing to interpret a 10 percent price correction as an opportunity to buy. However, when the market climate deteriorates growing groups of investors will see that same 10 percent price drop as 'the beginning of the end' and panic strikes.

The other way round: when markets are depressed most investors are waiting to see what others are doing. Only when they have heard others talk about specific stocks or asset classes, or when the prices of those securities have started to rise again will they consider buying that security. 

In other words: there is a tendency to sell when it is too late and to buy when it is to late. The Yale Endowment generated good performance because Swensen sticked to a pre-defined long-term strategy and had the courage to deviate not in an opportunistic way, but in a way in which short-term tactical deviations had to be integrated in the longer-term approach.

The structured investment process incorporated i) Asset Allocation; ii) Market Timing; and iii) (Stock/Manager) Selection.

In this Yale lecture Prof. D. Swensen tells us in detail about his approach. We felt that the lecture was so clear that it deserved a spot in our video top-5 on Asset Allocation.


Normally we would be very reluctant to add a lecture of about 70 minutes length to our Video Top 5. We know that people normally prefer shorter captures. However, we felt that all of us can learn from Swensen's approach and the clarity of explanation in combination with his modest/low profile way of presenting we derinitely something to be appreciated in a world in which most alleged financial gurus or top business men seem to be able to tell us how fantastic they are and why they deserve their bonus. But when asked about their approach and what they did fo us that was not directly linked to general market moves they hide themselves between jargon and black-box like stories. Not so Swensen. For those of you who like his explanations, we also refer to his investment books. In those books he explains in a bit more detail how he believes investment portfolios should be run efficiently.

What is also clear from Swensen's lecture is that there is a difference between individual and professional investors. But both make their mistakes albeit that those mistakes tend to be different. The top-down approach that Swensen tells us about can be applied by private investors as well. In that case he recommends to stick closer to strategic weights, be very reluctant with market timing and avoid overestimation of abilities in this respect and last but not least: select good products/funds within the 'Selection' component of the integrated investment process.

Our Video Top 5 on Asset Allocation has now 4 contributions:

4) David Swensen's lecture on an integrated, structured top-down investment process that starts with strategic and tactical asset allocation

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