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David Swensen

79 quotes

“Casual commitments invite casual reversal, exposing portfolio managers to the damaging whipsaw of buying high and selling low. Only with the confidence created by a strong decision-making process can investors sell mania-induced excess and buy despair-driven value.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Most asset classes contain investment vehicles exhibiting some degree of agency risk, with corporate bonds representing an extreme case. Structural issues render corporate bonds hopelessly flawed as a portfolio alternative. Shareholder interests, with which company management generally identifies, diverge so dramatically from the goals of bondholders that lenders to companies must expect to end up on the wrong side of nearly every conflict.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“active management strategies demand uninstitutional behavior from institutions”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Harvard articulated a goal of accumulating sufficient new capital gifts to offset the difference between the general inflation rate and university expense growth. In so doing, the university explicitly employed new gifts to replenish inflationary losses.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Unfortunately, the excess of university inflation over general price inflation may well consume any incremental returns from TIPS, providing almost no real return to the institution... Lack of productivity gains in education accounts for the greater inflation in academic costs.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“the distinction between current income and capital appreciation proves too easily manipulated to provide a sound foundation for spending policy.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“In desiring to supply a stable flow of operating income, hoping to exist forever and wishing to comply with minimum IRS distribution requirements, foundation fiduciaries face a fundamentally conflicting set of goals.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Simulations show that in 1970, if a traditional portfolio followed a stable spending policy, more than 60 percent of the purchasing power of a fund evaporated by the end of the decade... By spending at unsustainably high rates, purchasing power of assets declined dramatically, dropping more than 40 percent during the 1970s.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Successful investors articulate coherent investment philosophies, consistently applied to all aspects of the portfolio management process.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Investment returns stem from decisions regarding three tools of portfolio management: asset allocation, market timing, and security selection.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Typical institutional asset classes include domestic equities, foreign equities, fixed income, absolute return, real assets, and private equities.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Market timing consists of short-run deviation from the long-term policy targets.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“The authors note that “[o]n average, policy accounted for a little more than all of total return,” implying that security selection and market timing make no material contribution to returns.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“By choosing to place asset allocation at the center of the investment process, investors ground the decision-making framework on the stable foundation of long-term policy actions.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Because such activity lowers anticipated returns, market timers must succeed substantially more than 50 percent of the time to post a winning record. The wind in the speculator’s face, combined with transactions costs and market impact, provide a high hurdle for those who would beat the market by holding abnormally high cash positions.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“In less efficient markets, active management produces potentially sizable rewards. In fact, passive replication of benchmark returns proves impossible in private markets, such as venture capital, leveraged buyouts, real estate, timber, and oil and gas. Even were the market return obtainable, investors would almost certainly prefer to pursue more selective approaches. When examined over reasonably long periods of time, in aggregate, illiquid asset classes generally produce mediocre returns relative to less risky marketable security alternatives.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Intelligent acceptance of illiquidity, and a value orientation, constitutes a sensible, conservative approach to portfolio management.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Security selection decisions, while extremely difficult to execute with consistent success, contain the potential to add value to portfolio returns. Investors enhance opportunity for beating the market by pursuing excess returns where the degree of opportunity appears largest, by accepting reasonable degrees of illiquidity, and by maintaining a value orientation.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Sensible investors approach markets with a strong equity bias, since accepting the risk of owning equities rewards long-term investors with higher returns... the tension between the conflicting goals of preserving assets and spending for operations can be relaxed only by increasing investment returns.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“gold “bugs” will be disappointed to learn that their favorite precious metal returned a multiple of only 27 [from 1925 to 2005], trailing by a large margin the returns of low risk Treasury bills and only modestly exceeding the 16-fold impact of inflation.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“One study suggests that “…the 5 percent real capital appreciation return on U.S. stocks is exceptional, as other markets have typically returned 3 percent less than U.S. equities.” Were this conclusion to influence expectations for long-run equity returns, the case for stock investments becomes considerably less compelling.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Of the fifteen largest foundations in the United States, two (the Lilly Endowment and the Starr Foundation) hold nearly all assets in a single stock, another (the Robert Wood Johnson Foundation) holds well over half of assets in a single stock, and yet another (the Annie E. Casey Foundation) holds over a quarter of assets in a single stock. Oblivious to the measure of good fortune that contributed to the undiversified portfolio’s rise to the top of the charts, trustees use past success to justify continuing to concentrate assets in one security.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“True diversification requires owning assets that respond differently to fundamental forces that drive markets.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“If these asset classes provide high equity-like returns in a pattern that differs from the return pattern of the core asset (U.S. domestic equities), investors create portfolios that offer both high returns and diversification. Although on an asset-specific basis, higher expected returns apparently come with the price of higher expected volatility, the lack of correlation between individually risky asset classes actually reduces overall portfolio risk. Diversification represents “a free lunch” that allows investors to reduce risk without sacrificing expected returns.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Market timing, defined as a short-term bet against long-term policy targets, requires being right in the short run about factors that are impossible to predict in the short run. Yet investors can reasonably deal with the important drivers of returns in the long run as short-term anomalies disappear into predictable long-term patterns. Sensible investors avoid concentrated bets against the institution’s adopted asset allocation, thereby eliminating the risk of inflicting serious damage by holding a portfolio inconsistent with long-term objectives.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“This valuation-based technique worked well until 1958, when stock yields last exceeded bond yields.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“price volatility creates opportunity only when prices change more than necessary to reflect changes in underlying fundamentals.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“The fundamental purpose of rebalancing lies in controlling risk, not enhancing return.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Market timing explicitly moves the portfolio away from long-term policy targets, exposing the institution to avoidable risks. Because policy asset allocation provides the central means through which investors express return and risk preferences, serious investors attempt to minimize deviations from policy targets. To ensure that actual portfolios reflect desired risk and return characteristics, avoid market timing and embrace rebalancing activity to keep asset classes at targeted levels.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“While no market prices assets precisely at fair value all of the time, most markets price most assets with reasonable efficiency most of the time, providing few opportunities for easy gains. Moreover, active management costs increase the hurdle for success as active investors pay management fees, incur transactions costs, and create market impact. Intelligent investors approach active strategies with a healthy sense of skepticism. Sensible active managers favor markets with inefficiently priced assets and avoid those markets with efficiently priced assets.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“High quality fixed income securities, arguably the most efficiently priced asset in the world, trade in markets dominated by savvy financial institutions... The spread between first and third quartile results for active fixed income managers measures an astonishingly small 0.5 percent per annum for the decade ending June 30, 2005.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“With fee adjustments, the median active manager exceeds the benchmark by 0.5 percent per year. A first quartile manager adds real value, however, exceeding the benchmark by 1.4 percent per annum net of fees. The median small-capitalization manager beats the market by a scant 0.2 percent per annum. In contrast, a first quartile manager adds 2.3 percent per annum, reflecting the greater investment opportunity in less efficiently priced securities.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Simple return numbers tend to overstate value added since early strong results, necessary to attract institutional interest, generally apply to relatively small amounts of money. As size is the enemy of performance, more established managers with greater funds under management tend to produce less eye-catching results... A dollar-weighted evaluation of active management would no doubt provide even less encouragement to those hoping to employ market-beating strategies.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“In the least efficient private markets, no passive alternative exists. Even were a passive alternative available, market-like results would likely disappoint.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Serious managers who attempt to identify inefficiencies frequently gravitate toward relatively illiquid markets, since rewarding investments tend to reside in dark corners, not in the glare of floodlights. Such out-of-the-way, undiscovered opportunities receive little attention from Wall Street, which thrives on markets that generate large trading volumes.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Examples of illiquid opportunities in marketable securities abound. In the realm of full faith and credit obligations of the U.S. government, otherwise identical bonds trade at different prices solely because market liquidity differs... Receiving a full percentage point in yield over Treasuries for simply bearing the illiquidity of a private placement raises serious questions about rationality of markets.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Investors prize liquidity because it allows trading in and out of securities. Unfortunately, liquidity tends to evaporate when most needed.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“mindless contrarian investing poses dangers to portfolios. Sometimes popular companies deserve premium valuations. Sometimes out-of-favor companies deserve discounted valuations. Identifying out-of-favor assets serves as a starting point for serious investors, leading to further analysis. Only if careful analysis confirms expectations of superior future performance should investors purchase securities. Purchasing stocks with low price-to-earnings ratios or price-to-book ratios represents a naïve strategy.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Value investors seek to purchase companies at a discount to fair value, not to purchase low growth or distressed assets 'per se.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“When foolish clients of high quality managers destroy value by responding perversely to past performance, the already tough case for active management becomes tougher still.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“The process of asset allocation illustrates the importance of combining art and science in investment decision making, as neither informed judgment nor quantitative analysis alone produces consistently successful results.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Institutional portfolios require assets likely to generate equity-like returns, such as domestic and foreign equities, absolute return strategies, real assets, and private equities. To mitigate asset-class-specific risks, investors diversify aggressively, holding assets in proportions that allow the asset class to matter, but not matter too much.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Committing less than 5 percent or 10 percent of a fund to a particular type of investment makes little sense; the small allocation holds no potential to influence overall portfolio results. Committing more than 25 percent or 30 percent to an asset class poses the danger of overconcentration. Most portfolios work well with around a half a dozen asset classes.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Functional attributes play the dominant role in defining asset classes, with structural and legal characteristics taking secondary positions. Asset class distinctions rest on broad sweeping differences in fundamental character: debt versus equity, domestic versus foreign, inflation sensitive versus deflation sensitive, private versus public, liquid versus illiquid. Ultimately investors attempt to group like with like, creating relatively homogeneous groups of investments that provide fundamental building blocks for the portfolio construction process.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Treasury Inflation-Protected Securities have no place in a properly defined fixed income portfolio. Traditional fixed income assets respond to unanticipated inflation by declining in price, as the future stream of fixed payments becomes worth less. In contrast, inflation-indexed bonds respond to unexpected price increases by providing a higher return. When two assets respond in opposite fashion to the same critically important variable, those assets belong in different asset classes.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Judgment plays a critical role in defining and shaping asset classes. Unless the statistical analysis employed in the asset allocation process rests on reasonable asset class definitions, the resulting portfolio stands little chance of meeting institutional needs.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Although using normal distributions facilitates implementation of mean-variance analysis, real-world security returns include significant nonnormal characteristics, limiting the value of the conclusions... Richard Bookstaber... states that a “general rule of thumb is that every financial market experiences one or more daily price moves of four standard deviations or more each year. And in any year, there is usually at least one market that has a daily move that is greater than ten standard deviations.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Care must be taken, however, to avoid using asset class constraints simply to fashion a reasonable-looking portfolio. Taken to an extreme, placing too many constraints on the optimization process causes the model to do nothing other than to reflect the investor’s original biases... Alternatively, investors might identify superior, yet reasonable, portfolios by choosing from a set of portfolios that lay near (but perhaps not directly on) the efficient frontier.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Mean-reverting behavior in security prices implies that periods of abnormally high returns follow periods of abnormally low returns, and vice versa.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“A global equity asset class fails to recognize the critical contribution that currency movements make to investment returns, while individual country asset classes create too many variables for reasonable analysis. Separating domestic equities from foreign allows investors to account for critical home country characteristics, particularly with respect to currency. A further distinction between developed and emerging markets groups assets with respect to important differentiating risk and return characteristics.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source