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David Swensen

79 quotes

“Real estate provided extremely strong returns during the 1980s with relatively low volatility and relatively low correlation to traditional marketable securities. Not surprisingly, naïve application of mean-variance analysis led to recommendations of extraordinary allocations to real estate.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Real estate contains characteristics of both debt and equity. The stream of contractual lease payments resembles fixed income, while the residual value shows equity-like characteristics. Hence, return and risk expectations logically flow from and fall between those for stocks and bonds. Similarities in factors driving valuations of real estate and traditional marketable securities lead to the conclusion that correlations might be expected to be positive, albeit less than one.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“When relying on historical data, after a bull market run, asset classes appear most attractive just when future prospects prove bleakest.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Unfortunately, mean-variance optimization provides little useful guidance in choosing a particular point on the efficient frontier. Academics suggest specifying a utility function and choosing the portfolio at the point of tangency with the efficient frontier. Such advice proves useful only in the unlikely event that investors find it possible to articulate a utility function in which utility relates solely to the mean and variance of expected returns.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Private assets, including venture capital, leveraged buyouts, real estate, timber, and oil and gas, which barely register among the broad group of educational institutions and account for less than 10 percent of assets, play an important role for the major endowments with an allocation of 40 percent.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“In spite of producing greater expected returns, large institution portfolio risk levels actually fall below risk estimates for the less well-diversified endowments. Employing rigorous quantitative portfolio analysis contributes to the construction of diversified, high-return portfolios.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“More serious problems stem from instability in the risk and covariance characteristics of asset classes. The tendency of markets for risky assets to move together in times of crisis reduces the value of diversification, at least in the short run.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“If you’ve got half of your assets in a single asset class, U.S. stocks, and you have 90% of your assets in U.S. marketable securities, you’re not diversified. Half your assets in a single asset class is way too much.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“if you’ve got a long time horizon, you should be rewarded by accepting equity risks.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“So, if security selection and market timing are negative-sum games, then asset allocation would explain more than 100% of the returns.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“So, you could have a portfolio with 30% in U.S. Treasuries, and year in and year out you would pay this opportunity cost. And then, when the crisis comes, you can be happy for six or 12 or 18 months, and then you go back to paying the opportunity cost. And I would argue that, if you expand your time horizon to a sensible length of time, that the strategy, where you hold relatively little in the high opportunity cost U.S. Treasuries, is the best strategy for a long-term investor.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“we’re essentially one step removed from the security selection process. So, our job is to find the best hedge fund managers, find the best domestic equity managers, find the best buyout managers, and put together partnerships that work for them and work for the university.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“if somebody asked me whether stocks are expensive or cheap, my first line of defense, it doesn’t really matter all that much to me, because we’re well-diversified and because we do a great job of rebalancing.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“When I wrote my second book, Unconventional Success, I characterized its message as “a sensible investment framework for individuals,” in contrast to the institutional focus of Pioneering Portfolio Management. I erred in describing my target audiences. In fact, I have come to believe that the most important distinction in the investment world does not separate individuals and institutions; the most important distinction divides those investors with the ability to make high quality active management decisions from those investors without active management expertise. Few institutions and even fewer individuals exhibit the ability and commit the resources to produce risk-adjusted excess returns.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“The low return of Treasury bills should not come as a surprise. On at least two measures Treasury bills have been close to risk free. Investors face virtually no credit exposure, as the U.S. government represents, perhaps, the most creditworthy entity in the world. In addition, Treasury bills have provided a hedge against inflation, with returns that closely track price increases. The price of these attractive characteristics has been an extremely low real return. Thus, at least with twenty-twenty hindsight, Treasury bills would not have been an appropriate investment for an institution investing to earn substantial after-inflation returns.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Even though market return studies indicate that high levels of equity market exposure benefit long-term investors, the associated risks come through less clearly. Significant concentration in a single asset class poses extraordinary risk to portfolio assets. Fortunately, diversification provides investors with a powerful risk management tool. By combining assets that vary in response to forces that drive markets, investors create more efficient portfolios. At a given risk level, properly diversified portfolios provide higher returns than less well diversified portfolios. Conversely, through appropriate diversification, a given level of returns can be achieved at lower risk. Harry Markowitz, pioneer of modern portfolio theory, maintains that portfolio diversification provides investors with a “free lunch,” since risk can be reduced without sacrificing expected return.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“After the October 1987 crash, portfolio stability disappeared as market forces drove down allocations to stocks and pushed up allocations to bonds. Responding to the collapse in stock prices with fear, the average endowment manager exacerbated the market-induced dislocation by selling stocks. Reacting to the rally in high quality bond prices with greed, the average endowment manager enhanced the market-induced increases by purchasing more bonds. From June 1987 to June 1988, equity holdings declined from 55.3 percent to 49.1 percent, more than can be explained by the market drop during the year. Roughly offsetting the equity decline, fixed income increased from 36.7 percent to 41.9 percent, more than can be explained by the market rally. In retrospect, educational institutions bought high and sold low, following a poor recipe for investment success.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“real-time [daily] rebalancing tends to cost less, as trades generally prove accommodating to the market. Frequent rebalancers buy in the face of immediate declines and sell in the face of immediate increases, in both cases supplying liquidity for traders pursuing the opposite, predominant tack... The university’s endowment enjoys tax-exempt status, allowing frequent trading without adverse tax consequences associated with realization of gains... As a matter of course, at the beginning of every trading day Yale estimates the value of each of the components of the endowment. When marketable securities asset classes (domestic equity, foreign developed equity, emerging market equity, and fixed income) deviate from target allocation levels, the university’s investments office takes steps to restore allocations to target levels. In fiscal year 2003, Yale executed approximately $3.8 billion in domestic equity rebalancing trades, roughly evenly split between purchases and sales. Net profits from rebalancing amounted to approximately $26 million, representing a 1.6 percent incremental return on the $1.6 billion domestic equity portfolio. Even though rebalancing profits produce a nice bonus for investors, the fundamental motivation for rebalancing concerns adherence to long-term policy targets.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“In a sustained bull market, rebalancing appears to be a losing strategy, as investors constantly sell assets showing relative price strength. Years go by without reward, other than the knowledge that the portfolio embodies the desired risk/reward characteristics. The alternative of not rebalancing to policy targets causes portfolio managers to engage in a peculiar trend-following market timing strategy. Like many contrarian pursuits, rebalancing frequently appears foolish as momentum players reap short-term rewards from going with the flow. Regardless of potentially negative reputational consequences, serious investors maintain portfolio risk profiles through disciplined rebalancing policies, avoiding the sometimes expedient appeal of moving with market forces.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“In those markets with limited opportunities for active management, managers deviate little from the market portfolio, leading to market-like returns... While overachievers may temporarily gain clients and gain assets (and gain public adulation), because efficient markets present no mispricings for active managers to exploit, good results stem from luck, not skill. Apparent success proves transitory for active managers in efficient markets. As a result, over time, managers in efficient markets gravitate toward “closet indexing,” structuring portfolios with only modest deviations from the market, ensuring both mediocrity and survival. In contrast, active managers in less efficient markets exhibit greater variability in returns. In fact, many private markets lack benchmarks for managers to “hug,” eliminating the problem of closet indexing. Inefficiencies in pricing allow managers with great skill to achieve great success, while unskilled managers post commensurately poor results. Hard work and intelligence reap rich rewards in an environment where superior information and deal flow provide an edge.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“The radical break comes when moving from liquid public to illiquid private opportunities. Absolute return, real estate, leveraged buyouts, and venture capital exhibit dramatically broader dispersions of returns. For the ten-year period, absolute return shows a range of 7.1 percent between first and third quartiles, while real estate and leveraged buyouts exhibit even more extreme 9.2 percent and 13.7 percent per annum spreads. Venture capital captures the dispersion prize with a stunning 43.2 percent first-to-third quartile range. Selecting top quartile managers in private markets leads to much greater reward than in public markets... Ironically, identifying superior managers in the relatively inefficiently priced private markets proves less challenging than identifying skillful players in the efficiently priced marketable securities markets.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Fixed income represents an interesting case. If investors want fixed income assets to provide a hedge against financial accidents, then only high quality, long-term, noncallable bonds satisfy the requirement. Although from a legal and structural perspective below-investment-grade bonds (a.k.a. junk bonds or high-yield bonds) belong to the fixed income family, they lack important crisis-hedging attributes. Junk bonds contain equity-like risks, as payments depend mightily on the financial health of the issuer. Even if the high-yield obligor meets contractual obligations, holders may lose bonds through a mandatory call, as lower interest rates or improved corporate health allow issuers to redeem bonds at a fixed price prior to maturity. Ironically, junk bondholders may lose if corporate prospects deteriorate or if they improve! In any case, below-investment-grade bonds provide little protection against a period of severe financial distress, since at a time of economic disruption high-yield bondholders might suffer from a corporate default.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Many investors include foreign bonds in portfolios as part of a broadly defined fixed income asset class or as a separate asset class. Neither choice makes fundamental sense. First, foreign bonds have no role in a fixed income portfolio designed to protect against deflation or financial trauma. Investors cannot know how foreign bonds might respond to a domestic financial crisis, since conditions overseas may differ from the environment at home. Moreover, foreign exchange translations influence returns in a substantial, unpredictable manner. Second, as a separate asset class, high quality foreign bonds hold little interest. The combination of low, bond-like expected returns and foreign exchange exposure negates any positive attributes associated with nondomestic fixed income.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Careful investors define asset classes in terms of function, relating security characteristics to the role expected from a particular group of investments. In the case of fixed income, introduction of credit risk, call risk, and currency risk diminish disaster-hedging attributes. Yet in reaching for return or seeking an easy way to beat the benchmark, most institutional portfolios contain disproportionate allocations to bonds lacking the purity of U.S. Treasury obligations. The net result leads to a portfolio that meets neither the goal of producing equity-like returns nor the goal of protecting against market trauma.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“Mean-variance optimization defines return distributions completely in terms of expected return and risk. The framework fails to consider other important attributes, such as liquidity and marketability... Clearly, less marketable assets, such as private equity and real estate, cannot be rebalanced in a low cost, efficient manner... Another problem with mean-variance optimization relates to investor time horizon. In many cases, investors care about multiple objectives that span different time horizons. For instance, endowment managers seek intermediate-term spending stability even as they pursue long-term purchasing power preservation. A mean-variance time period of three to five years might serve the spending stability criterion, while a time period spanning decades might serve the purchasing power criterion. The almost universally employed one-year time period serves neither... Because the process involves materially simplifying assumptions, unconstrained asset allocation point estimates produced by mean-variance optimization represent simply a starting point for further work.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“absolute return managers attempt to produce equity-like returns uncorrelated to traditional marketable securities through investments in event-driven and value-driven strategies. Event-driven strategies, including merger arbitrage and distressed security investing, depend on the completion of a corporate finance transaction such as a merger or corporate restructuring. Value-driven strategies employ offsetting long and short positions to eliminate market exposure, relying on market recognition of mispricings to generate returns. Generally, absolute return investments involve transactions with relatively short time horizons, ranging from several months to a year or two.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“The real assets category includes real estate, oil and gas, and timberland, which share the common characteristics of sensitivity to inflationary forces, high and visible current cash flow, and opportunity to exploit inefficiencies. Real assets provide attractive return prospects, excellent portfolio diversification, and a hedge against unanticipated inflation. Despite important similarities, the three subasset classes differ from one another, showing only modest correlations, as supply of and demand for each depends on fundamentally different factors. For example, recent history indicates that oil and gas investments exhibit negative correlation to real estate and timber. Such diversification within real assets helps to produce steady returns through a variety of economic environments.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“The use of simulations to test portfolios created through mean-variance optimization allows assessment of the effectiveness of investment and spending policies over appropriate time horizons. Employing the same capital markets assumptions used in mean-variance analysis, the simulations allow examination of longer time frames, consideration of interaction between spending and investment policies, and translation of statistical capital market and portfolio characteristics into relevant quantitative criteria for decision makers. Failure to achieve investment goals defines portfolio risk in the most fundamental way. Goals, and risks following therefrom, must be described in a manner allowing investment fiduciaries to understand trade-offs between various portfolios. By evaluating portfolios in terms of probabilities of maintaining purchasing power and providing stable spending streams, fiduciaries understand and choose among alternatives defined in the context of criteria directly relevant to institutional objectives.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source
“the risks that exist in the portfolio aren’t really captured by the standard deviation of the returns. Just a quick example: If you look at real estate, or timber, or even any of our illiquid assets, they’re appraised relatively infrequently. There tends to be a huge stability bias in the appraisals. If somebody looks at a piece of real estate 12 months ago, six months ago, and today, they’re likely to see pretty much the same thing that they saw over that period. You can compare and contrast that to the volatility they’ve got in the stock market. I think Bob Shiller deserves credit for coining the term “excess volatility.” There’s no question that stock prices are way more variable than they need to be to adjust for changes in the underlying fundamentals.”
David Swensen (1954–2021) said by 2021 at the latest wikiquote, CC BY-SA 4.0 source