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Yale’s David Swensen on Asset Allocation

MJG
edited July 2012 in Fund Discussions
Hi Guys,

You all are familiar with Yale’s renown endowment fund manager David Swensen. His over two decade performance record approaches legendary status. His integrity and honesty matches that superb investment outcome. His advice is to be trusted. On March, 2011 he delivered an asset allocation talk in Korea.

David Swensen possesses an amiable personality and is an engaging financial speaker. His style is humble, uses numbers sparingly, and full of commonsense wisdom. The lecture examines the impacts of asset allocation, market timing, and specific stock selection on portfolio returns. His commentary and conclusions validate earlier work by a host of financial researchers. When Swensen talks, the investment community listens. So should we.

Access to the lecture is available in a 2-part series, each of which is about 20 minutes in duration. Here are the Links to the presentations:





I enjoyed the lecture; I suspect you will too. Please take advantage of this opportunity to better focus your own personal investment policy.

In many ways, Swensen’s conclusions are similar to the observations reported by Scott Burns in an article that Ted recently referenced. Here is a revisit to Ted’s fine Link:

http://assetbuilder.com/blogs/scott_burns/archive/print/2012/07/27/lazy-portfolios-beat-professionally-managed-portfolios.aspx

The Lazy-man’s portfolios do it again. Scott Burns’ commentary reinforces the futility of active fund management from a statistical perspective. His research suggests that owning a passively managed fund offers a higher likelihood of superior performance than a randomly selected actively managed fund. Of course, the linchpin to the selection process is not to randomly choose; research like that executed by many MFO members does tilt those odds somewhat in the favorable direction.

Today, CXO Advisory Group also addressed some issues of the debate with a very short term survey of the success of active mutual fund management with respect to their market timing acumen. Their results again disappoint, and fit nicely into the dismal record accumulated on average by market timers.

Here is the reference to the brief CXO study:

http://www.cxoadvisory.com/7922/sentiment-indicators/investment-managers-and-market-timing/

CXO concludes as follows: “In summary, evidence from simple tests on NAAIM survey data does not support a belief that the money managers as a group successfully time the U.S. stock market over the short term.”.

This rather tepid summary is consistent with the limited time scope of the simple study. But it adds yet another nail to the market timers coffin.

I recognize that I provided a whirlwind reference tour, but please visit and enjoy these Links. I anticipate that your portfolios will benefit from the tour.

Your comments are welcomed.

Best Regards.

Comments

  • I read a springtime article regarding Swensen's choice (if I recall properly) concerning an etf mix of 6-8 funds. Recall that the portfolio was rather static and to only be rebalanced once a year; back to original % holdings in each area.

    As noted: "Scott Burns’ commentary reinforces the futility of active fund management from a statistical perspective. His research suggests that owning a passively managed fund offers a higher likelihood of superior performance than a randomly selected actively managed fund. Of course, the linchpin to the selection process is not to randomly choose; research like that executed by many MFO members does tilt those odds somewhat in the favorable direction."
    And, as you note; the selection process.
    An investor or their advisor can just as readily damage a portfolio with a poor selection of any fund style; be it active, passive, index, etf or whatever.
    Regarding a static portfolio, one which is enforced by IRS rules and regs; is our daughter's 529 college fund. Only one change per calendar year, of the portfolio mix, is allowed. The mix is currently U.S. centered with 50% each in VBMPX and VITPX. This mix should do "okay" with the current sideways or slightly upward equity market. The downside potential would be strong in the event of a 2008 style market melt; which the bond portion would cushion somewhat, but could not offset equity losses. If the markets continue to swing back and forth between the equity and bond kids; the return will be decent and currently arrives at 7.15% YTD.
    Regards,
    Catch
  • Thanks for the Swensen's Asset Allocation Lecture.
  • MJG
    edited August 2012
    Reply to @catch22:

    Hi Catch,

    Thanks for your thoughtful contribution.

    Your recall that David Swensen is a reluctant trader and typically recommends very rare portfolio rebalancing is spot on-target. In another lecture at Yale, Swensen advised a Robert Shiller student class that assessing a mutual fund manager based on a single quarterly performance record was “ludicrous”. I specifically put ludicrous in quotation marks because that was his exact word choice and it impressed me.

    Swensen often impresses me; that is probably why he is one of my investment heroes. Relative to other portfolio managers, he trades rather infrequently, and when he does adjust his holdings, it is done incrementally. That’s a nice fit with my portfolio management philosophy.

    I suppose that is one of the reasons why I like Swensen; we share some common operational rules. The behavioral wizards observe that we all exhibit a confirmation bias; although I attempt to battle that disability, I too am guilty of falling into that Siren’s song trap.

    But I also respect Swensen’s frankness and honesty. When he initially attempted to write an investment book for individuals, he recognized that private investors do not have the resources to duplicate his institutional strategy because of time horizon, goal, and research constraint disparities. He completely rewired his “Unconventional Success” book accordingly. In that book, Swensen essentially endorsed a Lazy-man portfolio, rather passive Index approach for private investors. That recommendation dramatically departs from his institutional asset allocation which is dominated by alternate (hedge funds, timber, venture capital) investment categories.

    While preparing my reply to you, my thoughts shifted to a one-on-one meeting I held with a financial advisor a decade or so ago. She offered two distinct selling points to justify her extra 0.50 % fee above other management costs. She had assembled a list of superior portfolio managers who would specifically be selected for separate parts of my portfolio. She would review them on a monthly basis and replace poor performers if they failed to satisfy benchmarks either in a single or in two consecutive quarters. Swensen would not be comfortable with that hurdle.

    She and her partner, an economist with impressive academic credentials, would assess the overarching economic environment monthly, and would make adjustments that would reflect that review on a semi-annual basis. Economists are notoriously poor trend forecasters. They tend to be overly linear and do not include enough feedback loops in their analyses.

    I did not buy into their program. Their decision time scale was wrong for me; it likely would have been wrong for Swensen too.

    As the California professors said in their landmark research paper “Frequent Trading is Hazardous to Your Wealth”.

    Best Wishes.
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