Money Whiz Says Keep It Simple
By JOHN KIMELMAN
YALE UNIVERSITY'S CHIEF INVESTMENT OFFICER, David Swensen has compiled a 17.4%
annualized return for his school's endowment fund over the past decade,
easily making him one of
he's done it by limiting his exposure to
Conversely, he's loaded up on a wide range of more exotic investments such as private investments in timber and, of course, hedge funds. (Yale's endowment fund was valued at $15.2 billion as of June 30.)
Swensen , who earned his doctorate in economics from Yale, has written a book, Unconventional Success: A Fundamental Approach to Personal Investment (The Free Press, Simon & Schuster) -- to help individual investors achieve better results. His advice: Don't try this at home.
argues that most individual investors, including many wealthy people, are
better off with a plain-vanilla portfolio of regular and inflation-protected
Treasury bonds and low-cost index funds tied to
"If you're an individual investor who at most is going to spend a few hours a week looking at your investments, there's no way you can identify active management opportunities reliably," he says.
Barron's Online: In your book, you suggest a model portfolio built around stocks, bonds and real estate in order to give an individual investor proper diversity. But don't investors such as yourself invest in hedge funds with short positions to achieve even greater diversity?
Swensen : What I'm suggesting
here is much better diversification than most individuals currently have. For
example, many investors have a 50% weighting in
you look at relative valuations today, the
Q: In an effort to
achieve even greater diversification, what about buying gold or gold stocks,
or even passively managed "bear" funds that buy put options on
indexes to counteract the effects of a down stock market?
I had once suspected that the gold bugs had historical returns in their favor, but they don't. Over long periods of time, their returns have been miserable.
Q: What about bear
Q: What's the best
index for getting exposure to
Q: Many investors are
now using exchange-traded funds that track individual sectors such as
technology, pharmaceuticals or financial services. What do you think of this
Q: How should investors
gain exposure to non-U.S. stocks?
Q: It's pretty well
known that most of the variance in investment performance -- 90% or more --
can be explained by basically broad asset allocation decisions rather than by
individual stock and bond selection. Why is it, then, that so many investors
still focus on picking the right stocks and bonds?
Q: You are a strong
opponent of the actively managed mutual-fund industry, arguing that most
funds don't outperform the market index funds. But aren't there any active
fund managers that you think are doing a good job?
Well before [New York Attorney General Eliot] Spitzer got up on his soapbox about the fund industry, Longleaf went through their list of shareholders, and they kicked out people who were trading aggressively.
Q: Though you invest in
hedge funds for Yale, you are very tough on most hedge funds, as well as
funds of funds, that are available to individual investors. You basically
argue that the ones available to most investors lack the lockup periods and
the quality of management necessary to beat the market net of fees. Can you
I mean, if the individual knows enough to select hedge funds, then they are in a position to engage a fund of funds manager intelligently. But if they don't know enough about the underlying investments, then it's just a crap shoot if they go to a fund of funds because they don't know how to evaluate the fund of funds manager.
Many hedge funds and funds of funds also promise unreasonable liquidity to their investors.
At Yale, we're perfectly happy if we're working with a hedge-fund manager to lock up our capital for three years or four years or five years.
Q: In other words, a
one-year lockup, which is fairly common, isn't enough time to provide the
necessary environment to manage money effectively and to attract the best
So, when we work with fund managers, we'll try and make sure that they've got lockups that spread out over a five-year period so they don't end up being exposed to losing any more than 20% of their capital in a given year.
But if they operate with a one-year lockup or even quarterly liquidity, then they are operating with liquidity that's inconsistent with the underlying investments and that's a recipe for disaster.
Q: Thanks for your time.
Don't Try This At Home