David Swensen Changes His Portfolio Allocations

Investing Superstar:

David Swensen wrote Unconventional Success: A Fundamental Approach to Personal Investment, one of the best-selling investment books of 2005. Since then, Swensen, who has a phenomenal track record running the $22.5 billion endowment at Yale has become an Investing Superstar. In his book, Swensen recommended a portfolio allocation for the individual investor who wants a well-diversified, equity-oriented portfolio. I highly recommend his book.

Changes in Attitudes:

In a March/April 2009 interview with Yale Magazine, Swensen revised his allocation recommendations "due to economic conditions." The changes: Swensen lowered REITs from 20% to 15% & raised Emerging Markets from 5% to 10%.

Swensen Under Attack:

As recently written in Seeking Alpha, Swensen’s reputation is taking a beating, even from one of Swensen's proteges. Just like every investment portfolio heavily allocated to real estate and stocks, Yale’s endowment was down 25% in the fiscal year ending mid-year.

Asset Allocation:

Swensen advocates one strategy for individual investors and a different strategy for institutional investors. For all classes of investors, Swensen advocates a large allocation to REITs. For the institutions, Swensen advocates heavy doses of alternative investments such as hedge funds and private equity. A huge chunk of Yale's endowment was invested in hedge funds and private equity funds. With such a risky investing strategy, I wonder if Swensen’s out performance was due to his expertise, due to his overuse of hedge funds or due to just plain dumb luck.

Hedge Funds & Private Equity:

I like Swensen’s' recommendations for the individual investor. I am strongly against his use of hedge funds and private equity for any class of investor; institutional or individual. Both asset classes have high management fees and agency drag. I know I shouldn't paint all hedge funds with the same brush stroke, but the hedgies lost all my respect when some of them invested in Madoff without performing due diligence. While I think Swensen is brilliant, my opinion of him was tarnished when he advocated strong doses of these two asset classes.

Sensible Approach for the Common Man:

No matter, for Swensen does not suggest these overrated asset classes for the individual investor. Instead, he suggests a more sensible asset allocation. Swensen recommended that individuals allocate their assets using only index funds and keep the asset allocation fixed from year to year. In the interview with Yale Magazine, Swensen has apparently changed his “fixed” asset allocation. I think his revisions are better than the original:

David Swensen's Revised Asset Allocation Model:

In the chart below, Swensen’s original recommendations have been updated with his Mar 2009 revisions. I’ve taking the liberty of adding corresponding ETF choices in parentheses:

• 30% in U.S. Stock index funds (VTI), (IYY)
• 15% in Foreign Developed stocks (EFA), (VEA)
• 10% In Emerging Market stocks (VWO), (EEM)
• 15% in Real Estate index funds (VNQ), (ICF)
• 15% in U.S. Treasury bonds (SHY), (IEF)
• 15% in U.S. Treasury Inflation Protected Securities (TIP), (IPE)

Articles About Swensen:

• Swensen’s Asset Allocation (older Business Week Article)
• Critique of Swensen's Asset Allocation. (older)
• “Cash Me If You Can”, (Portfolio Magazine, April 09)
• “Ivy League Endowments Finally ‘Dumb’” (WSJ, June 09).

Commentary:

Overall, I think Swensen's portfolio allocation is a good starting point for the novice investor. As well, I don't like nominal bonds at all, so my bond side is heavier in TIPs and WIPs. At 25%, Swensen is light on the non-US side. As well, Swensen misses important asset classes, especially foreign bonds and foreign REITs. Rather than blindly follow Swensen’s stock/bond ratio, the ration should be tailored to the age and risk tolerance of the particular investor.

Full Disclosure: Author is long U.S. Equities & Real Estate, Foreign Developed Equities, Emerging Markets Equities, TIPs and WIP. You should always consult with a professional before investing.

Comments

[Samsung:]

Nice article, author.

Question - how David Swenson can recommend a fixed allocation and then change it ?

Jul 02 02:22 PM

[Samsung:]

oops . .sorry .. ignore that question.

Jul 02 03:00 PM

[Living4Divi...:]

Thanks for the compliments on my article, Samsung - Swensen revised his allocation recommendations "due to economic conditions.


On Jul 02 02:22 PM Samsung wrote:

> Nice article, author.
>
> Question - how David Swenson can recommend a fixed allocation and
> then change it ?

Jul 02 04:27 PM

[Living4Divi...:]

Go away Cetin

On Jul 02 08:06 PM sancs wrote:

>
>
> good articles: www.iamn

Jul 02 08:23 PM

[Bob Shreve:]

Thanks for the information. I admire Swensen for taking the time to 'talk' to average investors. Regarding hedge funds, I'm sure that Yale gets a better deal on their investments than most hedge fund investors. I read an article in which he talked about his relationships with the people he invests with. In fact, I believe he had gotten to the point where one of his investment criteria was the character of the principals.

Jul 02 08:41 PM

[Living4Divi...:]

Hi Bob - I never knew that about Swensen's investing criteria. interesting stuff. thanks for adding the nugget about Swensen

On Jul 02 08:41 PM Bob Shreve wrote:

> Thanks for the information. I admire Swensen for taking the time
> to 'talk' to average investors. Regarding hedge funds, I'm sure
> that Yale gets a better deal on their investments than most hedge
> fund investors. I read an article in which he talked about his relationships
> with the people he invests with. In fact, I believe he had gotten
> to the point where one of his investment criteria was the character
> of the principals.

Jul 03 04:36 AM

[Tampa DDS:]

Good article.

Jul 03 08:19 PM

[Living4Divi...:]

Thanks - I appreciate the compliment


On Jul 03 08:19 PM Tampa DDS wrote:

> Good article.

Jul 04 06:43 AM

[The Caring ...:]

Thanks for the article

Jul 08 10:42 PM

[Fiorano:]

This is Swensen's response: "The first thing I’d say is it’s too short a time period over which to judge. If you want to have a fair assessment of any investment strategy, get through the crisis and then look back and see how things performed.
If you look back 10 years from June 30, 2008, Yale’s performance was 16.3 percent per annum. Bonds were 5 percent plus or minus, and stocks were 3 percent plus or minus. So what are you going to do? You’re going to give up that kind of performance to hold a lot of bonds to protect against the financial crisis? Where’s the alternative that performs so much better? 100 percent government bonds? Is that the alternative? Well, then what would have happened if you had held that the decade before? I don’t get it.
They’re not thinking about what happened the 10 years before and they’re not giving us time to get through this crisis and see how it plays out for the Yale model against a more traditional portfolio. That’s one of the really interesting things in these articles that have been critical of the Yale model and sometimes of me personally: Where’s the alternative? What’s the option? Yeah, the model fails. Well, relative to what?

Here is the full interview: www.propublica.org/art.../

Sep 24 12:47 AM

[DAH1:]

I am currently investing in a Roth through Vanguard

Oct 31 10:11 AM

[DAH1:]

Thanks for your article. I am presently investing in a Roth through a Vanguard 2020 Index mix and was thinking of changing it to a mix like Swensen suggests. However, the minimums prevent me from doing that with what I presently have invested. You suggested an alternative mix...if you were to do that with VG Indexes may I ask what that would look like %-wise? And, how do you think that would stand up against the VG 2020? Thanks again!

Oct 31 10:48 AM