David Swensen, the Yale Endowment Manager, proposed this one size fit in all model portfolio for individual investors. The major difference between this portfolio and other conventional portfolios is that it emphasizes international equities (including emerging market equities) as well as real estate investment. Compared with various diversified portfolios, an interesting asset class missing is the commodities, which has been considered to be an excellent anti-inflation diversifier. This is complemented with its emphasis on the inflation-protected treasury bonds. In the model portfolio constructed, we assume annual rebalance although Swensen actually pointed out that in Yale's institutional portfolio, they rebalanced daily, which, by his estimate, gave about 1-2% of excessive returns vs. annual rebalancing.
Compared with the Simpler Is Better (SIB) portfolios we discussed in the previous article, Swensen excluded commodities while putting emphasis on using fixed income for the purposes of inflation protection and portfolio hedging. Since commodities ETFs and index funds are still problematic (see this article), Swensen's six assets are the most investable assets.
Note: it has been confusing whether Swensen advocated using long term treasury bonds or just an average duration treasury bonds. In his book "Unconventional Success: A Fundamental Approach to Personal Investment", he wrote "The purity of noncallable, long-term, default-free Treasury bonds provides the most powerful diversification to investor portfolios". Based on this sentence, it has been interpreted that he meant to use the long term treasury bond. However, recently, a reader posted a reply from David Swensen on this question in morningstar.com that indicates the average duration of treasury bonds.
The portfolio consists of the following:
- 30% in Vanguard Total Stock Market Index (VTSMX or Vanguard ETF VTI)
- 20% in Vanguard REIT Index (VGSIX or Vanguard ETF VNQ)
- 20% in Vanguard Total International Stock (VGTSX or 15% in VGTSX or Vanguard ETF VEU and 5% in VEIEX or Vanguard ETF VWO)
- 15% in Vanguard Inflation Protected Securities (VIPSX or iShares Tip TIP)
- 15% in Vanguard Long Term Treasury Index (VUSTX or iShares TLT or Vanguard ETF EDV)
We have constructed both index fund based and ETF based plans using the above funds. Model portfolios using MyPlanIQ Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA) are generated. The following compares the Swensen's portfolio with SAA moderate and TAA moderate model portfolios. Since the ETF based plan has a shorter history, we present here the index fund based portfolios.
SAA moderate model portfolio differs from Swensen's portfolio in both its target allocation and rebalancing frequency. SAA moderate is equally weighted among risky assets US Equity, International and Emerging Market Equity. It rebalances monthly whenever an asset weight deviates 20% from the target weight. The Swensen's rebalances annually. This, along with the proper selection between VIPSX and VUSTX in the fixed income portion, contributes to the outperformance over the Swensen's portfolio. TAA has the best performance as it used asset momentum to rotate out of risky equity assets and avoided big loss in 2008 and early 2009.
The following table shows its performance from 12/31/2000 to 6/7/2010.
|1 Yr||3 Yr||5 Yr||Inception|
|Annualized Return (%)||16.56||7.72||11.2||11.32|
|Sharpe Ratio (%)||107.23||55.36||84.95||103.24|
In conclusion, David Swensen's six assets are the most investable core assets with which main stream asset allocation strategies can be used to achieve reasonable investment results.