The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: SeattleCPA on May 30, 2018, 07:59:03 PM
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Say Tyler,
Does this post, which is great, provide a way to look at just David Swensen's performance?
I.e., I think he would agree most universities shouldn't go active. In fact, I think he says that in Pioneering Portfolio Management.
But in looking Yale's performance under his tenure, is he really getting beat?
I can't tell...
https://portfoliocharts.com/2018/04/16/things-we-can-all-learn-from-the-yale-vs-buffett-debate/#more-23533,
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As I note in the article, Swensen took over the Yale endowment in 1985. Look at the heat map only in that row and later and you’ll see that he’s done a fantastic job. I’m sure his proponents would argue that it’s because of his skill as an investor, while his skeptics would argue that anyone starting investing in 1985 at the leading edge of the US stock boom would look like a genius.
While I don’t have the numbers in front of me, I’ll simply point out that he chose to compare performance since 1998, not since he took over. That’s very beneficial to his argument, as a large percentage of his outperformance can be attributed to avoiding the stock crash in the early 2000’s. So even if the numbers under his watch compare very well, he’s stacking the deck by using the single best timeframe to maximize the difference while also skimming over the very real issue of manager turnover risk in actively managed investments.
In any case, I don’t mean to belittle his skill or even claim that Buffett is right. The larger point is that smart passive asset allocation is IMHO a very compelling alternative to either approach for everyday investors like you and me.
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Wow cool. I think that was your best post yet. I thought I read your site regularly, but I guess I fell off sometime in March. Also I really appreciate your new 15th percentile calculators.
Any portfolio that wants to be considered superior should have to beat typing a 3 or a 4 into every box on your calculators simply because those assets exist and the number needs to be 100. Seriously, the naive equally weighted 3-4% strategy has me seriously considering that (or maybe 5%s) for the future.
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The larger point is that smart passive asset allocation is IMHO a very compelling alternative to either approach for everyday investors like you and me.
Totally agree. And, I think, so does Swensen ... both for individuals and institutions.
I'm sure you've read Pioneering Portfolio Management, but for benefit of those who haven't, that book documents Swensen's thoughts/suggestions/assumptions regarding active management by big institutional investors like the Yale Endowment fund... In that book, Swensen as much says that "active" doesn't work unless you're Yale, focus on alternative asset classes, have access to the top venture funds, top hedge funds, etc. etc. He then nicely points out you're not Yale and so won't get access to top managers
My takeaway (which I don't think conflicts with your blog post's general conclusions): If I had Bill Gates type money, a couple of dozen MBAs and Ph.Ds on in my office, and access to that very top tier of active managers (like Kleiner Perkins, Elliot Management, etc), I very possibly would go active.
Or maybe I'd just stay with my current Swensen asset allocation.
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Tyler, interesting article.
I just wanted to point out that on the 2nd and 7th charts the draw-down box at the top wasn't clear to me. In the second it looks like the box reports that both the US Market index and at 13year draw-down lengths, but When I look at the charts themselves it looks like the Yales longest one is 14 years. Perhaps the box at the top of the chart needs an extra decimal place? 13.1 yrs vs 13.9 yrs or something?
First with respect to Mr. Buffett's advice, he specifically recommends the S&P 500 index fund (90% S and P and 10% in short term treasuries in some instances), whereas you and Yale compare Yale and Swenson a total market index fund. Also, Buffett's bet with protege parters was based on the S&P 500. Although the Total market and S&P 500 index are correlated to a degree, my understanding is that the S&P 500 has lower volatility and less severe draw-downs than the Total market index since it does not include small and mid-caps. So comparing the Yale and Swenson portfolios with the total market is not really a precise comparison with the advice that Buffett has specifically given. If you think about it, its a bit of a straw man, given that your article seems to give particular weight to the lower volatility and less severe draw-downs of the Yale and Swensen portfolios over the Total Market Index.
Also with respect to the Buffett advice, I think its important to point out that Buffett's thesis is not that skillful individuals won't be able to beat the market over the long term; I mean so far he has as well as some others. I think his point is that it is incredibly hard -- only a few with prevail --and that after fees most active managers are unlikely to produce superior returns and could result in underperformance if the wrong manager is picked and too high of a fee is agreed to at the outset. I think the data you provide bears this out to a degree. In your fourth chart the real CAGR of the Total market index is 3.3- 10.3 whereas the Yale portfolio is 5-11.9. However if one subtracts 150-175 basis points or so from the Yale performance, which I believe is in the ballpark for most retail investors who pay for active management through a financial advisor, then the results not very different from the total market index. And if one subtracts fees akin to the "2 and 20" that many hedge funds charge, then I'm sure the Yale portfolio would do much worse. Add to all of this the fact that most institutions select multiple active mangers, so good and bad performers begin to cancel each other out over time. The institutional investor is left with essentially market returns minus the fees they have agreed to over the holding period. Yale has an in-house office, so I assume they save a lot on fees by employing their managers directly.
A couple of observations:
1. Yale due to its size gets a discount on adviser fees.
2. Yale isn't investing in traditional asset classes and I am pretty sure Swensen and Yale think active can't work with traditional asset classes as a long-term strategy. Rather, they're investing in alternative asset classes: absolute return funds (e.g., hedge funds), private equity, venture capital, real assets like timber and direct real estate.
Also, this semi-redundant comment: Yale and Swensen don't think individuals can duplicate their approach. Further, they don't think most endowment funds can either. They get a seat at a very selective table where, in a sense, the odds are stacked in their favor. E.g., with venture capital investments, they get to invest with top tier VCs who by virtue of their status and position get to invest in the most promising startups.
I realize as I feverishly type this, that I'm repeating myself. Here's a longer discussion from a blog post I did:
Successful Active Investor Tips from David Swensen (https://evergreensmallbusiness.com/successful-active-investor/)