TITLE: Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated
AUTHOR: David Swensen
RATING: 8 of 10
Highlights:
- As the originator of the now widespread "endowment" model, Swensen offers several new strategies for investors to consider.
- Swensen book focuses more strongly on asset allocation than other books, which is probably a boon to investors who may be more focused on how to pick stocks.
- The author's overall approach to portfolio management is a mix of various philosophies, including value investing, asset allocation, and efficient market theory. This gives the reader much food for thought without descending into dogmatic assertions.
- Swensen supports his advocacy, or lack thereof, for various asset classes with sound reasoning and historical data.
Weak Points
- The writing style is a bit dry and academic. Â This should come as no surprise as the author runs an academic institution's endowment fund and the book is targeted toward other professionals in similar situations.
- Some strategies may be impossible for individual investors to implement (anyone got a producing oil field in their portfolio?). Again, this is not a surprise -- it is not geared toward individual investors.
- The book, while revised to reflect the credit crisis of 2008, published before the major market drop in late 2008 and thus, no commentary is included to reflect upon Yale's massive loss.
Despite Swensen's focus toward institutional investors, Â I found his revised edition to be insightful. While many of the strategies and recommendations are out of my purview (for instance, interviewing hedge fund managers or avoiding portfolio management consultants), the reasoning behind how to structure a portfolio and allocate assets is still relevant to all investors.
A book review is far too limiting to include all of Swensen's key insights but a few are worth mentioning.
Swensen recommends index investing for the vast majority of investors, except for those who have the resources to engage in active management decisions. Thus, the primary distinction between an active vs passive investor isn't whether that investor is an individual or an institution but simply, does the investor have the time and ability to make smart decisions on a consistent basis?
The author suggests asset allocation is the primary driver of long-term investment success, yet many investors spend too little time on this aspect of it. Instead, investors should seek to find a balance of asset classes that will deliver above-average returns and diversify against various market risks.
To this end, Swensen recommends allocating relatively small percentages to highly efficient markets like the US Treasury or domestic stock markets. Because markets here are relatively efficient, it is difficult to deliver risk-adjusted returns above the market itself. He notes that the top 4 endowment funds have the following average asset allocation: 15% US stocks, 11% US bonds, 40% private assets (including private equity, real estate, oil/gas).
Instead, Swensen has guided Yale's endowment fund to allocate large percentages of capital to illiquid "real" assets like real estate, resource properties and timberland. With access to top-flight managers who can add value operationally, real asset investors can gain good returns while protecting themselves from the volatility of the markets. Interestingly enough, Swensen rejects the use of public proxies for oil/gas and timber asset classes but states that REITs and other public securities are suitable proxies for real estate investment.
Swensen shares his view on many topics, including the investment worthiness of various asset classes ( he doesn't like junk bonds), the inherent conflicts of interest between the investor and various stewards from the asset manager to corporate honcho and the proper mentality needed to achieve investment success (contrarian). While I didn't necessarily agree with everything, it is beneficial to question your own beliefs and assumptions and Swensen's book accomplishes that quite well.
Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated
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Davy Bui
http://enlightened-american.com
