Foreword by Charles D. Ellis
1. Correctly and increasingly widely recognized as the best book ever written on managing instutional investment portfolios
2. On seven major dimensions Yale's investment management stands out
- Returns over long periods are outstanding
- The consistency of these returns is remarkable
- The structural strenght of the portfolio against market adversities is robust.
- The innovative and assertive search for superiror opportunities - by asset class and by manager - is exemplary
- The linkage of endowment investment management to Yale's overall financial mgmt continues to be innovative, constructive and prudent
- The organizational effectiveness and teamwork efficiency shown consistently by Yale investments office is admirable
4. Uses Monte Carlo simulations that incorporate many years of past experiences, Yale's portfolio is carefully structured to achieve optimal, non-covariant results
5. Swensen's Secret Sauce
5. Swensen's Secret Sauce
- Invest boldly in unconventional asset classes and to commit significant millions to little known, often newly formed, managers is a carefully constructed, rigorously tested portfolio structure and decision-making process that are clearly defensive
- Teamwork - rich cluture of professional respect and personal affection that bonds so many talented and committed individuals into a superbly effective team
Tobin's Friend: Foreward to the 2000 Edition
1. Introduction
5. Asset Allocation
1. The process of asset allocation illustrates the importance of combining art and science in the investment making decision.
2. Marrying the art of seasoned judgement with the science of numeric analysis creates a powerful approach to allocating portfolio assets
3. Many investors simply allocate among the asset classes popular at the time in proportions similar to those of other investors, creating uncontroversial portfolios that may or may not address institutional needs
4. Just as sartorial change, investment fashions ebb and flow. E.g railroad bonds in late 19th century
5. Investors begin by selecting asset classes and combining them in a way that promises to meet fundamental investment goals
6. By understanding and articulating the role played by each asset class, investors create a strong foundation for an institutional investment program
7. Asset class distinctions rest on broad sweeping differences in fundamental character: debt vs equity, domestic vs foreign, inflation vs deflation sensitive, private vs public, liquid vs illiquid.
8. Nobel laureates Harry Markowitz and James Tobin developed mean-variance optimization, one of the most widely used analytical frameworks. The process indetifies efficient portfolios, which for a given level of risk have the highest possible return have the lowest possible risk.
9. Mean-variance optimization defines return distributions completely in terms of expected retrun and risk. The framework fails to consider other important attributes, such as liquidity and marketability
10. MVO assumes annual rebalancing portfolio allocations, less marketable assets, such as private equity and real estate, cannot be rebalanced in a low cost
, efficient manner. This reduces the applicability of MV analysis
11. Another problem with MVO relates to inve
stor time horizon. In many cases, investors care about multiple objectives that span different time horizons.
12. Jeremy Grantham, a prominent money manager, believes reversion to the mean constitutes the most powerful force in financial markets
Private Equity
1. Private Equity includes venture captial and leveraged buyout participations, assets that respond to market influences in a manner similar to marketable equities.
2. Since private investments created through financial engineering strongly resemble their marketable security counterparts, the argument for segregating such private assets from public securities rests primarily on differences in liquidity
3. Superiror opportunities for value creation, combined with liquidity and structural differences, support treatment of private equity as a distinct asset class
4. Infrequent marks-to-m arket cause privte assests to appear less volatile than the underlying reality. The combination of infrequent reporting and market insensitive
5. Illiquidity and higher risk in private assets demand a substantioal premium over domestic equity's expectatios of 6% returns with 20% risk
6. Asset Allocation Management
1. The fundamental objective of portfolio managment is faithful implementation of long term asset allocation targets
8. Alternative Asset Classes
1. Employ alternative assets as legitimate tools in the portfolio allocation process to reduce dependence on traditional marketable securities, facilitating the structirung of truly diversified portfolios
2. Prices for many alternative assets lack the efficieny typical of prices for typical of prices for traditional marketable securities, lending to opportunities for astutue manages to add sunstantial value in the investment process.
Absolute Return
1. Absolute return investing consists of inefficiency-exploiting marketable securities positions that exhibit little or no correlation to traditional stock and bond investments
2. Abolute return managers reduce market risk by investing in event-driven or value dirven suitations
3. Event-driven - completion of specific corporate finance transaction such as consummation of a merger or emergence of a company from bankruptcy
4. value-drive stategies employ hedged portfolios in which short-positions offset long positions, dramatically reducing the investor's systematic risk,
5. In the absence of vaule added by active managers, investors receive money market rates of return
Event-Driven Investing
1. Merger Arb - investors depend far more on the specific event than on the general direction of the market
2. distressed securities area - event-driven investors look for opportunity in securities of companies undergoing regoranization.
3. by assessing, the timing of the company's emergence from brankruptcy and valuing the expected package of securities, players in distressed securities arena generate retuns more dependent on events important to the bankuptcy process than on the level of the overall stock market
4. In times of financial crisis, the correlation between event-driven strategies and market activity increases to uncomfortable levels,
5. The link, however unusual, between markets and meger deals lessens the diversifying power of merger arbitrage
Short Selling
Venture Capital
1. The combination of limited downside and substantial upside produces an investor-friendly, positively skewed distribution outcomes.
2. Over reasonably long periods
10. Investment Process
1. Governance process key to conterproductive market timing and identifying effective investment management relationships
2. Critical decision of portfolio magmt decisions
- developing an organiztion whith the capability of selecting high quality active menegers
- developing a strategy with emphasis on bare bones passive vechicle
3. Two important tenents of investment management - contrarian thinking and long term orientation
4. Group dynamcis can thwart contrarian activities and impose shorter than optimal time horizons
5. Worldy wisdom teahes that it is better for reputation to fail conventionally than to succeed unconventionally
6. Challenging facing an istitution attempting to structire effective governance processes center on excercising apporpriate fiduciary oversight, while encouraging "eccentric, unconventional, and rash" behavior
Active vs. Passive Management
Investment Committee