Highlights From A Conversation with David Swenson

From a November 2017 Counsel on Foreign Relations interview by Co-Chairman Ermeritus Robert Rubin of David Swensen, CIO of Yale University.

So for most of the 32 years that I’ve been at Yale, the standard assumption for endowment returns for the operating budget was 8 ¼ nominal. And that turned out to be a pretty decent working assumption. I think our 32-year rate of return is something like 13 ½, so we’ve generated a substantial cushion over the budgetary assumption for more than three decades.

What I’ve been talking to the provost about for the past 12 or 18 months is, for the first time in this very long period, reducing the expected return assumption in the budget to 5 percent nominal.

So, Bob, usually I’m not glad that I’m 63 years old—(laughter)—and nearer to the end of my career than the beginning of my career. But that question actually makes me glad of those two facts. (Laughter.) You know, I have never been a big fan of quantitative approaches to investment. And the fundamental reason is that I can’t understand what’s in the black box. And if I don’t know what’s in the black box, and there’s underperformance, I don’t know if the black box is broken or if it’s out of favor. And if it’s broken, you want to stop. And if it’s out of favor, you want to increase your exposure.

And so I’m an old-fashioned guy that wants to sit across the table from somebody who’s done the analysis and understand why they own the position. And then if it goes against them, I can have another conversation and try and figure out whether the thesis was wrong and we should exit, or whether the thesis is intact and we should increase the position. And I don’t understand any other way to invest.

Yeah. You know, for most of the time that I’ve managed Yale’s portfolio, we’ve tried to be relentlessly bottom-up and focused solely on identifying anomalies in the pricing of individual securities. And that’s worked out really well. I think with the advent of the financial crisis in 2008, 2009, that changed, because we had to be concerned about whether or not the banking system in countries around the world, particularly in the United States, was going to survive. We had to think about whether the eurozone would continue to be a cohesive whole. And so we’ve been forced into this uncomfortable position of needing to understand some of these macro questions that we could have previously ignored without peril.

It doesn’t mean that we’ve got, you know, answers to the questions. But they inform where it is that we’re more interested in placing funds and where it is that we’re less interesting placing funds, and they inform—they inform the asset allocation. And then, once that’s set up, which we review every year, then we go back to being relentlessly bottom-up, which is a much more comfortable place for us to be.

You know, I think it’s possible to take a long-term approach with publicly traded companies. We have some managers that are engaged in public-securities investing in markets around the world. And in each of our relationships, the managers invest with a long time horizon. I think it gives them an enormous advantage.

If you can invest with a three- to five-year horizon, which is a pretty, pretty difficult thing to do—it might sound like it’s an easy thing to do if market conditions are benign, but you throw a 2008 or a 2009 in there and you have to really work hard to remember that this is temporary and that you need to keep on looking out three to five years when you’re making these decisions.

Ultimately, that, I think, is an incredibly powerful advantage. And the people that are on the quarter-to-quarter timeframe, they’re going to lose almost certainly. And they’re definitely going to be losing to the managers that are using the three- to five-year horizon. So I do know that it’s possible to extend your time horizon and succeed.

One of the things that I think is fascinating, which is not very widely practiced—and there are only a handful of managers that I’ve come across that do this—is to essentially take a private-market approach in the public markets and take big concentrated positions in public companies, develop relationships with management, become partners with management, help them figure out intelligent intermediate and long-term strategies.

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