Some twenty years ago, David Swensen's thinking on diversification changed how Yale invested its endowment. As John Authers points out in this weekend's (October 26-27, 2013) Financial TImes, "Mr Swensen argued that he was most likely to find value away from the public markets. [...] He moved out of bonds and cash, and into hedge funds, private equity and real assets such as forestry. Yale now holds about 6 per cent of its assets in US equities. This reaped impressive investment returns for decades, and many endowments imitated it."
Authers goes on to illustrate that Yale, like everyone else, lost money (lots of it!) during the financial crisis. Interestingly, due to how it is diversified (as noted above), it has not seen the flattering returns of the S&P 500 index, though. And that's not a bad thing...Yale's endowment returned 12.5% last year, with its diversified model of looking for value in private markets. Yet, the main thrust of his article ("This is no time to get off the equity train") is that the notion of portfolio diversification hasn't worked terribly well over the past five years, mostly because large institutional investors diversified out of stocks, sometimes by a wide margin. Consequently, not having as much at stake in equities equated to a reduced return.
He is very supportive, though, of Yale's strategy of diversification, to the point that he supports endowment managers considering the application of the Yale process when purchasing assets, while being clear that managers shouldn't strive to imitate the portfolio's holdings. Basically, "look for assets that may be inefficiently priced and would not fall with equities."
What I appreciate is that Authers is looking ahead to the time when stocks lose their momentum, as is inevitable.
I don't hear this kind of talk from many, so it's refreshing to consider it.
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