Read Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment by David F. Swensen Free Online
Book Title: Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment|
The author of the book: David F. Swensen
Date of issue: May 22nd 2000
ISBN 13: 9780684864433
Format files: PDF
The size of the: 4.23 MB
Edition: Free Press
Read full description of the books Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment:Favorite quote from the book: â€œ[S]uccssful investment cultures encourage professionals to find new mistakes to make, instead of simply repeating old errors.â€ (page 304)
Originally published in 2000, Swensen updated his classic work on institutional investments early this year. Swensenâ€™s writing is very systematic, which can be expected from the Chief Investment Officer for Yale University. He begins by exploring the reasons for endowments and the necessity of an appropriate polices for spending and investments. After establishing a base level of understanding in these areas, he delves into a detailed outline of asset allocation and asset classes. Much of this material (especially his work on equity and bond investments) is also covered in his book, Unconventional Success: A Fundamental Approach to Personal Investing, which I reviewed last year. However, there are numerous differences between the goals and the approaches of an individual and of institutional investors. Non-profit institutional investors, for whom the book is written, donâ€™t have to work about the tax consequences in the same way an individual investor must consider them. Another major difference is the expanded number of assets available to institutional investors. Such institutions have a longer time horizons, the available resources for managing such investments and large amounts which allows them to expand into new categories which include more illiquid investments. By moving into alternative investments, an institution can hedge their investments. Swensen goes into such investments, which make up a significant portion of Yaleâ€™s portfolio. These investments include natural resources such as oil, gas and timber, commercial real estate, private equity, venture capital and investment buyouts pools.
Instead of providing a â€œhow-toâ€ manual, Swensen focuses on investment philosophy. The institutionâ€™s investment policy is a tool to maintain an appropriate risk level for investments, by spreading investments around to hedge from a massive loss in one particular sector or class. Institutions need to have a policy that outlines assets allocations and then the discipline to do regular rebalancing of the portfolio to maintain allocation targets. As one investment rises in price and begins to claim a larger percentage of the investment, Swensen advice is to sell and reap profits, while reinvesting in those areas in which the portfolio is down. Such â€œcontrarian thinkingâ€, according to Swensen, is the best way to â€œbuy low and sell high.â€ Swensen tells the story of insisting on a firm hand at Yale in the aftermath of the 1987 crash. After the stock market had a major loss, most people pulled money out of the market and put it into bonds. Yale did the opposition and reaped big gains in the months afterwards, when the markets recovered.
Swensen recommends that for investments in â€œefficient marketsâ€ (such as many of the equity markets in the United States, Europe and Japan) one employ a passive investment strategy. Efficient markets are those in which financial conditions are shared and well-known and in which the market is free to correct over or underpriced securities. Passive investments are tied to indexes (such as the S&P 500) and have much lower fees than their active counterparts. Swensenâ€™s observation, backed by massive amounts of data, is that active management in efficient markets seldom benefits the investors. Active management cost more and the fees often eat up any profit generated from the managerâ€™s strategies.
However, Swensen acknowledges the role of active investment in inefficient markets. More complicated investments require an active strategy. Alternative investments such as hedge funds, real estate and natural resources, along with emerging markets all require specialized knowledge and insight which can only be gained by employing active managers. I found his chapter on Alternative Asset Classes to be the most enlightening in the book. Not only does Swensen outline each type of investment, he explains the liquidity and fee structures for each type of investment as well as how the interest of the investors aligns with the manager of the funds and with other participating parties.
This book provides an investor with many questions to ask managers. He explains fee structures, which are often unfair to the investor and what one should be on the lookout for. He explains topics such as â€œsurvivorship biasâ€ and â€œbackfill biasâ€ which often skews an indexâ€™s performance. He suggests that one good way to insure a good active managers in the world of private equity is to find one who has a significant â€œco-investmentâ€ (as related to their net worth), meaning that if manager benefits, everyone will benefit. Too often, as he points out, due to fee schedules, an investment can flounder while the managers thrive. Swensen also explains how, especially in the bond market, powerful forces aligned against the investor. As he did in Unconventional Success, he recommends staying away from corporate bonds. However, he does provide an understanding into the various categories of such bonds.
This book came out in February 2009. I wish Swensen had waited and updated it based on the economic crisis of late 2008. Unfortunately, nothing is mentioned of the crisis with the exception of a brief discussion of the tightening in the credit markets in late 2007. Iâ€™m sure this book is not for everyone. It can be very academic; however, occasionally the reader is treated to a glimpse of his dry humor.
Read information about the authorDavid F. Swensen (born 1954) has been the Chief Investment Officer at Yale University since 1985. He is responsible for managing and investing the University's endowment assets and investment funds, which total $23.9 billion. Realizing an average annual return of 11.8 percent on his investments over the ten years to 2009, Swensen's consistent track record has attracted the notice of Wall Street portfolio managers. He is notable for inventing The Yale Model which is an application of modern portfolio theory. Swensen was listed third on aiCIO's 2012, a list of the 100 most influential institutional investors worldwide
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