The Swensen Way (and How It Works)When David Swensen died earlier this month, at the untimely age of 67, there were plenty of eulogies to the transformative impact the long-time head of the Yale University endowment had on asset allocation. His model has been much envied and copied: Swensen pioneered a move away from Treasury bonds and equities to a variety of alternatives and real assets on the basis that this was where an endowment could best take advantage of its long time horizon and tolerance for illiquidity. The thinking behind his approach (which he documented in two books), and the numbers from Yale that proved his thinking right, have been much repeated. But it's still necessary to understand a little more about the man's legacy. None of his imitators have managed to perform as well, even though many are just as clever as he was, and enjoyed comparably big inbuilt advantages. Why did Swensen apply his own model so much better than the many brilliant asset allocators who have followed him? My pet theory has been that he enjoyed first-mover advantage. He was entering sectors like hedge funds and private equity when they were aiming to exploit market anomalies that nobody else had yet spotted. In the early days, naturally it was only the sharpest and most self-confident operators who set up shop with such vehicles. All good investors have to be opportunistic to a great extent, and David Swensen took a great opportunity. I still think I was right about this, but there was more to the Swensen way than getting there first. This is important to note because there is some revisionism afoot. He showed that it was possible to make a lot of money in alternative assets; many alternative asset managers showed that it was possible to get very rich by feeding the appetite for their product that Yale had created. Hence there are attempts to blame Swensen for the growth of "2-and-20" hedge funds, after a decade in which their business model has looked ever worse. That is more than a little unfair. What follows is my attempt to summarize and synthesize what might be called the "soft skills" that allowed Swensen to make the Yale model work so well for so long. It's based on the observations of Charley Ellis, best known as the founder of Greenwich Associates and one of the intellectual fathers of index investing through his book Winning the Loser's Game. He had a great vantage point as the chairman of Swensen's board for eight years, and a member for 16. Virtually all the insights that follow come from Ellis. So, here are the key tenets of the Swensen Way: Know Your Comparative Advantage Yale couldn't match the rewards available on Wall Street, but it did have a very long-term time horizon, and a big pool of money with which to start. Its reporting requirements weren't too onerous. That meant it could potentially do well by tolerating illiquidity that others couldn't. It also had a natural pool of young talent, in its student body. Every year, some 4,000 bright young people arrived in New Haven, Connecticut — a group of potential investment professionals already in position, often with a sense of loyalty to Swensen's institution. The faculty of one of the world's most prestigious universities could also be quite an asset. So, if Swensen wanted to be smarter than others in ferreting out opportunities in inefficient markets, it was realistic to give it a try. That was his fundamental comparative advantage. Be the Best Client You Can Be The key to hiring the best managers was to be a great client. This isn't just a question of the prestige of an Ivy League name, or Yale's ability to put a lot of money away for a long time. Swensen worked hard at it. Being based in New Haven, he was an easy day trip from New York (and even closer to the burgeoning hedge fund center of Greenwich). If someone came and gave him a presentation, they knew they would get an answer within a day or two. If Swensen thought it was a near miss, he would explain exactly what needed to be improved. "You got terrific feedback for the cost of driving to New Haven and back. If it didn't work out, at least it was a great dress rehearsal, and you hadn't wasted any time." And, of course, this approach helped Swensen ensure that he got first choice of promising managers before they took their wares elsewhere. Once managers had been hired, Swensen made sure to keep in touch with them. There were weekends at New Haven, including the opportunity to play a round at Yale's golf course (a great lure for some). But there was more than that. Swensen knew what he wanted from each manager, and what he thought they had to offer. That brings us to another critical point: Be a Coach Swensen would work very hard with managers to get them to do what he wanted. If he thought their approach wasn't going to work, but their business strategy showed something promising, he would call them back in and work through ways they could improve. Ellis draws an analogy to the coaches in Chariots of Fire; take talented and motivated individuals, and see if you can find the small adjustments to their technique that will take a few seconds off their time, and allow them to win. In many cases, Swensen hired brilliant young managers before they had even opened for business. They regarded him as a coach who was building their ability. He had a first-mover advantage alright, but he did a lot to earn it; it wasn't just an accident of timing. That leads to another sporting analogy: Be a Scout Baseball scouts in places like the Dominican Republic, Puerto Rico and Venezuela come across many gifted and competitive young men desperate for a professional career in the sport as a ticket out of poverty. Motivation isn't a problem, and there's plenty of raw talent; but how to find the ones that will really make it? The answer these days is to set up baseball academies. In the Dominican Republic, teenage boys with promise find themselves living in dormitories, undergoing strict training regimes, and playing regularly in summer leagues. Each major league team sponsors an academy. Under the watchful eye of the scouts, these academies tend to reveal who really has the make-up to succeed, while enabling forensic monitoring of their skills. When it came to recruiting the direct staff who helped him administer the Yale endowment, decide on asset allocation and choose managers, Swensen realized that he had an opportunity to do much the same thing. Just as Puerto Rico is full of fit young men who want to be major league baseball players, Yale's campus is full of young men (and a few young women) who badly want to be successful money managers. Most had the basic knowledge and intelligence. To spot the ones who might become great managers, Swensen took matters into his own hands: "How do you find the best people who are most motivated?" asks Ellis. "You create a course and teach that course yourself. And the word gets around that you don't do that course unless you're ready to work. And then out of a group of maybe 30 or 40, you pick two or three of them to be summer interns. And of those interns, every once in a while you choose one to get a three- or four-year deal." This was a great deal for all concerned. Swensen had first dibs on some brilliant young minds, who he had already started to train. They got to stay in the town where they had already enjoyed their time in college and got a fantastic grounding in investment. If they didn't stay at Yale, as most wouldn't, the possibilities in Wall Street, Greenwich or in endowment management for other big institutions were wide open. Yale's inability to pay quite as well as the most acquisitive players in Wall Street or hedge row didn't matter — and Swensen had worked out a great way to maximize his scouting. Don't Just Take What's On Offer One other key point in the Swensen approach was that he was prepared to negotiate very directly with his managers. If he had a particular strategy he wanted executed, or there was something that he disliked about an otherwise good management presentation, he would negotiate to change it. That way he got what he wanted. He wasn't, current detractors take note, one to pay excessive fees for average performance, or to accept terms without an argument. It's hard to blame him for the excesses of the compensation that people in the alternative assets world would come to demand. Minimize Turnover All of these tenets helped ensure that Yale didn't suffer wasteful turnover. The average duration of Yale endowment managers under Swensen was 14 years. With about 100 in total, this meant that only about 7% moved on each year; a very low number. This was because Swensen had caught them young, worked with them to ensure they were providing exactly what was wanted, and made certain they regarded themselves as part of his team. Reducing turnover is usually seen as a way to limit costs and guarantee consistency. But according to Ellis, Swensen also saw it as key to risk management. Choosing young managers to try out esoteric strategies is risky; but less so if you know them well and stay with them. Once everybody knows what a manager is supposed to be doing, it becomes easier to spot when they are straying from their path, Treat Your Bosses Well (and Choose Your Bosses If You Can) Investment success helped make Swensen popular with Yale's governing bodies. But he made sure to maintain a good relationship with the people running the university, and be clear how he was getting his results and why his model might work. When it came to his investment committee, Swensen tried hard to find people from a variety of backgrounds, and work them hard. Ellis said he needed to spend 12 hours going through the material Swensen gave his committee to look through each quarter — an onerous commitment for people who had full-time jobs of their own. The idea was to use them to come up with points of difference and avoid groupthink. Swensen also, however, wanted to make sure that his overseers became a useful asset to improving performance and risk management, rather than just people who saw that everything was in order. Groom Successors Succession management is often a problem for long-lived managers. Swensen had an idiosyncratic way of doing things, and had more than 35 years in the job. This is the classic recipe for a succession problem. Time will tell, but his entire process was geared to identifying and developing people who could fill his shoes. There are Swensen proteges at Yale, and at Stanford, MIT, the University of Pennsylvania and Princeton. His approach should have provided a pool of potential successors. Risk Control, Risk Control, Risk Control All of this ultimately was joined in Swensen's mind under the discipline of risk control, according to Ellis. His ideas sprang from academic work on risk management, and he was putting the university's money into some ventures that on the face of it were unproven and risky. In his mind, everything about the way he approached the job, both in terms of numerical asset allocation and soft people skills, was about controlling risk. He undeniably got good results. This was my best attempt to sum up how he did it. My thanks to Charley Ellis; all thoughts gratefully accepted. Survival TipsO.K., some more Yalies. For children's books, you can't beat Sandra Boynton whose Rhinoceros Tap was my kids' favorite album for many years; Maya Lin has just given us the Ghost Forest in Madison Square Park to follow the deeply moving Vietnam Memorial on the mall in Washington; Dick Cavett (seen here interviewing John Lennon and Yoko Ono) arguably invented the chat show; Meryl Streep, among many other achievements, managed to be more like Margaret Thatcher than Thatcher was herself; and the Yalie Josh Malina claims to have destroyed the great political drama The West Wing. Or you could check out the work of Claire Danes, Jodie Foster, Anderson Cooper, Edward Norton, or one of the many novelists who went to Yale. Like Bloomberg's Points of Return? Subscribe for unlimited access to trusted, data-based journalism in 120 countries around the world and gain expert analysis from exclusive daily newsletters, The Bloomberg Open and The Bloomberg Close. | 
⋮↠〖*HDvideo~〗 2020 Spycies: Dos espÃas rebeldes PelÃcula Completa En LÃnea released 2020. story: Vladimir y Hector, dos agentes secretos d...
Post a Comment