Biggs on the Markets by Barton Biggs

Author:Barton Biggs
Language: eng
Format: mobi
Tags: Investments & Securities, Business & Economics, General
ISBN: 9781118299999
Publisher: Wiley
Published: 2012-10-09T00:00:00+00:00

Swensen and Yale

June 8, 2011

For a large pool of money, whether you ’re trying to get richer or preserve and enhance wealth, getting your asset allocation right is what the battle for investment survival is all about. I am talking about the objective of fiduciaries—true investors, not speculators—and make no mistake, survival means generating “good real” (inflation adjusted) returns over time.What does “good” mean? Answer: Real returns of 6% to 7%. Bear in mind that in real terms over the 20th century, equities in the U.S. returned 6.7%, Treasury bonds 1.6%, and Treasury bills 1.1%. Swedish and Australian stocks did even better but a lot of markets such as France and Italy generated considerably lower but still positive returns. There are no solid numbers for the equities of the developing countries such as Brazil, Russia, China, and India.

Expectations of “good” performance have escalated in the last hundred years. Back in 1900 the great German “Iron Chancellor” Bismarck demanded his investment adviser provide returns of 2% real. He was skeptical of even successful investment managers, reasoning that they would eventually be emasculated by getting either rich or old.As a result, he favored timberland, which in northern Europe had natural growth of about 2% per annum and which could be held forever.With timberland you didn ’t need professional investment management or have to worry about changing your asset allocation.

In my opinion, one of best investors in the world is David Swensen, who runs the Yale Endowment, and so I read the just released report of the endowment with great attention. He is a very clear and lucid thinker. As caveats, I disclose that I went to Yale and David is a very good friend of mine. However, his performance numbers verify my judgment of him even though his so-called “Yale Model” is currently being disparaged. As everyone knows, recent times have been very difficult for stocks and

107 unusually good for bonds. The S&P 500 and almost every other index in the world are still well below the highs of 2000 and 2007. Bonds have beaten stocks, and asset classes such as private equity and opportunistic real estate have been crushed. Hedge funds also did not perform as advertised in the 2008 panic, although they fell far less than the popular indexes.

As one of the most revered heroes, Swensen has taken a lot of grief in the last couple of years as the Yale endowment declined from $22.8 billion to $16.6 billion. Bear in mind that the endowment provides about 40% of the operating budget of the university, so that over the last three years about $3 billion has been withdrawn but gifts were a partial offset. For the 20- and 10-year spans ending June 30, 2010, the endowment returned 13.1% per annum and 8.9%, respectively. A conventional portfolio invested 70% in stocks and 30% in bonds for the last 10 years returned 1.5% a year.

Swensen has always preached that the long-term investor should strive to be an owner rather than a lender.

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