Pioneering Portfolio Management is a book where David Swensen, Yale’s portfolio manager, provides his insight on portfolio management. Under his 23 year tenure at Yale, Swensen added $20 billion to Yale’s endowment. In this week’s blog post, I will talk about the top 10 takeaways from this book. Let’s dive in.
- Rebalancing is essential so that you don’t get overly exposed to fluctuations of one specific security or asset class in your portfolio.
- Market returns stem from three sources – asset allocation, market timing, and security selection. In regards to asset allocation, create a diversified portfolio with fundamentally different asset classes. Have a long time horizon, follow the policy targets, and don’t be driven by fear or greed associated with market timing. Fund managers increase their probability of success by focusing on inefficient markets that present the greatest range of opportunities.
- Value can either be purchased by identifying assets trading below fair value, or by bringing unusual skills to improve corporate operations. Value investors operate with a margin of safety unavailable to less conservative investors.
- Interest rates play an important role in markets. Increasing rates cause bond prices to decline and may cause stock prices to decline, eliminating or reducing the hope for diversification effects.
- When a fund grows too big, the manager’s focus shifts from portfolio returns to maintaining a steady stream of income via fees. This subtle shift of manager’s focus to maintaining fees at the expense of generating returns leads to the inevitable decline of the fund/firm.
- Leveraged Buyouts – Stay away from leveraged buyouts when the transaction sponsor has no value-added activities. Leveraged buyouts simply increase the risk profile of the company. In aggregate, buyout investments fail to match public market alternatives. After adjusting for the higher level of risk and greater degree of illiquidity in buyout transactions, publicly traded equity securities have a clear advantage.
- Foreign equity (foreign stocks) are better investment than foreign bonds. Foreign bonds are a lot riskier, since investors have no idea what impact foreign exchange rates would have on the value of foreign bond positions.
- Investors need to support contrarian managers. In order to increase the likelihood of investment success, investors need to create an environment that encourages managers to make potentially embarrassing out-of-favor investments and to tolerate the inevitable missteps.
- Investors need to pay attention to risk adjusted returns, and not just absolute returns. Diversify with domestic equity (domestic stocks), US government bonds, international developed market equities, and foreign emerging markets.
- Investor should not worry too much about illiquidity. If the company is good/successful, it will eventually become liquid.
In the book, Swensen goes over various asset classes such as stocks, bonds, absolute return (event and value driven arbitrage investing), real assets (TIPS, asset backed securities, real estate, energy/oil, and timber), and private equity (venture capital, leveraged buyouts). He goes over the pros and cons of each asset class, and which asset class would thrive under different economic conditions. Swensen also talks about the equity and survivor biases, and outlines the mean-variance optimization process. He shows how the goal is to pick securities with low variance (risk) and high mean (expected return).
I would recommend this book to anyone who wants to get exposure to all the investment instruments out there. This is also a book for someone who wants to know what portfolio management entails; ways to diversify risk, take on additional risk to bring down the overall portfolio risk, and the risk associated with each asset class,
Hope you learned a little and found this blog post helpful. We talked about the 10 Key Takeaways from the book: Pioneering Portfolio Management. As always, you can sign up for our free mailing list here. You can sign up for our paid subscription services here. Like us on our Facebook page here. Subscribe to our YouTube channel. Thank you!
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