When it comes to university endowments, Yale and Harvard are at the top. Dr. David Swensen has worked as CIO of Yale University's endowment since 1985, growing it to more than $25 billion in size and bringing it to second place in the world after Harvard's endowment. Swensen has made headlines throughout his tenure at Yale's endowment for his exceptional gains and savvy investment practices. For the period ending in June of 2015, Yale's annualized ten-year return of 10% (Harvard's was 7.6% for the same period). Swensen is famed for his long- and short-term asset allocations and his focus on the absolute return sector. Although Yale's endowment brought in just 3.4% in 2016, it nonetheless managed to trounce all other Ivy League endowment performances in what was generally a tough year for investors. Now, Swensen is speaking out about his thoughts on hedge funds.
Swensen Recommends Low-Cost Index Funds
When it comes to the ongoing debate over passive and active management strategies, Swensen has revealed his position to the everyday investor across the country: trust in low-cost index funds. Swensen recommends these funds for general investing and also cautions that investors should ensure global diversification and periodic rebalancing. Swensen has recently suggested that these practices alone should be enough to secure retirement investments for most people. MarketWatch has reported that Swensen recently provided advice along these lines to the general public, cautioning them away from seemingly lucrative and luxury investment methods like hedge funds. At this point, hedge funds are struggling to post positive returns at all, let alone to match the double-digit gains that they would commonly see in years past.
Emphasis on Steady Contributions and Compounding
Swensen's recommendation of low-cost index funds relies on steady contributions and compounding through reinvestment. In fact, investors may be best served by actually ignoring return data on the short term, as it tends to be fairly predictable over a longer period of time. On the contrary, those investors should focus their attention on risk. Matching up investment risk and goals could be key to seeing investments grow. While Swensen's own investing makes use of a modern portfolio called the Yale Model, he nonetheless recognizes that investment strategies for a major endowment do not necessarily translate well to those that may be successful on a small scale. As of a year ago, Swensen's top five positions included energy company Antero Resources Corp. (AR), the Vanguard FTSE Emerging Markets ETF (VWO), iShares MSCI EAFE ETF (EFA), iShares China Large-Cap ETF (FXI), and Shore Bancshares, Inc. (SHBI). Based on his successful investing, the Yale endowment has seen average returns of more than 17% for the 10 years leading up to 2016.