David Swensen, who pioneered an investing style that helped endowments beat markets by using alternative assets such as private equity and real estate, said investors who don’t have access to top managers are best off using index products.
“There are two sensible approaches to investing -- either 100 percent active or 100 percent passive,” Swensen, the chief investment officer of Yale University’s $19.4 billion endowment, said today at the John C. Bogle Legacy Forum hosted by Bloomberg Link.
Unless an investor has access to “incredibly high-qualified professionals,” they “should be 100 percent passive -- that includes almost all individual investors and most institutional investors,” he said.
Most active mutual funds are more interested in collecting fees than in boosting returns for investors, Swensen said at the conference, which highlighted Bogle’s work in building up index investing as a low-cost alternative to traditional mutual funds. Yale, which is based in New Haven, Connecticut, returned more than 14 percent annually over the past 20 years, compared with the 13 percent increase at the world’s richest school, Harvard University.
Swensen said he was “happy” with Yale’s hedge-fund exposure, adding that the investments remain a necessary part of the university’s holdings given the “subdued or modest expectations” of stock-market returns.
‘A Huge Issue’
“High quality hedge-fund exposure that produces returns that are fundamentally independent of what’s going on in the markets can be a great addition to an institutional portfolio,” said Swensen, 58, who has headed Yale’s investments office since 1985.
Still, hedge funds’ traditional fees of 2 percent of assets and 20 percent of profits “are a huge issue,” Swensen said, and unmerited except for extraordinary performance.
“If you’re going to engage in the game where you’re charging enormous fees, you have to be in the top 5 percent to 10 percent to win on a risk-adjusted basis,” he said.
Swensen said he also takes issue with high-frequency traders, saying they take unfair advantage of traditional investors.
“I’ve always viewed high-frequency trading as a tax on the rest of us,” Swensen said. “A bunch of smart people taking advantage of order-execution rules as opposed to doing something good for the market place.”
Yale’s endowment gained 22 percent in the fiscal year ended June 30, compared with a 21 percent increase for Harvard. Columbia University in New York was the best performer among the eight Ivy League schools last year with a 24 percent gain.