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Swensen’s Ivy League portfolio revisited

David Swensen popularised the Ivy League portfolio

I wrote last year about how to construct the Ivy League portfolio proposed by David Swensen, the endowment fund manager at Yale and author of the nerdy investment classic Unconventional Success.

My Ivy League portfolio was based on a US article that followed Swensen’s advice; I simply re-worked it for UK ETFs.

While it has the diversification that Swensen champions, I knew even then that this ETF portfolio wasn’t really a proxy for the true Yale fund, which has delivered market trouncing average returns of over 16% in the 21 years to 2007.

Rather, it was a case of do what he says, not what he does. The Ivy League portfolio follows the advice Swensen presents in Unconventional Success as the optimal strategy for private investors – to use ETFs, avoid non-Government bonds, and shun expensive funds.

The Ivy League Portfolio Vs. Swensen

It was therefore always going to be interesting to see whether a private investor could get Yale-like returns from these six cheap to buy-and-hold ETFs.

And the answer appears to be: we can’t.

According to an article published on The Motley Fool last week, the real Yale portfolio run by Swensen trashed the US ETF proxy in every year (ending June) from 2005 to 2008.

As for the year ending June 2009, that year the ETF portfolio and the real Yale portfolio matched each other. But it was hardly a champagne moment – both recorded a loss of 25%! (The results to June 2010 aren’t yet in).

Factors that saw the real Yale porfolio win

The Motley Fool says it’s easy to see where the real Yale portfolio got its edge:

According to the Yale fund’s annual report (pdf file) for the year ended 30 June 2009, the fund had less than 20% in domestic and foreign equities, and less than 5% in fixed income.

Around a quarter of the fund was allocated to ‘Absolute Return’, another quarter to ‘Private Equity’, whilst the largest allocation, nearly a third of the portfolio, was to ‘Real Assets’.


Firstly, it seems Swensen was as bearish about the Government bond bubble as I was back in late 2008, given the small amount he was holding in June 2009. Still, a US private investor sticking to Swensen’s fixed boundaries for the ETF model portfolio would have only seen their 15% allocation of Treasuries drop in value by 1% to June anyway, thanks to the big rally of late 2008 they’d have enjoyed before the pullback.

No, the real damage was done by the ETF portfolio’s weighting towards equity and commercial property, which fell between 30%-50% in the year to June 2009 alone.

In contrast, Swensen had more than 75% of his money in very un-ETF like funds, presumably in an attempt to avoid correlation with equities.

Yale’s out-performance would therefore appear to be a clear win for both active fund management and market timing, which is contrary both to Swensen’s book and my own modest thoughts on investing!

Is it fair to judge the ETF Ivy League portfolio this way?

You can certainly argue it’s not a useful comparison to pitch Swensen’s model ETF portfolio against what he actually does for Yale:

  • The institutional funds Swensen buys for Yale are cheaper than those sold to private investors, and he has a team of people to investigate them before investing.
  • Plenty of the out-performance of private equity and real estate had dissipated by 2009.
  • March 2009 onwards would have seen a huge surge in the ETF portfolio’s equity positions – perhaps even enough to make up for previous years. The dates covered in the Fool article are then unfortunate for the ETF approach. It will be interesting to see the results to June 2010.

On the other hand, we’re more interested in results than in excuses. We can’t invest alongside Swensen, so can we do anything to better replicate his method?

Doing a Swensen to spice up the all-ETF approach

It’s no easy thing for a private investor to access decent absolute return or hedge funds. As Swensen himself says in Unconventional Success, big institutions get superior deals and are better equipped to evaluate what they’re offered.

Yet it can’t be beyond us to add some assets to Swensen’s bare bones ETF portfolio to try to diversify further, like he does with Yale.

We’re told Swensen’s money was mainly in absolute return, private equity, and real assets as of June 2009. What can we do to copy him?

Absolute return funds I’m sceptical about whether most absolute return funds will deliver what they promise over the long-term. Private investors also face higher charges and greater risk, due to not being able to do the due diligence that Swensen’s large team will bring to bear. I think absolute return funds are a classic case of dangerous exotics. But even the Daily Mail is now suggesting otherwise, so check out their article if you want some names to research further. Personally I’d suggest you increase bond holdings or cash if you’re nervy, rather than buying a fund manager a sports car. Alternatively, consider a cautious investment trust like the Personal Assets trust, which is relatively transparent and not too expensive to hold.

Private equity – Here’s better news. Investment trusts like 3i and HGCapital enable retail investors to get exposure to the private equity cycle, and they currently look cheap. Some even pay a dividend. They will be correlated with equities, though. Riskier but of interest to some UK investors – and potentially less correlated – are Venture Capital Trusts (VCTs), which invest in small companies and can pay a hefty dividend. Many have a dismal record, so I’d stick to the likes of Northern and Baronsmead’s VCTs. The annual expenses will be over 3%, but the dividends are tax-free.

Real assets – Here it’s actually easier for us than Swensen. He has to invest in gold and the like – and so can we – but we can also buy antique furniture, paintings, stamps or even a bigger home to try to lock in some of the benefits of real assets (chiefly a lack of correlation with equities and some inflation proofing). Your collection of first edition Marvel comics might not be big enough to excite a Yale fund manager, but it could work wonders for your own balance sheet.

The Ivy League portfolio: Take 2

Here’s an example of how the Ivy League ETF-based portfolio might be tweaked in light of the above thoughts. I should stress – as should be obvious – that this is not a portfolio recommended by David Swensen!

Also note that while I’ve reduced equity holdings, I’ve also increased the emerging market weighting to 10% since last time, and reduced REIT exposure, both in light of comments made by Swensen in interviews since he wrote Unconventional Success.

The NEW Swensen inspired portfolio

  • Domestic Equity (10%): FTSE 100 / FTSE 250  (ISF / MIDD)
  • Emerging Market Equity (10%): MSCI Emerging Market Equity (IEEM)
  • Foreign Developed Equity (10%): FTSE Developed World (IWXU)
  • Property (REITs) (10%): FTSE EPRA/NAREIT UK Property (IUKP)
  • U.K. Government Bonds (15%): FTSE UK All Stocks Gilt (IGLT)
  • U.K. Inflation-Linked Bonds (15%): £ Index-Linked Gilts (INXG)

Plus additions of:

  • Absolute return (10%): Personal Assets trust / 3-4 expensive funds
  • Private equity (10%): Investment trusts (3i / HGcapital / VCTs)
  • Real assets (10%): Physical Gold ETF (PHGP) / Your stamp collection

My revamping doesn’t even match – imperfectly – the weightings accorded by Swensen in his Yale fund to private equity and absolute return. But it does reduce pure equity exposure – although the investment trusts I’ve suggested will undoubtedly be somewhat correlated with the markets. The bigger holding of government bonds should offset some of this.

Also note that when buying investment trusts or funds, it’s a good idea to invest through several different companies to increase diversification and reduce the risk of management failure or fraud.

Beware: You could be tinkering at the wrong time

While I quite like the look of the Ivy League Portfolio 2.0, I suspect it’s a terrible time to reduce equity exposure so radically.

Swensen made the same point in an interview with Yale’s Alumni Magazine at the nadir of the bear market last year:

If an individual investor followed the program I outlined in Unconventional Success, they probably did reasonably well, through the crisis, thus far. They’d have 15 percent of their assets in U.S. Treasury bonds. They’d have another 15 percent in U.S. Treasury inflation-protected securities. Those two asset classes have performed well.

Of course, the other 70 percent of assets are in equities, which have not done well. […]

I recommend that investors rebalance. Rebalancing is even more important amidst these huge declines in the stock market because it presents a great opportunity. People can sell the Treasury securities that have appreciated dramatically to bring their allocation to the 15 percent target, and they can redeploy those funds into domestic equities and foreign equities and emerging market equities and real estate investment trusts, all of which are now much cheaper, and therefore have higher prospective returns.

Such rebalancing would indeed have led to huge gains in 2009 to 2010, as well as reducing the risks of holding overvalued government bonds. Read my series on rebalancing your portfolio to learn more.

Note: As ever, this article is just for your interest. It is not personal investment advice. Read about other easy ETF portfolios before making any decisions.

{ 5 comments… add one }
  • 1 Gabriela August 3, 2010, 3:59 pm

    It’s not quite fair to compare his fund to the market (S&P 500), because he took considerably more risk with his portfolio, and it doesn’t look like they accounted for the costs of maintaining that large staff (probably not negligible). Also, we should keep in mind that Yale foundation has a time horizon that goes into perpetuity, unlike private investors, which changes their risk profile.

  • 2 The Investor August 4, 2010, 1:45 pm

    @Gabriela – Actually, from my reading of the Yale Endowment fund results (link above) those returns are net of direct fees/costs incurred by managers.

    Also, in terms of risk, I am certain that Swensen would say – probably rightly – that his portfolio mix was much *less* risky then just tracking the market. The hurdle/cost is fees he pays to the managers of funds he invests in, and potential underperformance in a roaring bull market. His absolute funds will have large holdings of bonds etc, for instance. But they will charge a pretty penny for the right to own them every year.

    Finally, the Fool and article (and by extension my article) is not comparing Yale with the S&P 500 but with the ETF portfolio mix linked to at the start of the article.

    Absolutely agree about time horizon, though – definitely helpful!

  • 3 ermine August 4, 2010, 11:22 pm

    I think Real Stuff is often overlooked in investment. It’s lumpy, it’s illiquid, it doesn’t pay you a return or dividends, but it is immune to many ills that afflict paper financial instruments.

    It’s a shame that a house is usually the only example of it in most people’s net worth. It’s good to see it working for Swenson, and your post on Rothschild’s IT also indicated that had Real Stuff in it. It seems to have a particular attraction for organisations with long time horizons.
    .-= ermine on: My Escape Plan =-.

  • 4 WebRECC March 2, 2012, 2:07 pm

    I have looked at the 2011 report from Yale/Swensen and it is quite different from the above interpretation. Any chance of a current update?

  • 5 The Investor March 2, 2012, 3:40 pm

    @WebRECC — Really? I haven’t read what he’s doing recently, but I’d be amazed if he has changed tack in a big way.

    To be clear, this is a way for retail investors to follow his asset allocation strategies cheaply (as discussed in his book Unconventional Success) not a replication of his specific investment portfolio etc. If you’re investing a multi-billion dollar endowment, you have rather more work to do. Also Swensen has access to vehicles such as cheap/attractive hedge funds, that retail investors simply do not have access to, in either my or indeed his own opinion. (We have access to poor and expensive ones).

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