財經觀察 2095 --- Yale Swensen Recommends TIPS

Yale’s Swensen Recommends TIPS to Hedge ‘Substantial Inflation’
2009-05-23 04:01:01.0 GMT

By Gillian Wee
     May 23 (Bloomberg) -- David Swensen, the top-ranked college endowment manager in the past decade, said individual investors should own inflation-protected Treasuries because U.S. economic recovery efforts may lead to an increase in consumer prices.
     “We’ve had this massive fiscal stimulus, massive monetary stimulus, and it’s hard to see how that doesn’t translate into pretty substantial inflation, or at least pretty substantial risk of inflation,” Swensen, Yale University’s investment chief, said in an interview on the “Consuelo Mack WealthTrack”
television show that aired yesterday. Treasury Inflation- Protected Securities “should be in every investor’s portfolio," he said.
     President Barack Obama’s administration on May 11 raised its estimate for this year’s federal deficit by 5 percent to a record $1.84 trillion as the recession reduces tax receipts and increases the costs of propping up the economy. U.S. consumer prices may rise 1.6 percent in 2010, according to the median forecast of 57 economists in a Bloomberg News survey.
      That compares with a median decline of 0.7 percent forecast for this year. Inflation averaged 2.9 percent in the past three years.
     ‘‘The stimulus, the significant government actions in the last six months have focused the heads of a lot of investors on potential inflation,” James Platz, a fund manager at American Century Investments in Mountain View, California, said in an interview. The firm oversees $24 billion in fixed-income assets, including TIPS.
     Treasury Inflation-Protected Securities, known as TIPS, pay a lower coupon than nominal Treasuries because investors receive an inflation adjustment to the principal to reflect the change in consumer prices. Regular Treasuries have lost 3.9 percent including interest payments this year, while TIPS have returned
3.6 percent, according to Merrill Lynch & Co. bond indexes.

                        Harvard vs. Yale

     Swensen, 55, has managed the New Haven, Connecticut, school’s investments since April 1985. The endowment was valued at $17 billion in December, a decline of 25 percent since June 30. It’s the second-largest U.S. college fund after Harvard University’s, which stood at $28.8 billion in December after losing 22 percent since June.
     Yale’s endowment produced an average annual return of 16.3 percent in the 10 years ended June 30, compared with 13.8 percent for Harvard, which is in Cambridge, Massachusetts. The average for U.S. and Canadian schools was 6.5 percent, according to the Washington-based National Association of College and University Business Officers.
     Tom Conway, a spokesman for Yale, said Swensen declined to be interviewed by Bloomberg News.

                        Guiding Principle

     Swensen boosted returns by cutting the fund’s holdings of stocks and bonds and buying more real estate, private equity and hedge funds, a strategy that has been copied by endowment managers across the nation. His guiding principle, outlined in his 2000 book “Pioneering Portfolio Management: A Unconventional Approach to Institutional Investment,” is that the best stock and bond pickers don’t outperform bottom-rated managers by much.
     The biggest performance gap comes in “less efficient”
markets such as private equity and natural resources, he wrote.
     What’s more, he wrote, those assets aren’t highly correlated, meaning they don’t move lock-step with stock and bond markets. That provides diversification and protects against loss when public markets decline.
     Swensen, in the television interview, said his approach to diversification can’t prevent losses during market declines such as the one that slashed the value of the Standard & Poor’s 500 Index by 54 percent from start of 2008 through the market nadir on March 9, 2009.

                        Illiquidity Pays

     “I’m not sure that the crisis has caused us to conclude that we would do things differently, but it certainly highlighted the importance of liquidity,” Swensen said, according to a transcript of the interview provided by the show.
     “One of the things that I’ve said consistently, and I still continue to believe to be true, is that investors get paid unreasonable amounts for accepting illiquidity in their portfolios,” he said.
     Individuals, who can’t invest with the best managers available to Yale, need to take a different approach, Swensen wrote in his second book, “Unconventional Success: A Fundamental Approach to Personal Investment” (2005). Instead, he recommends passive index funds because they provide diversification at a relative low cost.
     Swenson told Mack that equity-oriented investors should allocate 30 percent of their money to U.S. stocks, 15 percent to Treasury bonds and 15 percent to TIPS. He recommended putting 15 percent into real-estate investment trusts, 15 percent into equities in non-U.S. developed markets and 10 percent into emerging markets.

                      Stocks More Attractive

     “It’s certainly a better time to put money in the stock market than a year ago, or three years ago or five years ago,”
Swensen said. “You’ve got a much more attractive entry point.”
     Yale had 10 percent of its assets allocated to U.S. stocks, bonds and cash as of June, compared with 75 percent in 1988, according to the school’s annual report. Real assets such as oil, gas, timber and real estate, seen as a hedge against inflation, made up 29 percent of the portfolio. Twenty-five percent was devoted to absolute-return strategies such as hedge funds, with 20 percent in private equity. The remainder of the portfolio was held in stocks outside the U.S.
     Endowment income is one of the main revenue sources for colleges and universities, along with tuition, public financing and gifts. In the year starting in July, Yale plans to cut endowment spending by 6 percent, while Cornell University will scale back by 15 percent and Harvard by 8 percent.
     Yale’s endowment supports 44 percent of the university budget this fiscal year, up from 18 percent in 1998. The school plans to cut salaries and benefits for non-faculty staff by 7.5 percent in fiscal 2010, deeper than the 5 percent the school had planned in December.

                         Crisis Thinking

    Swensen, who updated his first book in January, said the collapse of the real estate markets and ensuing financial market losses has required him to broaden his investment analysis.
     “The crisis forces you to think top-down in ways that would, I think, be unproductive in normal circumstances, or absolutely necessary in the midst of a crisis,” Swensen said.
“You have to think about the functioning of the credit system.
You have to think about the potential impact of monetary policy on markets over the next five or 10 or 15 years.”