Swensen brings ideas to new book

Yale Chief Investments Officer David Swensen’s new book, “Unconventional Success: A Fundamental Approach to Personal Investment,” began as a way to apply the lessons of endowment management to an individual’s portfolio. But by the time he finished the book, it had morphed into a 365-page crusade against the mutual fund industry — plus appendices — and Swensen said he now believes the individual investor cannot successfully imitate Yale’s strategy without dedicating a significant portion of his or her life to market study.

“Most people don’t spend their lives focused on financial markets,” Swensen said. “It’s unlikely that they would make the right choices in the first place and to know how to continue to behave in the second place.”

David Swensen, the University’s chief investment officer, is the guardian of Yale’s endowment.
Esther Quintana
David Swensen, the University’s chief investment officer, is the guardian of Yale’s endowment.

Swensen said his book could have detailed his basic strategy in two pages or less, but that he expanded on his central claims to more deeply impress his concerns upon the investing public. The book argues that mutual funds are inherently foolish investments because the profits that mutual funds enjoy are a direct function of the profits they are able to siphon from their clients.

“It’s a system that can’t really be fixed,” Swensen said.

The problem of mutual fund priorities has steadily grown as mutual funds have come to typify how much of the private sector chooses to invest its money, School of Management professor Owen Lamont co-authored a study this past spring that supports Swensen’s claim that the wild popularity of certain funds ultimately hurts investors.

Lamont said the fundamental problem with mutual fund popularity is that investors get attached to certain funds. During the 23-year span covered by his study, “Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns,” Lamont and University of Chicago professor Andrea Frazzini discovered that the least popular 20 percent of all funds were worth, on average, 1.8 percent more than the most popular 20 percent of funds at each three-year benchmark.

Individuals who invest in mutual funds must actively manage their money to steer away from the popular funds of the day, Lamont said, referencing the tech bubbles of the 1960s and 1990s.

“One wants to do the opposite of what individual investors are doing,” Lamont said. “That’s an inherently unpopular idea, but no study has ever found that [mutual funds] add value.”

Swensen said he recommends that individual investors focus on index funds — broadly diversified portfolios that can mimic the larger market rather than attempting to beat it. This class of investment has gained grown more popular since the publication of a landmark study, “How Well Have Taxable Investors Been Served in the 1980s and 1990s?”, which concludes that index funds offer investors a better chance at mimicking the market than mutual funds do at beating it.

While he said there is more to his job than the passive nature of index fund management, Swensen said individuals can benefit from a more “hands-off” style.

“If there’s one thing I want people to get from the new book, it’s a template for managing their investments,” he said. “People should be able to succeed in this way, even if they only have a couple of hours every week or a couple every month to devote to it.”

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