Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment

I have recommended this book to numerous colleagues at work. We use it as a great summary of our investment philosophy and as a touchstone for investment values and sanity checks. We have purchased mutiple copies which we give to stakeholders to spread the word and bring them up to speed with these investment truths. I've been a professional f.m. for 25 years and I wish I'd read this book closer to year 1 than year 25. BTW we got far less incremental value out of Swensen's second book

Swensen's book is a must-read for endowment managers and other institutional investors, particularly those who take a fund-of-funds approach (as does Yale, where Swensen is Chief Investment Officer). Swensen aptly lays out the investment policy that has enabled Yale to consistently outperform other U.S. endowments. As Yale's CIO, Swensen has set a target portfolio allocation that departs significantly from the still heavily U.S. equity and debt-focused strategy of most endowments. Swensen's approach includes a large allocation to asset classes that are not highly correlated to the U.S. public equity market. He outlines these "alternative" classes in his book, giving the reader an excellent view of how alternative investments can increase risk-adjusted portfolio returns.Perhaps the biggest contribution of Swensen's book, however, is the debunking of myths that still lull fiducaries into making the wrong decisions, for example when it comes to picking investment managers. Swensen advises against chasing managers who have performed well simply because of their past performance. If attributes such as personal integrity and the right fee structure are lacking, solid past performance can become a liability, not an asset. Swensen describes the example of private equity firm KKR-- after tremendous early successes, the flood of investor capital into KKR enabled the firm's partners to set up a fee structure that ensured big payoffs for themselves even if their funds underperformed. This is just one of many valuable lessons the reader will draw from Swensen's book.

First of all, Swensen and Takahashi's team puzzled me by its consistent performance to beat the benchmark for over 15 years, with last year¡¯s stunning annual return of 41%, leading the assets under management to easily surpass $10 Billion. The book is not only a great resource to look into the minds of the people who made this happen but also a wonderful application of finance, investment, asset allocation, strategy and management that you are learning in business school. Without mentioning the merits of the finance theory and investment techniques, the book is presenting a compelling case study of how investment office fits into the picture of institution building.Second, the fascinating aspects of the book is the ¡°unconventional approach¡±, not just simply statistics and financial modeling, for long-time horizon investing. For example, in asset allocation and manager selection, it can come from topdown analysis with support of quantitative modeling and sophisticated simulation; it also can come from scientific findings and number crunching to uncover the value creation process, which usually leads to the later asset allocation strategy to fully take advantage of the discoveries. Third, the stress and analysis of alternative investment assets and absolute returns are also worthy of mentioning. Contrary to what traditional financial theories or books focusing on efficient markets, Swensen¡¯s book casts a lot of insights on the less-covered alternative asset classes and less efficient markets. Interestingly, they never seem to be constrained by their own defined class by constantly exploring those asset classes. For example, Swensen is famous for backing venture capital and private equity. It is true that they took the plunge well before others did. Nevertheless, they explore much more than that --other inefficient markets and conventionally less-discovered places.Finally, there are some more things that I would love to see in the book¡¯s next edition or a new book. One intriguing aspect of Yale Investment Office is its consistently great performance, which happens to coincide with the very volatile years from 1985-2001. Think about the Black Monday in 1997, the stagnation (coupled with high inflation) in late 1980s, bull market, bear market, Asian Financial Crises, Russian Default, Internet bubbles in 2000 and recent bubble-burst. How they weather through the storms as well as sunny days in a systematic way would be really worthy of reading. How do they deal with financial innovation, such as some exotic financial instruments and hedge funds? In general, I would rate this book the highest score, with high hopes for another book from their team.

I give this the highest rating available for two reasons: First, it gives rare insight into the forces driving generally any institution and in particular investments by endowments and foundations. Second, Mr. Swenson provides surprisingly original and expectedly sophisticated thoughts on a number of new and crucial aspects of portfolio management from a wholistic and asset-class specific perspective. He also provides a fresh look at new or often brushed over topics including alternative investments, evaluation of quantitative strategies, and evaluation of managers within each asset class. Although the investments of the Yale Endowment are well known, I knew little about David Swenson prior to reading this book. I came away very impressed with his thoughts. He managed to provide insight and make interesting a lot of topics previously thought simple.Generally speaking there are two sources of capital available, those from individuals and those from institutions. Every other investment institution(ie, investment banks, mutual funds, hedge funds, brokerages) are simply intermediaries that help transform investment capital into working capital. Understanding the needs of both individuals and institutions is crucial from a number of perspective. For an economist, both groups represent fundamental causal mechanisms in the flow of capital. For anyone in the investment business from stock brokers to investment bankers to hedge fund managers, both individuals and institutions represent a significant potential source of revenue. More information than we need to know is available about the individual. However, surprisingly little good information is available about institutional investors. If anything, the first half of this book provides a useful look into the views of an institutional investor.Aside from providing a look at the industry, this book was undoubtedly insightful from a pure finance/investment perspective. Mr. Swenson manages to shed light on a lot of topics that were previously taken for granted. Examples include his illustration that on a risk adjusted basis, private equity funds(LBO and venture capital)on average don't perform that well. Only top-tier funds are beating the "market" (S & P500), and only they're worth investing in. Moreover, he's even shed light on the much whispered....never talked about fact that perhaps private equity managers are overcompensated.His examination of alternative investments is only one aspect of the book. He also provides a fresh look at other important topics that often go unnoticed such as the limitations of mean-variance optimization in asset allocation, active vs. passive fund managers, the role of real estate within the overall portfolio, the significance of REITs, and many others.

I found this book extremely thorough and well researched. Numerous relevant anecdotes help illustrate the author's key points and make the book a great read for investment professionals and retail investors alike.David Swensen's biting opinions on the disadvantageous return/risk/fees combination for U.S. publicly traded securities (equities and fixed income) should be read by anyone interested in learning the cold, stark realities on trying to beat markets that are highly efficient.Swensen and Dean Takahashi have long been held in the highest esteem by leading investment professionals. Now we know why: not only are there numbers great, but their thought processes are well thought out and understandable.The challenge of readers of this book will be to accept the difficulties of beating the market without a true competitive advantage. Moving forward, the challenge for Swensen, and Yale, will be to continue to outperform their benchmark now that their strategy will be widely disseminated. And, of course, copied.