Global Asset Allocation – David Swensen and the Yale Endowment

David Swensen, the Chief Investment Officer at Yale’s endowment has an incredible track record over the past 20 years, achieving a 16% compound annual return. His 2005 book Unconventional Success is a must-read for any amateur or professional investor. Courtesy of my friend Bob Burlinson at Regis Capital Management, I just read Swensen’s 2006 annual report with asset allocations from mid-year 2006. Swensen has reduced his U.S. equity (12%) and bond (4%) allocations down even further to fund opportunities in timber, oil and gas (27%). Yale’s scale and access give it access to some of the most attractive investments in timber and venture capital. He raised his foreign equity (15%), hedge fund (25%) and (surprisingly) private equity (17%) allocations. He notes that his allocations are influenced by bottoms-up opportunities that he sees versus strictly expected returns, deviations and covariances. He is betting more on real assets and foreign equity, which will allow him to benefit if the dollar falls (or other inflationary pressures increase). He is also acknowledging that emerging markets (7.5%), and to a lesser extent Europe and Japan (7.5%), while not cheap, may still offer better risk-adjusted returns than the U.S. Finally, he does not see bonds and cash as an attractive alternative to a well constructed portfolio of hedge funds. Bottom line, he is bearish on the dollar and bullish on real assets such as timber, oil and gas, as well as private equity investments by strong managers.