Yale's Swensen Talks About China, Quants, Manager Selection

(Bloomberg) -- Yale University chief investment officer David Swensen, in a rare public appearance, spoke Tuesday to former U.S. Treasury Secretary Robert Rubin at the Council on Foreign Relations.

During the hour-long session, Swensen, 63, disclosed that annualized returns over his 32-year tenure have been 13.5 percent, higher than the endowment’s assumption of 8.25 percent a year.

Swensen said he favors private equity and doesn’t like quants, and talked about his efforts to get university officials to lower expectations for future returns. The endowment has swelled to a record $27.2 billion, the second-largest in U.S. higher education.

During the interview, Swensen shared thoughts about investing and opportunities:

  • On where to invest: “The types of questions that you need to ask with respect to where you are investing are the bedrock for putting together your asset allocation. When I look around the world, there are places that we just won’t invest. Russia. If the rule of law does not follow, then do you know whether or not you own anything? And if you don’t know whether or not you own it, then why would you put your funds there? As we look around the world in spite of the problems we face in the United States, this is one of the best environments in which to invest. I think that the breadth of emerging markets that we were interested in 20 years ago has narrowed dramatically.”
  • On China: His level of concern about China has been “pretty constant” over the past 12 or 18 months. “China is an area that makes me incredibly nervous, but at the same time, we’re heavily committed there. I’ve had great relationships with a handful of managers in China that have produced extraordinary returns. The party commitment to capitalism doesn’t seem as steadfast as I might have thought five or ten years ago.”
  • On private and public markets: Private equity “where you buy the company, you make the company better and then you sell the company is as a superior form of capitalism. I’m really concerned about what’s going on in our public markets. The short-termism is incredibly damaging. There’s this focus on quarter-to-quarter earnings. There’s this focus whether you are a penny short or a penny above the estimate. There’s this activist mentality that permeates the markets.”
  • On quants: “I’ve never been a big fan of quantitative approaches to investing and the fundamental reason is that I can’t understand what’s in the black box. And if don’t know what’s in the black box and there’s under-performance, I don’t know if the black box is broken or if it’s out of favor. If it’s broken you want to stop and if it’s out of favor, we want to increase exposure. And so, I’m an old-fashioned guy that wants to sit across the table from somebody who’s done the analysis and understand why they own the position.”
  • On manager selection: Swensen has long attributed much of his success to the selection of managers for their character and the quality of investment principles. The test for character is “subjective, a gut feeling.” He tries to spend time with prospective managers in a social setting when making evaluations. “Track records are really overrated,” Swensen said. “We would miss out on some incredible investment opportunities if we required three or five years of audited returns before backing somebody.”

©2017 Bloomberg L.P.