David Swensen is a legendary endowment manager at Yale University. In a recent interview with Consuelo Mack on Wealthtrack, the following exchange occurred. (You can read the full interview here.) Mr. Swensen is talking about the difficulty that individuals have succeeding in the market. It turns out that Yale outsources all of the management to firms who have found an edge they can exploit. It’s the only way to level the playing field because, as he points out, most people “have something they do with their lives other than studying financial markets.” We believe that relative strength has been proven to be just such an exploitable edge. He makes the point elsewhere in the interview that most firms do not have any kind of quantifiable edge. I was also struck by the fact that, although he is surrounded by talent at Yale, his group outsources all of the management. They focus on the overall asset allocation and spend their time trying to identify the managers that have an edge. Recommended reading.
CONSUELO MACK: It seems so unfair. So you think that individuals are always going to be, essentially, at a disadvantage, so the best that we can hope for is to have market returns and to have a portfolio that has some noncorrelated assets? Is that -
DAVID SWENSEN: Yeah, it seems unfair in a sense, but most everybody has something that they do with their lives other than studying financial markets.
CONSUELO MACK: Right.
DAVID SWENSEN: And I know how hard it is to beat the markets. They’re actually quite efficient. And so I’ve got an incredibly highly qualified, wonderfully motivated group of colleagues at Yale, and we work really, really hard to put together these market-beating portfolios.
CONSUELO MACK: And the market-beating portfolios, our viewers should know — you’re not investing the money yourself.
DAVID SWENSEN: No.
CONSUELO MACK: You outsource.
DAVID SWENSEN: With outside stock managers.
CONSUELO MACK: Right. So is there one or two things that you insist upon in choosing a manager? I mean, what are the things that you look for in choosing a good investment manager? Criteria.
DAVID SWENSEN: If we talked about this 20 years ago, I probably would have come up with a list of objective criteria.
CONSUELO MACK: And now?
DAVID SWENSEN: And now, I just say it’s all about the people. You want to have really high quality people, great integrity, very intelligent, hard-working, people that have found an edge that they can exploit.
CONSUELO MACK: In their particular niche.
DAVID SWENSEN: In their particular niche. And I would say it’s people first, people second, people third. You just want to be partners with great people.
