Let's continue to get acquainted with the legends of Yale University, and concurrently with the legends of the economic/investment world. Abstract Books Innovative portfolio management. David Swenson. After Bob Schiller, let's move on to his guest during the recording of the series of lectures on finance – David Swensen.
Mr. Svensen manages Yale University's investments with 1985 of the year, systematically stagning S&P 500 with less volatility. (although alas, I have never understood how to compare with stupid, Sorry, dynamics S&P, for such a comparison does not contain any logical load. at least just because, that shares – it's only part of the portfolio).
Basically, it was he who created the approach/process of managing pension funds and other similar, and his Pioneering Portfolio Management has become the bible among managers.. Generally, if Warren Buffett is an image of a pop guru, then Svensen is a guru for professionals. A little later, Svensen's book Unconventional Success was published.: A Fundamental Approach to Personal Investment for Individual Investors, but we won't get to it (in principle, the main salt in the main book).
Several reservations at once. You are as a private investor or a small professional (up to several billion.), just can't follow Svensen's full ideas. For a) you don't have 30 Yards, in) You have taxes, with) your horizon is not infinity.
And another series of flaps. The unsophisticated reader may have an incorrect idea of active/passive management and the risk that endowment funds take.. Actually, the same Svanson is very active in managing the portfolio, it's just that this activity is not in the realm of catching the weekly maximum on S&P. AND, just in case, Do not forget, that period under review – it's the greatest bull market, and the share of shares and leverage in the portfolio is much higher, what it seems at first glance. Plus do not forget, that is illiquid (alternative asset classes) “Keeps” better in times of crisis (here the greater illiquid, all the better, because illiquid so-so can fall on 100%, and illiquid that is not traded can not).
David Swensen: interview 2009 of the year, Yule Endowment 2010
Synopsis of the book Innovative Portfolio Management
1. Introducedenie.
Concept. Agency problem. Active management.
2. Instrumental tasks.
Independence. The Story of Yuel. Examples are successful and not very good.
Stability. Examples.
Additional income provides an advantage in the quality of education.
3. Investment and current objectives.
Since the endowment must perform two functions – to preserve/increase funds for the future and at the same time serve as one of the sources of funds for financing current operating activities, contradictions often arise. How much to spend, how much to invest. This is decided by the investment policy. Generally, the chapter is intuitive, but it is worth reading because many people know about the nuances of the financial life of universities.. For example, the usual CPI for the endowment is irrelevant, the university has a different cost structure, hence the need to overtake your own CPI.
4. Investment philosophy.
Concept:
1) asset classes (asset allocation)
2) market timing (timing)
3) selection of specific tools (selection)
Timing here is perceived as a short-term deviation from long-term targets for asset allocation. Hence the non-perception of this fragment seriously. By prinytsip – more harm, what is useful. Wherein, both items No. 2 and No. 3 constitute the active part of the management (although again, and the asset allocation process itself – it's that passive control?)). And then he is born., IMHO, extremely sound thought – active management is useful on inefficient (alternative asset classes) markets and harmful in effective (stock).
And a very incessant chat is about rebalancing.. That's what I understood., that they rebalance every day. Everyone. Rebalancing has pros and cons, but it is one of the main means of risk management. For sale then, that has grown (since the share of this instrument has grown), bought then, that has decreased or increased at a slower pace. With individual stocks, it would be suicide on the principle of selling good., buy bad. But with asset classes, the idea is very sound..
5. Simple accumulation of a portfolio of Treasury securities with inflation protection (TIPS) allows investors to receive inflation-sensitive profits, state-guaranteed. Unfortunately, the excess of university inflation over overall price inflation may well absorb any additional profit from TIPS, practically not providing real returns for the university. Such a focused focus on asset preservation does not meet institutional needs., because simply accumulating a portfolio of assets with stable purchasing power does not benefit the academic enterprise., if at all gives it.
6. In an interview with the New York Times from 2 august 1998 G. Hansmann suggests, that "a stranger from Mars", who looks at private universities, probably, would say, that these are institutions, whose business is to manage large pools of investment assets and that they manage educational institutions on the side., which can expand and contract, to act as buffers for investment pools ». 7. Return on investment depends on decisions, concerning the three portfolio management tools: asset allocation, choice of time on the market and selection of securities. Investor behavior determines the relative importance of each aspect of portfolio management, at the same time, cautious investors consciously build portfolios, to reflect the expected contribution of each portfolio management tool.
8. Many investors believe, that the law of finance dictates, that policy allocation decisions determine portfolio returns, taking the market period and actions on the choice of securities to the background. In the study 2000 Roger Ibbotson and Paul Kaplan reviewed a number of articles on the contribution of asset allocation to investment returns.. The authors note, that "on average, politics was a little more, than all the total profit", Implying, that the choice of securities and the timing of the market do not make a significant contribution to profitability1. Another hint at the central role of asset allocation. Ibbotson and Kaplan came to the conclusion, that "... approximately 90 percent of the volatility of the fund's return over time is explained by the variability of the policy's yield".
9. There is an inverse relationship between the effectiveness of asset pricing and the corresponding degree of active management. Passive management strategies are suitable for high-performance markets, such as U.S. Treasuries, where market returns determine results, and active control adds almost nothing. Active management strategies are suitable for inefficient markets, such as private capital, where market returns have very little effect on deliverables, and the choice of investments provides a fundamental source of income.
10. Feeling skeptical, with which investors looked at stocks in the 1930s, permeates Robert Lovett's "Gilded Uncertainty", published 3 April 1937 of the year in the "Saturday Evening Post". Lovett begins his study of historical market returns with an assumption., that his readers "[c] realize the absurdity of applying the word "security" to a bond or stock". Lovett's analysis showed, that investor, bought "100 shares of each of the most popular stocks" at the turn of the century, by the end 1936 would have turned almost 295 000 dollars in 180 000 Dollars. In conclusion, he warns his readers.: «(1 ) that corporations... die easily and often; (2) take special care, when things start to look good; (3) you buy risks, not securities; (4) that governments break promises as well, as well as business;
11. Timing in the market, defined as a short-term rate against long-term policy objectives, requires correct identification of factors, that cannot be predicted in the short term.
12. Modern, a somewhat more complex version of the relative return game of the 1950s, tactical asset allocation (TAA), moves assets above and below policy weights based on the recommendations of a complex quantitative model.
13. In the 1950s, many investors played the market game over time with stock and bond yields., based on "... Practically a statement about, that good stocks should generate more revenue, than good bonds..." 9 When The Dividend Yield on Stocks Exceeded the Yield on Fair Margins, Investors Viewed Stocks as Attractive, larger than bonds. And vice versa, when bond yields approached stock yields, investors preferred bonds. History has laid a solid foundation for strategy. "Only for short periods in 1929, 1930 And 1933 years the yield on the stock was lower, than on government bonds" 10. This assessment method worked well before 1958 of the year, When was the last time stock returns outperformed bonds?. In the late 1950s – early 1960s, when bond yields have increased compared to stocks, market timers began to invest more in fixed income and less – in the action. Certainly, investors suffered significant losses from lost profits, waiting in vain, when the yield of the shares indicates the possibility of buying. Ultimately, the failure of the method of calculating time in the relative return market forced practitioners to find an alternative form.
14. The main purpose of rebalancing is to control risk., not in increasing profitability.
15. It goes without saying, that at the beginning of each trading day, The University of Yule estimates the value of each of the fund's components. When the classes of market assets of securities (internal capital, capital of a developed foreign company, emerging market capital and fixed income) deviate from the distribution target level, the investment department of the university takes measures to restore the distribution to the target level. IN 2003 Fiscal year, The University of Yule spent approximately 3,8 billion dollars on transactions on rebalancing of domestic capital, approximately evenly distributed between purchases and sales. Net profit from the rebalancing was approximately 26 million dollars, what is the additional income on 1,6 percentage of the internal portfolio of shares in 1,6 billion dollars.
16. The main purpose of rebalancing is to control risk., not in increasing profitability. Rebalancing transactions keep portfolios at the level of long-term policy objectives, eliminating deviations, resulting from differences in yields of asset classes. Disciplined activity to restore balance requires a strong stomach and serious endurance. Rebalancing, conducted in a significant bear market, seems like a losing strategy, as investors invest in assets, demonstrating continued relative price weakness.
17. The alternative of not rebalancing in relation to policy objectives forces portfolio managers to use a kind of market strategy for following the trend..
18. Against, active managers in less efficient markets show greater variability in profitability. Actually, many private markets lack benchmarks, that managers could "hug", which eliminates the problem of indexing the cabinet. Inefficient pricing allows managers with extensive experience to achieve great success, while unqualified managers report commensurately poor results. Hard work and intelligence bear great fruit in the environment, where excellent information and flow of trades provide an advantage.
19. Ironically, prejudice against survival leads to, that active managers seem less successful than their peers, what reality shows. Consider an American wealth manager, which retains capital in 2000 year. According to the results, received in 2000 year, as shown in the Table 4.6, zero income easily exceeds the average result -3,1 percent. Because the problem of survival inexorably changes the situation, to 2005 year median yield 2000 of the year is transformed into an increase in 1,2 percent. Over time, profitability, which used to be above the median, zero, moves from a respectable second quartile to a not very respectable third quartile. Survival bias obscures the pattern of relative performance.
20. In the least efficient private markets, there is no passive alternative. Even if a passive alternative were available, market results, probably, would disappoint.
21. John Maynard Keynes in his book "General Theory" argues, that "[from] there are no principles of orthodox finance, undoubtedly, more antisocial, than a liquidity fetish, doctrine, according to which investment institutions concentrate their resources in the storage of "liquid" securities. He forgets, that there is no such thing, as investment liquidity for the community as a whole ».
22. John Maynard Keynes, in his book General Theory, articulated this concept of value.: «... there is no point in creating a new enterprise at a price, exceeding that, on which a similar existing enterprise can be purchased; while there is an incentive to spend an amount on a new project, which may seem extravagant, if it can be released... with immediate profit »18. James Tobin and William Brainard formalized this concept as "q", ratio of market value for replacement
23. Historically naive value creation strategies have provided higher returns., while exposing investors to a relatively high level of fundamental risk.20 Grantham Grantham Mayo Van Otterloo warns of a "sixty-year flood", which can negate years of profit, obtained simply by buying the cheapest stocks. True value can be acquired by purchasing assets at prices below fair value, it's a promising concept, which takes into account the expected cash flows adjusted for the level
24. Asset classes, of which investors build portfolios, change over time. Recent images of Yale's portfolio 150 years give an idea of the evolution of the portfolio structure. Real estate accounted for almost half of the portfolio 1850 of the year, "bonds and bills of exchange, mostly secured by mortgages", and the shares made up the remainder.
25. Traditional fixed income assets respond to unforeseen inflation by lowering the price, as the future flow of fixed payments becomes smaller. Against, bonds with an inflation index react to an unexpected increase in prices, providing higher profitability. When two assets react in the opposite way to the same critical variable, these assets belong to different asset classes.
26. After determining the expected return, risks and correlations for a set of investment asset classes begins the search for effective portfolios. Starting from a given risk level, model explores portfolio by portfolio, which ultimately leads to the identification of a combination of assets, giving the highest profitability. Excellent portfolio takes place at the edge of efficiency. The process then continues by identifying the portfolio with the highest returns for a range of risk levels., as a result, a combination of excellent portfolios defines the boundary of efficiency.
27. However, caution must be exercised., to avoid using asset class constraints simply to create a reasonably looking portfolio. As a last resort, imposing too many restrictions on the optimization process leads to, that the model doesn't do anything, except for reflecting the investor's initial biases, which leads to the phenomenon of GIGO (garbage at the entrance / output), well-known computer specialists.
28. Richard Buxtaber, author of The Demon of Our Own Design, approves, that "the general rule of practice is, that each financial market experiences one or more daily price movements of four or more standard deviations each year. And in any given year, there's usually at least one market., daily movement of which exceeds ten standard deviations »3.
29. Historical capital markets data needs to be adjusted. Behavior of securities prices, returning to the average, means, that periods of abnormally high returns follow periods of abnormally low returns, and vice versa. Jeremy Grantham, well-known money manager, considers, that the return to the average represents the most powerful force in the financial markets.
30. In the spring study 1988 G., conducted by Paul Fyrstenberg, Stephen Ross and Randall Zisler "Real Estate: history» Journal of Portfolio Management, it was concluded that, that institutional allocations for real estate should be dramatically increased from the then average, less than 4 Percent. portfolio assets. The authors based their conclusions on data, showing government bonds with yield 7,9 interest and risk (standard deviation) 11,5 percent, ordinary shares with yield 9,7 interest and risk 15,4 percent, as well as real estate with profitability 13,9 interest and risk 2,6 percent. Percent. Although for the purposes of their study, the authors increased the risk levels of real estate from a historical level to a more reasonable level., their results on the average variance were not reasonable at all. Effective portfolio structure, including from 0 to 40 interest on government bonds, from 0 to 20 interest in shares and from 49 to 100 interest in real estate. Fortunately, authors tempered their enthusiasm, adhering to the "pragmatic point of view ... pension funds should strive for the initial placement of immovable property in the amount of 15 to 20 percent" 8.
31. For many investors, defining the performance boundary is the ultimate goal of quantitative portfolio analysis.. Choosing from a set of portfolios at the border guarantees, that, given the initial assumptions, there is no better portfolio. Unfortunately, mean deviation optimization provides few useful guidance when selecting a specific point at the efficiency boundary. Scientists propose to specify the utility function and choose a portfolio at the point of contact with the efficiency boundary. Such advice is useful only in the unlikely event., when investors find it possible to formulate a utility function, in which utility is related solely to the average value and variance of expected profit. Defining a set of portfolios with an effective average deviation does not allow solving the task. After determining the effective boundary, investors should determine, which combination of assets best suits the goals, formulated for the trust fund. Successful portfolios must meet two money management goals: maintaining purchasing power and providing substantial and sustainable support for operations. To assess the ability of the portfolio to meet these goals, creative modelers conduct quantitative tests.
32. Actually, world of trade (unlike the world of investment) usually rewards according to trend. Feeding winners and killing losers leads to commercial success. Leaders, which overcharge the winners, give attractive results. Managers, Starving losers, save scarce resources. In the Darwinian business world, success breeds success. In the world of investment, failure sows the seeds of future success. Strategy with an attractive price, not popular, provides much better prospective profits, than a highly appreciated short-term alternative. Discount, applicable to unloved assets, increases the expected return, even if the award, assigned to preferred assets, reduces expected results. Most investors find convenient positions on the mainstream, partly because of a sense of security in the numbers.. The attitudes and actions of the majority create consensus.. By definition, only a small fraction of investors find themselves in an uncomfortable position, working outside the main direction. As soon as the majority of players take the previously opposite position, the minority view becomes a widespread view. Only a few unusual people constantly take positions., really contrary to conventional wisdom. Investors discuss, with what frequency portfolios should be balanced. Some follow the calendar, performing operations monthly, quarterly or annually. Others try to control transaction costs, setting wide limits and trading only then, when the distributions exceed the specified ranges. A small number of companies are constantly rebalancing. – стратегию, which provides greater control over risks with potentially lower costs, than calendar or trading range approaches. Continuous rebalancing requires a daily assessment of portfolio assets. If asset class values deviate by one or two tenths of a percent from the target values, managers trade securities to reach target levels. Deals, usually, small and market-appropriate. Since rebalancing requires the sale of assets, prices that have relative strength, and asset purchases, experiencing relative weakness, the immensity of continuous rebalancing forces managers to sell that, what others buy, and buy that, what others sell, thereby ensuring liquidity in the market. Against, rebalancing strategies, not so meeting the requirements of the market, require larger and less flexible transactions, which increases market impact and transaction costs. If asset class values deviate by one or two tenths of a percent from the target values, managers trade securities to reach target levels. Deals, usually, small and market-appropriate. Since rebalancing requires the sale of assets, experiencing the relative strength of prices, and asset purchases, experiencing relative weakness, the immediacy of continuous rebalancing forces managers to sell that, what others buy, and buy that, what others sell, thereby ensuring liquidity in the market. Against, rebalancing strategies, not so meeting the requirements of the market, require larger and less flexible transactions, which increases market impact and transaction costs. If asset class values deviate by one or two tenths of a percent from the target values, managers trade securities to reach target levels. Deals, usually, small and market-appropriate. Because rebalancing requires the sale of assets, prices that have relative strength, and purchase of assets, experiencing relative weakness, the immediacy of continuous rebalancing forces managers to sell that, what others buy, and buy that, what others sell, thereby ensuring liquidity in the market. Against, rebalancing strategies, not so meeting the requirements of the market, require larger and less flexible transactions, which increases market impact and transaction costs. Since rebalancing requires the sale of assets, prices that have relative strength, and asset purchases, experiencing relative weakness, the immensity of continuous rebalancing forces managers to sell that, what others buy, and buy that, what others sell, thereby ensuring liquidity in the market. Against, rebalancing strategies, not so meeting the requirements of the market, require larger and less flexible transactions, which increases market impact and transaction costs. Since rebalancing requires the sale of assets, prices that have relative strength, and asset purchases, experiencing relative weakness, the immensity of continuous rebalancing forces managers to sell that, what others buy, and buy that, what others sell, thereby ensuring liquidity in the market. Against, rebalancing strategies, not so meeting the requirements of the market, require larger and less flexible transactions, which increases market impact and transaction costs.
34. Leverage is manifested in portfolios explicitly and implicitly.
35. Placing asset allocation goals at the center of the portfolio management process increases the likelihood of investment success. With the help of disciplined rebalancing methods, portfolios are created, reflecting clearly defined risk and return characteristics.
36. Traditional asset classes rely mainly on market returns, providing reasonable assurance of that, that the various components of the portfolio are fulfilling their objectives. In those cases, when active management is important to the success of a particular asset class, the investor relies on an unusual ability or luck to get results. If an active manager shows poor skills or is unlucky, the investor suffers, because the asset class is not achieving its goals. Because traditional asset classes depend on returns, market-driven, investors do not need to rely on the intuition or perceived experience of market participants.
37. Share Risk Premium, defined as additional gains of shareholders for taking risk above the level, inherent in bond investments, is one of the most critical variables in the world of investment. As well as all forecast indicators, the expected risk premium is shrouded in uncertainty about the future. To understand, what the future holds, thoughtful investors explore the peculiarities of the past.
38. Roger Ibbotson, a professor at the Yell School of Management, produces a widely used set of capital markets statistics., which reflect the difference in the yield of stocks and bonds over eighty years in the amount of 5,7 percent per year1. Data from Professor Wharton Jeremy Siegel for 203 years show risk premium 3,0 percent per annum2. Regardless of the exact number, historical risk premiums show, that stockholders had a significant advantage in yield over bondholders..
39. Market participants rarely wonder, whether high profitability is the result of taking more, than market, risk, or low yield is the result of lower yield, than market, risk. The lack of skepticism on the part of the investment community about the source and nature of excellent returns leads to this, that strange characters get the status of market gurus.
40. Of all the people, who drove the markets with their forecasts, Joe Granville may be one of the strangest. In the late 1970s – in the early 1980s, a technical analyst made a number of predictions "for money".
41. In the early 1990s, the Ladies of Birdstown attracted the attention of investors..
42. Joe Granville, ladies from Birdstown and Jim Cramer provide compelling evidence of this, that market participants often and uncritically accept simple notability as proof of a reasonable underlying investment strategy. The Fall of Grace, suffered by Joe Granville and Lady Birdstown (And, maybe, the future fall of Jim Cramer) should encourage investors to be skeptical when assessing active management opportunities.
43. Structuring a portfolio according to fundamental investment principles requires a management process, which gives the appropriate policy portfolio, avoids counterproductive market deadlines and defines effective investment management relationships.
44. John Maynard Keynes in his book "General Theory" describes the difficulties, related to group investment decisions: "Finally, it is a long-term investor, which most promotes the public interest, in practice will be subjected to the greatest criticism, where investment funds are managed by committees, advice or banks. For the essence of his behavior is, that he must be eccentric, non-standard and reckless in the eyes of the average opinion. If he succeeds, this will only confirm the general belief in his recklessness.; and if in the short term it fails, which is very likely, he won't get special favor. Worldly Wisdom Teaches, that it is better for reputation to fail in the traditional way, how to achieve non-standard success »1.
45. Certain asset classes require active management skills, if the investor hopes to get an attractive risk-adjusted result: absolute profitability, real assets and private capital. In each case, the investor does not have a market to buy; active management is critical to obtaining acceptable results.
46. In his wonderful book, Winning the Loser's Game, Ellis complains about the fact., that persons, decision makers, spend too much time on relatively interesting trading and tactical decisions due to more powerful, but more mundane political decisions6.
47. Charlie Ellis describes a useful framework for categorizing various portfolio management solutions. Policy decisions address long-term issues, which determine the basic structural basis of the investment process. Strategic decisions are medium-term steps, aimed at adapting long-term policies to immediate market opportunities and institutional realities. Trading and tactical decisions involve short-term implementation of strategies and policies.
