Back in 2000, David Swensen, the long tenured chief investment officer of the Yale University Endowment wrote a book entitled “Pioneering Portfolio Management.” The subtitle was “An Unconventional Approach to Institutional Investment” and honestly, it was not only very unconventional, but it was also very successful. Swensen’s methodology was and still is to use the Endowment’s large size to attract the very best students and employees to work with him, and let them then attract literally the very best investment managers from around the globe. He doesn’t have these managers invest in traditional stocks and bonds (he handles that in-house), but he has them invest 70-80% of the Endowment’s funds into illiquid investments such as farmland, timber, venture capital, private equity and various hedge funds. Now defining liquid investments as those you can get “most” of your money back quickly, say within a day or two, illiquid investments would then be those that are contractually tied up for months, or even years, with little hope getting funds back quickly regardless of the nature of global investment markets. Because Yale’s Endowment has a time horizon of 80 – 100 years, has 20-30% liquidity, and investment redemptions of staggered terms, this approach worked well from 1985 through 2007.
Swensen’s investment returns were so good during this period of time that most large university endowments at least tried to replicate his methods. And because his book was so clear as to his methodology, even my peer group tried to emulate his success to various degrees by investing some of our clients’ funds in a similar fashion. But it didn’t quite work. Over time, we discovered that there were three major differences between what Dr. Swensen was doing and what we were trying to accomplish. First, few of us had the inherent talent of David Swensen, and even his own peer group struggled to keep him in sight. Second, he was using investment vehicles where the most talented managers really make a positive difference. But last, the difference in his investment horizon of 80 – 100 years is radically different from dealing with human clients where 35 years would be considered lengthy. During the 2008 crisis, Yale, Harvard and many other well-known Endowments had problems funding normal college obligations, primarily because the bulk of their funds were illiquid. Our clients too had problems during this time, but getting money out of the market was not one them.
Since that time six years ago, many companies have introduced liquid fund versions of many of the strategies Swensen continues to use, although it is still hard to wrap farmland up into a fund. With stock markets around the world close to all-time highs and bond markets being extremely expensive because of record low interest rates, these liquid strategies are becoming more appropriate for those of us with investment horizons of less than 100 years. The liquidity of these newly packaged alternative investments allows capital allocators like Longview the ability to grow and protect our client portfolios in a much broader and richer fashion. We all need liquidity for purchasing our basic needs. And those of us who invest will always need liquidity for down payments on a home, for children and grandchildren, for college educations and especially for funding retirement. As these newly packaged, liquid versions of investments continue to improve, it is our hope that the process of helping clients accomplish their goals will also continue to improve.
Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc. He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at firstname.lastname@example.org.
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