Swensen Portfolio in 2021
Table of Contents
Mr. David Swensen created this particular portfolio. He served as the chief investment officer at Yale University from 1985 until his death in 2021. His portfolio was tremendously effective for Yale’s endowment fund but is it a good portfolio for us as institutional investors? Is it better than some of the other lazy portfolios?
Every investment strategy comes with its benefits and drawbacks. Therefore, we analyze the portfolio holdings, historical performance, risk metrics, and future potential.
David Swensen Portfolio Composition logic?
The David Swensen Portfolio includes:
- 30 percent in the Total Stock Market
- 15 percent in the International Stock Market
- 5 percent in Emerging Markets
- 15 percent in Intermediate Bonds
- 15 percent TIPS
- 20 percent REITs
Alright, that is quite different from our other portfolios:
- This portfolio has the lowest exposure to bonds at 15% to intermediate bonds out of all the lazy portfolios.
- It has 15% in TIPS, which we never see included in a high-profile portfolio idea like this.
- There is 20% in Real Estate Investment Trusts (REITs).
What Are the Benefits of the David Swensen Portfolio?
There are a few significant benefits of going with the David Swensen Portfolio. A few pros include:
- Like all the other lazy portfolios, it is easy to set up and provides plenty of diversification.
- With low exposure to bonds, we should see the higher historical performance but with increased volatility.
- This portfolio does not include gold as an inflation hedge and uses specific treasury bonds instead. These are the most straightforward inflation hedged assets and are much simpler than gold or other commodities.
What Are the Drawbacks of the David Swensen Portfolio?
At the same time, you also have to understand a few drawbacks of the David Swensen Portfolio. A few cons to note:
- This portfolio could be a bit more complicated for someone new to the investing world, as it targets investment vehicles such as TIPS and REITs with which some people may not be familiar. Don’t worry, though. We will reconstruct it using ETFs down below so it is as easy to set up as possible.
- This is a portfolio that targets riskier investment opportunities, such as the international market and emerging markets. Therefore, you need to have a higher level of risk tolerance if you are interested in setting up this portfolio.
- ETFs that invest in emerging markets and international markets typically have higher MER (Management Expense Ratio) or fees than ETFs that invest purely in domestic markets.
Let’s get into the nitty-gritty.
Composition & Logic
We reconstruct Swensen portfolio using most popular ETFs.
Historical Performance vs. S&P500
Metric Swensen Portfolio Start Date
Let’s compare Swensen Portfolio performance to S&P 500. To make it simpler we will compare it to SPY ETF. Here are the results starting in 2012.
Despite this portfolio being so heavily exposed to stocks (70% combined U.S and International stocks) it significantly underperforms the SPY over the last 10 years. Swensen’s portfolio is a lower risk portfolio so it does have a lower volatility than SPY. Not bad for a portfolio with 70% in stocks. Here is the detailed percentage return by year from 2011.
So why did it underperform, let’s break down each ETFs performance and see what contributed most to the portfolio.
Interestingly, domestic stock market has contributed half the returns. Portfolio also benefited from having real estate exposure as VNQ performed very well over the last 10 years, delivering over 20% of the overall return. Bonds and TIPS delivered income as well as lowering portfolio volatility.
Here is a look at portfolio income & yield.
Portfolio has yielded a stable yield hovering in the 2.5% to 3% range thanks to bonds and dividends.
Asset types we buy when we purchase this portfolio:
Stock sectors we buy into when we purchase this portfolio:
Notably there is some overlap between various ETFs and their underlying assets, especially in the real estate. Despite REITs being only 20% of the portfolio, because of this overlap, portfolio is 31% invested in Real Estate, followed by Technology and Financial Services.
Fees and Risks
This portfolio is constructed using ETFs that you can see under composition section. ETFs are professionally managed and carry a fee called MERs. This fee is part of your return so it is not charged separately. Here is the breakdown of the fees.
At 0.07%, this is one of the cheapest portfolios to buy. The most expensive ETF on the list is REIT which is understandable as REITs typically cost more to manage than all stock or bond exchange traded funds.
Any investment carries some risk of loss. Risk is captured by portfolio’s volatility. Here is the summary of how much each ETF contributes to portfolio’s volatility as a % of total.
As expected almost 80% of the risk comes from stocks and Real Estate. Not only are these assets with the highest overall volatility but also highest weights in the portfolio.,
Notes on results:
Performance analysis is not of the exact portfolio offered by a 3rd party service. For back testing purposes, portfolios are reconstructed using best available information.
Investing involves risk, including possible loss of principal. The value of the investments and the income derived from them may fluctuate over time.
All portfolio returns presented are hypothetical and backtested. Hypothetical returns do not reflect trading costs, transaction fees, or taxes.
The results are based on information from a variety of sources we consider reliable, but we do not represent that the information is accurate or complete.
The results do not constitute investment advice or recommendation, are provided solely for informational purposes, and are not an offer to buy or sell any securities.
The results are based on the total return of assets and assume that all received dividends and distributions are reinvested.
CAGR = Compound Annual Growth Rate
Stdev = Annualized standard deviation of monthly returns
The results assume annual rebalancing of portfolio assets to match the specified allocation