Monday, May 10, 2004
Pioneering Portfolio Management
A friend of my step-dad's who heard I was interested in investment management loaned me a copy of Pioneering Portfolio Management by David Swensen, the CIO at the Yale Endowment. I am only about a third of the way through it, but so far it has been very enlightening. I have done quite a bit of investment reading over the last four years or so, and I think Swensen is giving the best view of what a portfolio manager actually thinks about in formulating investment policy.
Today at lunch I read a very interesting section about the trade-off between liquidity and the ability to produce above-average returns. Swensen's view is that active management is more capable of achieving better-than-market returns in illiquid markets for the obvious reason that there is not as much coverage and less efficiency in those markets. Conversely, it is not wise to pay for active management in a well-developed market because those managers can probably not achieve good enough returns to offset their fees. So, while an actively managed international equity fund deserves a space in your IRA or 401k, an actively managed domestic equity fund probably does not, and an actively managed Treasuries fund definitely has no place anywhere. Instead, in efficient markets it is best to go with an index fund. Obvious conclusions, yes, but an interesting way of arriving at them.
Today at lunch I read a very interesting section about the trade-off between liquidity and the ability to produce above-average returns. Swensen's view is that active management is more capable of achieving better-than-market returns in illiquid markets for the obvious reason that there is not as much coverage and less efficiency in those markets. Conversely, it is not wise to pay for active management in a well-developed market because those managers can probably not achieve good enough returns to offset their fees. So, while an actively managed international equity fund deserves a space in your IRA or 401k, an actively managed domestic equity fund probably does not, and an actively managed Treasuries fund definitely has no place anywhere. Instead, in efficient markets it is best to go with an index fund. Obvious conclusions, yes, but an interesting way of arriving at them.
