The David Swensen Portfolio will always come up in the discussions about lazy portfolios. Having reviewed a few other lazy portfolios like the All-Weather Portfolio, Larry Swedroe’s Portfolio, and Harry Browne Permanent Portfolio, we will be taking an in-depth look at the Swensen Portfolio. As always, I am here to tell you all you need to know about the portfolio and, more importantly, help you decide if it is suitable for your investment plans and goals.
Without wasting any more time, let’s get to it!
Key Takeaways
In a hurry? Check below for the major talking points of the article;
- The Swensen Portfolio is another top lazy portfolio popular among investors.
- It was created by David Swensen, the President and Chief Investment Officer at Yale University Endowment.
- The portfolio is a blend of safer assets, including US stocks and Intermediate bonds.
- It prioritizes diversification with exposure to significant opportunities and minimizes risks.
- The David Swensen Portfolio is suitable for young investors and real estate enthusiasts.
- Investors can replicate the traditional Swensen portfolio using certain ETFs available in the current market.
Who is David Swensen?
David F. Swensen is a household name in the investment circle. Asides from being the pioneer of the famous David Swensen Portfolio, Swensen was also a well-known money manager whose exploits with Yale’s endowment fund remain preserved in history. He started his professional career on Wall Street with two three-year stints at Lehman Brothers and Salomon Brothers. Among other things, Swensen revolutionized the endowment investing system and elevated Yale’s fund as the best-performing fund in the United States over a two-decade period.
Swensen authored two books – “Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment” and “Unconventional Success: A Fundamental Approach to Personal Investment” which put forward his thoughts to the investment community. His strategy has always been about broad diversification. More than mixing stocks and bonds, he believed combining safer assets that offer considerable exposure but with minimal risks is the way to weather the investment storm in the long run. Unfortunately, he lost his long battle with cancer in 2021 at 67.
The David Swensen Portfolio Explained
Now that we know who David Swensen is let’s talk about the portfolio he created. The David Swensen Portfolio was designed to serve as a contrarian model focusing on a well-diversified but equity-oriented asset allocation. It requires investors to show courage and play the long game, thereby rewarding them with considerable and often above-market performance over time.
It is a portfolio that invests in multiple types and classes of assets within and beyond the United States. Despite its apparent tilt to more real estate assets, the portfolio has returned impressive success in the market over time. I must state, at this point, that the Swensen Portfolio is not the same as the Yale Portfolio. David Swensen invented both, but the Yale endowment model inspired the latter under his watch at Yale.
The major differences between the David Swensen and Yale Endowment Model portfolios lie in their asset allocation and investment strategy. For example, only institutional investors can access the exotics in the Yale Portfolio. However, every investor can model the David Swensen Portfolio to their taste.
What is the Swensen Portfolio Investment Strategy?
The investment philosophy behind the Swensen Portfolio is somewhat different from the conventional lazy portfolios. For example, while other portfolios throw in some gold and other precious metals investments into the blend, the Swensen portfolio does not. The exclusion of precious metals can be associated with the increasing concerns about how safe these investments actually are.
You may want to ask, how did the Swensen Portfolio make up for the exclusion of precious metals? Well, it introduced TIPS – Treasury Inflation-Protected Securities (TIPS), which are assets that increase with inflation and decrease with deflation. Considering the relatively lower 15% allocation, it gives to bonds; the portfolio is set up to deliver on long-term maturities and extended stability.
So, the portfolio minimizes risk by opting for assets that perform well in opposing times. For example, you can expect the US and international stocks to outperform other stocks during the bull market and the treasury bonds and TIPs to outperform other assets during the bear market. The introduction of REITs and TIPs helps to limit the effect of inflation, and the emerging market stocks offer access to markets with high potential.
The David Swensen Portfolio: Asset Allocation
This portfolio is a blend of U.S., international, emerging market stocks, and REITs. Let’s look at the weight, components, and asset classes.
Weight, Components, and Asset Classes
In terms of weighting, the asset allocation in the Swensen Portfolio cuts across stocks (50%), intermediate bonds (30%), and real estate (20%). The 50% allocated to stocks is further split into 30% for the total stock market, 15% for the international stock market, and 5% for emerging markets. The 30% intermediate bond cut is often split equally between TIPs (15%) and U.S. Treasuries (15%). The remaining 20% allocated to real estate goes into REITs.
You may find other models of the same portfolio with slightly different weightings. For example, some models are designed to contain 10% emerging markets and 15% REITs. This ultimately depends on your personal investment goals and preferences.
I have expatiated more on each of the asset classes below:
International Stocks
15% of the entire portfolio goes into the international stock market, i.e., investment-grade funds interested in global stocks across different market caps, sectors, and regions.
Total U.S. Stocks
As the name implies, the total U.S. stocks representing 30% of the portfolio include assets invested in a highly diversified U.S. stock with rich exposure to multiple sectors and market caps.
Emerging Markets
Emerging markets are not without their associated risks. However, we must also acknowledge their significant growth potential. The 5% emerging market stocks expose investors to these growth and profit potentials while minimizing risks across the overall portfolio.
Treasury Bonds
The Swensen Portfolio allocates 30% to intermediate bonds, which is equally split between TIPs and intermediate-treasury bonds. The intermediate-term treasury debt securities are generally U.S. treasury bonds with terms ranging from three to ten years. The Treasury Inflation-Protected Securities are designed to perform in line with inflation and are therefore inflation-protected.
REITs
Real Estate Investment Trusts (REITs) are made up of companies owning income-producing real estate assets. This can be compared to owning a mutual fund in real estate, adding more diversification to the portfolio outlook and considerable returns over time. For example, these funds have returned about 11% since their inception in the 1970s.
Before we move on to the performance of this portfolio over time, here is a summary of its Weight, Components, and Asset Classes:
Asset Class – Stock (50%):
- 30% Total Stock Market
- 15% International Stock Market
- 5% Emerging Markets
Asset Class – Intermediate Bond (30%):
- 15% TIPs
- 15% U.S. Treasuries
Asset Class – Real Estate (20%):
- 20% REITs
The David Swensen Portfolio: Historical Performance
How has the David Swensen Lazy Portfolio performed over time? Let’s find out!
Swensen Portfolio Capital Growth
Let’s assume you invested $10,000 in a David Swensen Portfolio in 2010; you would have made over $16,000 in returns today, translating to a return of 163.09% in total. Note that this hypothetical situation includes price adjustments for dividends and splits. That’s pretty decent, isn’t it?
But when compared to the common portfolio benchmark, the S&P 500, the Swensen Portfolio underperformed. A similar investment in the S&P 500 over the same period would have yielded a return of 279.54%.
Next is the portfolio dividends.
Swensen Portfolio Dividends
Investors claimed a 2.51 dividend yield from the David Swensen Portfolio in 2021. If we annualize the returns over the last three years, this portfolio has delivered 7.80% in return, which is the same as 3.57% if inflation-adjusted. The five-year performance of the portfolio stands at 7.58% and 4.11% for both unadjusted and inflation-adjusted annual returns.
Swensen Portfolio Drawdowns
Here is an insight into the drawdowns of this portfolio as part of its performance assessment. The highest drawdown recorded over time is -40.89 between November 2007 and February 2009 – 16 months. Conversely, the lowest drawdown ever recorded was -3.28% within October 1997 – just one month.
Swensen Portfolio Efficiency
Despite its 7.88% 25-year annual return, the LazyPortfolio website classified the David Swensen Lazy Portfolio as high risk, with a 25% – 49.99% bond weight. I should also add here that the Sharpe Ratio of this portfolio is -0.002. While this carries almost no significant information, many investors often lookout for this value.
When it comes to volatility, the current volatility rating of this portfolio is 37.55%, which is about 16% higher than the volatility of the S&P 500.
Replicating the Swensen Portfolio With ETFs
One of the beauties of lazy portfolios is replicating them using suitable ETFs. Fortunately, the Swensen portfolio is not an exception. I have identified the best exchange-traded funds you can choose to set up your own Swensen Portfolio, in line with the asset classes and weights described in the previous section.
Asset Class – Stock (50%)
30% Total Stock Market – The Vanguard Total Market Index Fund ETF (VTI) exposes the portfolio to extensively diversified domestic sectors across all sectors and market caps.
15% International Stock Market – The Vanguard Total International Stock Index Fund ETF (VXUS), an ex-U.S. investment fund exposing the portfolio to international stocks with high diversity and reach within developed and emerging markets.
5% Emerging Markets – The Vanguard Emerging Markets Index Fund ETF (VWO) is a good candidate for emerging market exposure. The fund exposes the portfolio to companies in emerging economies like Brazil, China, South Africa, and Taiwan. Another great option here is the iShares MSCI Emerging Markets ETF (EEM), which invests in Asia Pacific Equities.
Asset Class – Intermediate Bond (30%)
15% Treasury Inflation-Protected Securities (TIPs) – The Vanguard Intermediate-Term Treasury Index Fund ETF (VGIT) is an excellent means of exposing the portfolio to diverse intermediate-term Treasury debt securities especially bonds in the bond market with 3-10 years of maturity.
15% U.S. Treasuries – The Schwab U.S. TIPS ETF (SCHP) fund is perfect for accessing a wide range of TIPs. If you prefer iShares, the iShares TIPS Bond ETF (TIP) is another decent option for exposure to inflation-protected funds.
Asset Class – Real Estate (20%)
20% REITs – The Vanguard Real Estate Index Fund ETF (VNQ) has proven to be a reliable real estate fund, offering exposure to a blend of companies that invest in various property types across specific regions of the world.
Should you adopt the David Swensen Portfolio Model?
There is no perfect answer to this all-important question. Your decision will largely depend on your preferences and investment goals. But to make it easier, I have outlined the advantages and disadvantages of the Swensen Portfolio below:
Pros
You can expect strong returns – Investors are in for compelling annual returns over time for a portfolio which outclassed the S&P 500 more frequently than it doesn’t. The risk and aggressiveness remain, but the returns make up for them well.
It is a highly diversified portfolio – The heavy diversification of the Swensen Lazy Portfolio is evident with the introduction of 3x index funds and ETFs with high individual diversification and a REIT. Investors can expect a decent level of protection irrespective of the market conditions.
It is easy to manage – No lazy portfolio should be challenging to manage, and this portfolio is not an exception. You can set it up and leave it for as long as you want while rebalancing as and when required. It takes away the investment burden and anxiety.
Cons
It exposes you to risk – Pitching your tent with this portfolio means you are in for an aggressive exposure to risk. Risk-averse investors should look for safer options as the drawdowns can be hard to take during challenging market situations.
It exposes you to real estate – Putting 20% of your investment into real estate is a turn-off for most investors. If that is you, you may need to adjust your choices to avoid being heavily weighted to the real estate side of the market.
It exposes you to the international stocks – It is essential to mention the high risks that come with international stocks. Despite their reputations for high returns, having 20% of your money in such a risky venture may not always be a comfortable call.
Final Word
The David Swensen Portfolio remains one of the most sought-after lazy portfolios out there, and for the right reasons. The historical performance is relatively good, the rich diversification, and the management is seamless. If you are not overly risk-averse, the real estate allocation should not be a problem. Based on this premise, risk-averse investors like retirees and people nearing retirement may want to avoid this portfolio.
Young investors will find the Swensen Lazy Portfolio an excellent fit for their investment goals. 30% of the portfolio goes into TIPS and bonds. Although this doesn’t reduce volatility or risk, it is still fair for young investors playing the long-term game and open to considerable risk. Real estate enthusiasts will also find this portfolio an excellent choice, with 20% of its allocation going into REITs.
Overall, it is a portfolio that promises consistent and excellent returns while keeping you safe from the possible downsides of a 100% stock portfolio or portfolios with similar asset allocations.
Did you enjoy reading this? If yes, you can check out more educative portfolio reviews here.
Good luck, and see you on the next one!