| The 1378th meeting of the Connecticut Academy
of Arts and Sciences was held on Wednesday, May 16, 2007 at the
New Haven Lawn Club. Some 70 members and their guests enjoyed
cocktails at 5p.m. At 5:10 p.m., the speaker sent a message to
say he was held up and would be arriving at 6p.m. At 5:30 he
reported that he was in a traffic jam on the road from New York
due to a violent storm and could not estimate his time of arrival.
With the help of the Lawn Club staff, it was agreed to serve
dinner at 6:15, before the talk. Some 60 people remained for
dinner and the speaker arrived safely at 6:30. Following dinner
at 7:15 the President, Ernest Kohorn introduced the speaker,
Dr. David Swensen, the Chief Investment Officer, Professor, School
of Management and Lecturer in Economics at Yale University although
he said he did not think Dr Swensen needed any introduction.
At 7:45 p.m., a member of the audience collapsed, received immediate
attention from several physicians in the audience, and an emergency
ambulance arrived within a few minutes. (The patient recovered
well later in the evening.) Dr.Swensen's talk was entitled "Managing Yale's Endowment" and he began by explaining that a university needed a n endowment that was permanent in order to support in perpetuity the mission of the institution. Why an endowment? For three reasons: first for independence. In 1792, there had been a rift between the college and the colonial government and it was the State's support that became so important for independent activity. Secondly to give stability for operations: Josiah Gibbs, an eminent scientist and teacher in the 19th century, was unpaid until the college had an endowment from which to pay his salary. The third reason was to extend the margin of excellence. Tuition levels for most colleges and universities are equal. The differentiating factor is the size of the endowment, which determines the quality of the program. When Dr. Swensen came to Yale his goals were to support the institution at its highest level and to insulate the Endowment from market volatility. Looking at how other universities managed their money, he realized that one needed an equity bias in the long run and also that diversity was essential. It was dangerous to put all one's eggs into one basket. In 1986, 75% of the Endowment was committed to U.S. stocks, bonds and cash. Therefore, with his team he used three tools to achieve his goals: asset allocation, market timing and security selection. Asset allocation was the most important. Treasury bills are popular because they yield a good result but much of that is consumed in inflation. Stocks in large companies are the next most popular but depend on market timing. Small stocks are the best value if they are in good, ethical companies but one must stay the course despite the variability in order to make gains. Dr. Swensen followed Keynes method of investment management. The market is driven by fear and greed and a recent study showed that people buy high and sell low, just as Keynes had described, adding to the volatility of the market and decreasing its effectiveness. The third tool is security selection. As fees become higher so does the leakage. The hurdle to win is now much higher than 50 or 60 years ago. There is no good measure of market efficiency. Information regarding some mutual funds is biased because the numbers are often manipulated. One should look for the best venture capital. Dr. Swensen suggested that one creates value by building better, companies that are more ethical. Throughout all the evening's trials Dr. Swensen continued his talk with great aplomb and even answered several questions, |