10/05 11:52 ET
Charley, as chairman of Yale’s investment committee, you spent a lot of time working with David Swensen, the endowment’s legendary CIO, who passed away this year. We’re about to see enormous gains by endowments because of venture capital.
Can you talk about the long-term strategy of institutional investors and how it differs from everyone else?
Janet Lorin Investing Reporter
10/05 11:56 ET
I really like to give a very long answer to this question. The Yale endowment under David Swensen was marvelous!
An appropriate investment strategy for an institution like Yale is very, very different from individual investors or institutions that don’t have the unusual skills that Yale developed as an investment-management organization.
Charles D. Ellis, Greenwich Associates Founder
10/05 11:57 ET
Over the long term, “venture capital investing” has been a disappointment. Returns have been significantly less than the equity market. The risk has been greater, and basically it has not been a good idea.
Charles D. Ellis, Greenwich Associates Founder
10/05 11:58 ET
Venture capital is not about the money; it’s about the people. And 10 or a dozen great success makers in venture investing concentrate substantially on
knowing all the people who might be terrific in a new organization and assemble the very best teams to create great success. And they succeed.
As a result, everybody who wants to be successful as builders of new technology companies wants to work with those very best investors. So demand exceeds supply, and the best investors know that they have limited capacity from dollars’ point of view, so they limit their investors to those who truly understand venture investing and are long-term investors and will be repeating long-term investors.
Charles D. Ellis, Greenwich Associates Founder
10/05 12:00 ET
As we all know, life itself is unfair, and it turns out that only 10 or a dozen organizations are really successful at venture investing, and that means everybody wants to be investing with them or have them invest in their companies.
Usually 90% of the great successes in venture investing go back to those same 10 or dozen organizations. And success breeds success, which breeds success. So you’re either one of the favorite investors, or you shouldn’t consider venture investing, because you will not succeed.
Charles D. Ellis, Greenwich Associates Founder
10/05 12:02 ET
Yale this year has more than 25% in venture capital and will likely see gains like it hasn’t seen since 2000’s 41% return. U.S. stocks also performed well during the year ended June 30, with the S&P 500 returning 41%, including reinvested dividends. Who did better with less risk?
Janet Lorin Investing Reporter
10/05 12:03 ET
This is clearly a very clever question. The obvious answer is: Doing well in the S&P 500 (as good as or better than in venture investing) is much less risky.
The second answer would be to borrow from Marty Leibowitz’s book “Inside the Yield Book.” It all depends on what your investing is going to be for the next year.
In the case of a large endowment like Yale, one or two years is way too short a time period to get a good fix on risk.
Ten years might be long enough; 25 years is almost surely long enough. But one year is way too short.
Charles D. Ellis, Greenwich Associates Founder
10/05 12:05 ET
This is a very specific question from a reader, but it raises the very broad point that rebalancing at present would appear to mean buying bonds. Is this really a good idea? Here’s the question:
“I’m on the board of a well-endowed private school. Our consultant advises upping our risk to compensate for the skimpy income we’re earning on our portfolio in order to maintain the endowment’s roughly 4% annual support of school operations. Doesn’t rebalancing (winning the loser’s game) call for doing just the opposite, namely, selling equities and using the proceeds to augment the portfolio’s skimpy income as needed to fund operations?
“Asked differently, shouldn’t an endowment’s allocation be maintained independent of the cash support it is called upon to provide?”
John Authers, Bloomberg Opinion, New York
10/05 12:06 ET
For an endowment that’s large relative to its mission, asset allocation should be optimized quite independently from the determination from an appropriate annual draw. This is a wonderfully thoughtful question.
Charles D. Ellis, Greenwich Associates Founder
10/05 12:07 ET
With the Federal Reserve driving interest rates down and inflation verging on 3%, maybe more, conventional wisdom from the past on stock-bond ratios really needs to be reconsidered carefully.
These are, as Abraham Lincoln would have said, unusual times, so our strategy should be comparatively unusual, or at least unconventional.
Charles D. Ellis, Greenwich Associates Founder