YouSaid · the spoken record

David Swensen

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13

first

2023-03-25

most recent

2023-03-25

sittings or episodes

1

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podcast

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1. “Times of great stress present opportunities. Warren Buffett says when the tide goes out, we find out who's swimming naked. That's true a little bit, but most of the time we need to look closely just to see if the color of a money manager's trunks is what we thought it was for those still clothed. It's time to sharpen our pencils on first principles because things are about to get interesting. Renderwrite a manager's competitive advantage in sourcing, due diligence, decision making, portfolio construction, and risk management. When a manager finds an opportunity in the mess and calls for the ball, confirm that their first principles resonate with the opportunity set and be ready to pounce. That's what David would do.”

   2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source

2. “Here's the opposite of Yale SVB's balance sheet management. SVB was a beloved bank. They served the venture community, offered terrific client service, made loans that others wouldn't, supported decades of innovation, and thrived alongside the growing venture ecosystem for forty years. They also managed their balance sheet the opposite of how David would have. When reinvestment opportunities dried up in a low rate environment, SVB didn't exit the business. On the contrary, they extended duration and assumed unhedged rate risk despite paltry returns available. Like many short term focused strategies, it worked. So, what would David do now? It's one thing to point out problems. It's another to suggest action. As frequent podcast guests and macro strategist James Aiken likes to say, so what? And now what?”

   2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source

3. “What did David do once the lucrative business got less attractive and others were taking more risk than he felt was prudent? He exited the business. David believed the corporate bonds weren't worth owning most of the time. In fact, he wrote his PhD thesis on the subject, concluding that corporate bonds failed to offer the safety characteristics of US government bonds or the upside of equities. Our reinvestment of securities lending collateral in AAA rated credit was about as much risk as he would accept. When the return attribution from the program shifted from favoring the lending spread to the reinvestment of proceeds, he said no thanks. If only others running large books of assets and liabilities behave the same way.”

   2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source

4. “During the year, the niche market of securities lending changed. Competition came in from custody banks whose clients were previously unaware of the opportunity. Custodians conducted securities lending on behalf of their clients and split the proceeds fifty fifty. The increase in supply of securities available to borrow caused an increase in the short rebate and commensurate reduction in the lending spread from fifty basis points to around 25. At the same time, the custodians took more credit risk on the reinvestment of proceeds than we did. Although the true value of their services came only from the lending spread, the clients weren't sophisticated enough to understand they were also paying a 50% carry on a credit risk premium.”

   2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source

5. “The AAA yield less Fed funds. We achieve that return with no duration or interest rate risk. It was the kind of small thing David found in markets a hundred different ways that added up to meaningful value added for Yale above its external manager returns.”

   2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source

6. “Another example Yale Securities Lending Book in 1994. I also oversaw Yale's equity securities lending book at the time. Securities lending was a nice activity to add a little value to the stock portfolio. For a primer, we lent out stock held by growth managers, also known as short sale candidates desired by hedge funds to borrow, and received cash collateral for the securities. We paid interest on that cash, the short rebate, of around Fed funds minus 50 basis points, and reinvested the proceeds in AAA-rated credit on a short-term basis that matched the duration of the loan. We earned a spread of around $75 basis points, the AAA yield less the short rebate, which could be decomposed into the lending spread of 50 basis points, Fed funds minus the short rebate, and the AAA credit risk premium of 25 basis points.”

   2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source

7. “Scared and commensurate rewards are higher, he chose to take less risk. This approach may generate smooth returns, but it fails to optimize risk adjusted returns through a cycle. I was afraid to ask what pain the clients realized along the way”

   2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source

8. “Here's the opposite of you smooth return fixed income management. Last week on a panel discussing the banking crisis, the head of a large private credit shop discussed the repositioning of their portfolio to take less risk for similar returns than was recently available by moving up the capital stack of corporate issuers. The CIO of a mega private bank also on the panel agreed with the moves. That approach is one David would have thrown up all over. The strategy begins with an output, delivers smooth returns for clients. Instead of an input from a first principle. In fact, it's the opposite of a sound strategy. It's called buy high, sell low. When markets ignored risk and offered scant compensation, the manager took more risk and stretched for returns by moving down in the capital structure. Now that risk surfaced, the market”

   2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source

9. “David would have none of it. When the fixed income world got thrown into a tizzy, you wouldn't have known if you sat on the desk with me. We stayed the course with our approach and made one trade a month to rebalance. We looked for enhancements to the portfolio, didn't find any, and carried on our merry way. As an aside, I had a chance to bid on Orange County bonds and got outbid by others who paid up for the novelty value of the issue. That year, our bond portfolio performed near the top of the charts. Boring was beautiful.”

   2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source

10. “My role was paper intensive and kind of boring, but the capital market environment that year was one for the ages. The Fed hiked interest rates seven times doubling short term rates from three percent to six percent. That move led to blowups in mortgage funds like asking capital, public pensions like Orange County, California, and emerging market debt called the Tequila Crisis. Innovation sprung up that became the predecessor of structured credit, crafty derivatives to dissect mortgages, interest rate swaps to hedge risk, and other funky securities borne out of Wall Street.”

    2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source

11. “Of long duration treasuries and agency mortgage backed securities backed by the full faith and credit of the US government. The only deviations from that model were security specific opportunities to get paid for illiquidity without taking any interest rate or duration risk. We owned a strip Brady bond and a closed-end fund trading at a discount as examples.”

    2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source

12. “David Twenton lived and breathed long-term investing. From his license plate endow to his aphorism Don't be so short term, David walked into the office every day with a mindset that embodied Yale's perpetual time horizon. The issues I raised in short term gain, long term pain three weeks ago would have resonated with him. Since then, the collapse of SBB revealed another example of long-term pain inflicted by short-term gains. The conditions leading to the bank crisis included violations of two of David's beliefs. Invest according to first principles, and take risk only when receiving adequate compensation. In 1994, part of my job at Yale was managing the bond portfolio. Its purpose was to protect the endowment against periods of deflation. David built a portfolio true to that objective, comprised almost entirely”

    2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source

13. “Today's episode is the second audio version of my blog. Three weeks ago, I wrote a piece called Short-term Gain, Long-term Pain that described a common issue with retirement plans, obesity, and climate change. But I forgot to record it for the podcast. Since then, we certainly hit a big one. A banking crisis caused in part by short-term behavior. As we all voraciously take in the news every day, I had a chance to take a step back and draw from my experience working at Yale for some parallels. Suffice it to say, David Swenson didn't play the game like SVB did. But I think I know how he would have been spending his time to prepare for what comes next. Without further ado, here it is. Short term gain, long term. two.”

    2023-03-25 · Capital Allocators · WTT - Short-Term Gain, Long-Term Pain, Part 2 · IDENTIFIED FROM THE TRANSCRIPT · source