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Investing

Yale’s David Swensen sees low volatility as ‘profoundly troubling’

David Swensen

David Swensen, Yale University's longtime chief investment officer, said the lack of market volatility in the current geopolitical environment is a major concern and warned that another crash is possible.

"When you compare the fundamental risks that we see all around the globe with the lack of volatility in our securities markets, it's profoundly troubling," Mr. Swensen said Tuesday during remarks at the Council on Foreign Relations in New York. That "makes me wonder if we're not setting ourselves up for an '87, or a '98 or a 2008-2009," he said, referring to previous market crises.

"The defining moments for portfolio management" came in those years, "and if you ignore that you're not going to be able to manage your portfolio," Mr. Swensen said.

The investment chief, who was interviewed by former U.S. Treasury Secretary Robert Rubin, also said he's expecting lower returns for the university's endowment, which he's run for 32 years with a 13.5% average annual rate of return.

For the past 12 to 18 months, Mr. Swensen said he has been warning university officials to expect much lower returns in the future, as little as 5% annually, which would be down from previous assumptions of 8.25%.

"It's not a very popular change," he said. "We're victims of our own success."

Mr. Swensen's widely copied strategy of shifting away from U.S. stocks to alternatives including private equity has generated billions of dollars in gains for the school in New Haven, Conn. The fund reached a record of $27.2 billion as of midyear.

"We have to take strategic positions in the portfolio," Mr. Swensen told an overflow crowd. "One of the most important metrics that we look at is the percentage of the portfolio that's in what we call uncorrelated assets, and that's a combination of absolute return, cash and short-term bonds. Those are the assets that would protect the endowment in the event of a market crisis."

Asked why Yale's uncorrelated assets are higher now than in 2008, he said, "I'm not worried about the economy so much, what I'm concerned about is valuation."