David Swensen, who pioneered an investing style that helped endowments outperform markets by using alternative assets such as private equity and real estate, said investors who don't have access to top managers are best off using index products.
“There are two sensible approaches to investing — either 100% active or 100% passive,” Mr. Swensen, chief investment officer of Yale University's $19.4 billion endowment, said Tuesday at the John C. Bogle Legacy Forum.
Unless an investor has access to “incredibly high-qualified professionals,” they “should be 100% passive — that includes … most institutional investors,” he said.
Most active mutual funds are more interested in collecting fees than in boosting returns for investors, Mr. Swensen said at the conference, which highlighted Mr. Bogle's work in building up index funds as a low-cost alternative to traditional mutual funds.
Yale, which is based in New Haven, Conn., returned more than 14% annually over the past 20 years, compared with the 13% increase at the world's richest school, Harvard University.
Mr. Swensen said he was “happy” with Yale's hedge fund exposure, adding that the investments remain a necessary part of the university's holdings given the “subdued or modest expectations” of stock-market returns.
“High-quality hedge fund exposure that produces returns that are fundamentally independent of what's going on in the markets can be a great addition to an institutional portfolio,” said Mr. Swensen, who has headed Yale's investments office since 1985.
Still, hedge funds' traditional fees of 2% of assets and 20% of profits “are a huge issue,” Mr. Swensen said, and unmerited except for extraordinary performance.
“If you're going to engage in the game where you're charging enormous fees, you have to be in the top 5% to 10% to win on a risk-adjusted basis,” he said.
Mr. Swensen said he also takes issue with high-frequency traders, saying they take unfair advantage of traditional investors.
“I've always viewed high-frequency trading as a tax on the rest of us,” Mr. Swensen said. “A bunch of smart people (are) taking advantage of order-execution rules as opposed to doing something good for the market place.”
Yale's endowment gained 22% in the fiscal year ended June 30, compared with a 21% increase for Harvard. Columbia University in New York was the best performer among the eight Ivy League schools last year with a 24% gain.