Yale turns debt into opportunity

Bloomberg

"There are some really extraordinary opportunities in the credit world," said David Swensen, the school’s investment chief, in a phone interview from his office at the New Haven, Connecticut, university. "Everything, from bank loans to investment-grade bonds to less-than-investment grade bonds, is priced at really cheap levels."

Swensen, 54, increased Yale’s endowment to $22.9 billion on June 30, from $1 billion in 1985 when he assumed the job, making it the second-wealthiest university in the U.S. The school estimated on Dec. 16 that the fund had fallen 25 percent, to $17 billion, because of the global financial crisis. Swensen, who has updated his 2000 book on investing for re-release Jan. 6, said periodic losses are inevitable in a portfolio tilted toward stocks and built to grow over many years.

"There isn’t an investment strategy that can produce the kind of long-term results we’ve generated at Yale that isn’t going to post the occasional negative return," Swensen said in the Dec. 30 interview. "I don’t think people should disregard the book because of the market trauma of the last few months. We’re not even done with the current fiscal year. Judging a long-term investment strategy based on the results of a five- to six-month period is foolish beyond words."

Flight to quality
Among Swensen’s core principles is the importance of diversifying holdings while focusing on equities. In a recession, the advantages of diversification get overwhelmed by investors’ selling equities in favor of U.S. Treasury bonds in a "flight to quality," he said.

"When you have a market in which any type of equity exposure is being punished, it’s going to hurt long-term investors," he said.

In the current environment, distressed corporate securities can produce "equity-like" returns, Swensen said. "You want to make sure you’re with companies that have the ability to survive in a really tough economic environment" he said, declining to name any of the companies.

Yale, one of eight schools in the elite Ivy League in the northeastern U.S., dates from 1701. The school, which has about 13,100 students, trails only Harvard University in wealth.

Harvard, in Cambridge, Massachusetts, had an endowment valued at $36.9 billion on June 30 before reporting losses of about $8 billion, or 22 percent.