Defence

The real secret to Yale’s remarkable continuing success is defence, defence, defence…Delete a few disasters and compounding takes care of everything.

Overview

A strong portfolio management framework rests on asset allocation decisions and incorporates a bias toward equity assets with an appropriate level of diversification. Since market timing actions generally prove unrewarding and always cause portfolios to deviate from desired characteristics, serious investors avoid market timing. Security selection decisions, while extremely difficult to execute with consistent success, contain the potential to add value to portfolio returns. Investors enhance opportunity for beating the market by pursuing excess returns where the degree of opportunity appears largest, by accepting reasonable degrees of illiquidity, and by maintaining a value orientation.

Diversification

‍By identifying high-return asset classes that show little correlation with domestic marketable securities, investors achieve diversification without the opportunity costs of investing in fixed income. The most common high-return diversifying strategy for a U.S. investor involves adding foreign equities to the portfolio. Other possibilities include venture capital, leveraged buyouts, real estate, timber, oil and gas, and absolute return.

Rebalancing

‍Like many contrarian pursuits, rebalancing frequently appears foolish as momentum players reap short-term rewards from going with the flow. Regardless of potentially negative reputational consequences, serious investors maintain portfolio risk profiles through disciplined rebalancing policies, avoiding the sometimes expedient appeal of moving with market forces.

Active management

‍Any measure of dispersion provides some sense of the degree of active management opportunity. More efficiently priced assets provide less opportunity for active managers and less efficiently priced assets provide more opportunity… Inefficiencies in pricing allow managers with great skill to achieve great success, while unskilled managers post commensurately poor results. Hard work and intelligence reap rich rewards in an environment where superior information and deal flow provide an edge.

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