Unconventional Success: A Fundamental Approach to Personal Investment [Hardcover]

David F. Swensen (Author)

Book Description

Release date: August 2, 2005

The bestselling author of Pioneering Portfolio Management, the definitive template for institutional fund management, returns with a book that shows individual investors how to manage their financial assets.

In Unconventional Success, investment legend David F. Swensen offers incontrovertible evidence that the for-profit mutual-fund industry consistently fails the average investor. From excessive management fees to the frequent "churning" of portfolios, the relentless pursuit of profits by mutual-fund management companies harms individual clients. Perhaps most destructive of all are the hidden schemes that limit investor choice and reduce returns, including "pay-to-play" product-placement fees, stale-price trading scams, soft-dollar kickbacks, and 12b-1 distribution charges.

Even if investors manage to emerge unscathed from an encounter with the profit-seeking mutual-fund industry, individuals face the likelihood of self-inflicted pain. The common practice of selling losers and buying winners (and doing both too often) damages portfolio returns and increases tax liabilities, delivering a one-two punch to investor aspirations.

In short: Nearly insurmountable hurdles confront ordinary investors.

Swensen's solution? A contrarian investment alternative that promotes well-diversified, equity-oriented, "market-mimicking" portfolios that reward investors who exhibit the courage to stay the course. Swensen suggests implementing his nonconformist proposal with investor-friendly, not-for-profit investment companies such as Vanguard and TIAA-CREF. By avoiding actively managed funds and employing client-oriented mutual-fund managers, investors create the preconditions for investment success.

Bottom line? Unconventional Success provides the guidance and financial know-how for improving the personal investor's financial future.

Editorial Reviews

From Booklist

Swensen, CIO of Yale University and the author of Pioneering Portfolio Management, reveals why the mutual fund industry as a whole does a disservice to the individual investor. Soft money, 12b-1 fees, overtrading, market timing, and other management practices lower performance and virtually guarantee that most mutual fund returns will fall short of their benchmark, such as the S&P 500. Furthermore, for-profit mutual fund companies have a fiduciary obligation to their stockholders, not to their investors, and this relationship "inevitably resolves in favor of the bottom line." Swensen is also highly critical of the Morningstar rating system, which only causes investors to chase hot performing funds and managers. He advises considering alternatives to the for-profit mutual fund industry, including Exchange Traded Funds and not-for-profit financial institutions such as Vanguard and TIAA-CREF. He highly recommends that as an individual, you should play a more active role in your financial future. This includes periodic portfolio evaluation and rebalancing, to ensure that your asset allocation remains diversified and suits your investment time line. David Siegfried
Copyright © American Library Association. All rights reserved

Review

"Mutual fund managers and marketers are not going to like David Swensen's thoughtful and intelligently opinionated analysis of their 'colossal failure' resulting from the fund industry's 'systemic exploitation of investors.' Coming from the mind and heart of one of America's most successful and integrity-laden money managers, this is a book that will change the way you think about mutual funds. It's high time for you to follow the elegantly simple advice he presents in this wonderful book."

-- John C. Bogle, founder and former CEO, The Vanguard Group

"Swensen is the best. Always a pioneer, his new book presents an approach to investing that is both brilliant and practical."

-- Barton Biggs, former Chief Global Strategist, Morgan Stanley

"A legendary institutional investor reveals the conflicts of interest that induce most financial services companies to provide inadequate products for the individual investor. Swensen's wise solution: Low cost, tax efficient, market-mimicking funds available either through Exchange Traded Funds (ETFs) or from not-for-profit mutual fund companies. Unconventional Success does for the individual investor what Swensen's Pioneering Portfolio Management did for the institutional investor."

-- Burton G. Malkiel, author of A Random Walk Down Wall Street

"David Swensen is one of today's best endowment managers, if not the best. Unconventional Success is a perfect summary of what is wrong with a very important industry. This book should lead the reader to better investment decisions."

-- Michael F. Price, Managing Partner, MFP Investors

"Unfortunately, at the bottom of our industry -- money management -- there is a rather thick layer of muck, and Swensen's Unconventional Success rakes through this muck in spectacular fashion and great detail. It is the truth, the whole truth, and the very ugly truth. If you want to avoid the snares that lurk in money management, and save yourself lots of money, you must read it."

-- Jeremy Grantham, Chairman of GMO

See all Editorial Reviews

Product Details

• Hardcover: 403 pages
• Publisher: Free Press; First Edition edition (August 2, 2005)
• Language: English
• ISBN-10: 0743228383
• ISBN-13: 978-0743228381
• Product Dimensions: 6.4 x 1.3 x 9.3 inches
• Shipping Weight: 1.1 pounds (View shipping rates and policies)
• Average Customer Review: 4.1 out of 5 stars  See all reviews (109 customer reviews)
• Amazon Best Sellers Rank: #11,908 in Books (See Top 100 in Books)
  • #15 in Books > Business & Investing > Personal Finance > Retirement Planning
  • #66 in Books > Business & Investing > Investing > Introduction
  • #70 in Books > Business & Investing > Accounting

More About the Author

David F. Swensen is the chief investment officer of Yale University and the bestselling author of Pioneering Portfolio Management. He serves on the boards of TIAA, The Brookings Institution, Carnegie Institution, and Hopkins School. At Yale, where he produced an unparalleled two-decade investment record of 16.1 percent-per-annum returns, he teaches economics classes at Yale College and finance classes at Yale¹s School of Management. Mr. Swensen lives in New Haven, Connecticut.

Most Helpful Customer Reviews

490 of 494 people found the following review helpful

5.0 out of 5 stars Excellent book September 5, 2005

By S. Vaccaro

Format:Hardcover

I am a graduate of the Yale School of Management (with a focus in finance) and have been a fan of Swensen's for a long time. Unconventional Success is, in my view, a must read for anyone who has to manage their own retirement assets (which is most people today).

Swensen compellingly makes the case that (a) the vast majority of passively managed funds outperform actively managed funds (after fees), (b) the vast majority of the mutual fund industry allows profit motives to trump their fiduciary duty to investors, and (c) an individual investor's financial assets are best managed by non-profit organizations - i.e., Vanguard or TIAA-CREF.

Swensen lays out six "core" asset classes that should form the basis of an individual investor's portfolio, each of which should comprise between 5% and 30% of the portfolio. Below is the "generic" target portfolio outlined in the book:

1. Domestic Equity (30%)

2. Foreign Developed Market Equity (15%)

3. Emerging Market Equity (5%)

4. Real Estate (20%)

5. U.S. Treasury Bonds (15%)

6. U.S. Treasury Inflation-Protected Securities (15%)

Swensen also discusses "non-core" asset classes and why each should not be a part of an individual investor's portfolio. These "non-core" asset classes include:

1. Domestic Corporate Bonds, 2. High Yield (Junk) Bonds, 3. Tax Exempt (Municipal) Bonds, 4. Asset-backed securities, 5. Foreign Bonds, 6. Hedge Funds, 7. Leveraged Buyouts, and 8. Venture Capital. We spent so much time in business school glorifying these assets that I found the rationale for why they have no place in an individual's portfolio quite useful.

The most valuable lesson in the book for me was the importance of "quarterly, semi-annual, or annual" rebalancing - i.e. selling winners and buying losers to move various asset classes back to long-term targets (taking into account the tax consequences for post-tax accounts). This is a basic lesson, of course, but the reminder was still highly valuable.

The book does have a few shortcomings. The book can be a bit technical and dry at times, especially if the reader has no background in finance. I would have also appreciated more discussion of how non-financial assets (e.g., home equity) and personal liabilities (e.g., student loans, mortgage), should impact portfolio allocation. Overall, however, I think anyone with a 401k or a few thousand dollars to invest will benefit from a thorough reading of this book.

69 of 70 people found the following review helpful

4.0 out of 5 stars Assets Not for Asset Allocation April 23, 2006

By Dale C. Maley VINE™ VOICE

Format:Hardcover

I was fairly impressed with this book. I would give it an A, but the style of writing was painful to read, so I give it a B.

I recently saw several articles about Harvard's endowment manager leaving Harvard to set up his own firm. I was amazed to see how diversified the Harvard fund was in that it included not just stocks and bonds, but many other asset classes:

U.S. equities 15%
Commodities 13
Private Equity 13
Hedge Funds 12
U.S. Bonds 11
Foreign Equities 10
Real Estate 10
Inflation-Indexed Bonds 6
Emerging Markets 5
High-Yield 5
Foreign Bonds 5
Borrowed Money -5

This info came from 12/27/04 Business Week article. The same article said Harvard's endowment fund grew from $4.7B in 1990 to $22.6B in 2005. This sounds impressive until you calculate the compounded return, which is 11.04%. Simply investing in an S&P 500 index fund over the same time period would have given roughly a 10.91% compounded rate of return.

Swensen seems to have followed a similar very diversified approach at Yale.

I really enjoyed the explanation of why certain asset classes should not be included in investor's portfolios.....specifically foreign bonds.

Since I am an avid Index Fund investor, Swensen was preaching to the choir with regards to blasting the "for profit" mutual fund companies. Being a Vanguard investor, I was disappointed to see Vanguard take one hit for following one type of unsavory practice. Compared to the "for profit" mutual fund companies, Vanguard is a shining angel.

The successes of Harvard's and Yale's endowment fund investments are spreading the gospel of the advantages of asset allocation. Gary Brinson's 1986 famous study can be defined as the birth of asset allocation. He found that over 90% of a portfolio's return can be determined by the asset classes used, not what the individual investments were. Brinson's findings have been relatively slow to flow through the investment community and to individual investors. Dial the time clock ahead from 1986 to 2006, and one of Business Week's cover stories seeks to explain why the S&P 500's profits have increased dramatically over the last 5 years, yet the S&P 500 companies have had very little stock price appreciation. One explanation offered is that more and more investors practice asset allocation and choose other investments besides the S&P 500 for their portfolios. The increased demand for other asset classes like foreign stocks, commodities, and gold has subsequently less to a decrease in demand for large cap stocks in the S&P 500.

This book contains excellent information and guidelines for serious investors. It is very dry and boring to read.

All-in-all, a good book for serious investors. I would suggest companion books to supplement this book including The Richest Man in Babylon, Bogle on Mutual Funds, The Millionaire Next Door, The 4 Pillars of Investing, A Random Walk Down Wall Street, and the Coffeehouse Investor.

85 of 89 people found the following review helpful

4.0 out of 5 stars Outstanding book for the semi-sophisticated investor but not quite everything you need October 2, 2005

By B. Humphrey

Format:Hardcover|Amazon Verified Purchase

Written by one of the brightest and most successful money managers, the book has straightforward advice on what assets should makeup a portfolio and what assets (and providers) should be avoided. He definitely picks a few bones with the mutual fund industry which of course has been done before in such books as "The Intelligent Asset Allocator" by Bernstein and "A Random Walk Down Wall Street", corporate governance etc. As mentioned elsewhere he also goes into detail about the importance of rebalancing your portfolio.

Pros:

1. Gives advice on companies which can be trusted and provide products and investments where the investors objectives are aligned with the products (stocks, etfs, government bonds etc).

2. Lists specific indecies and providers he favors over others. There are tons of etfs out there so it's helpful to see a list he likes. He goes into detail about why some are more efficient then others.

3. Straightforward writing and sections. Easy to skip things you may already know (e.g. most mutual funds should be avoided).

4. Written by someone whe has done this with great success himself.

Cons:

1. Spends long sections in the book going into perhaps too much detail on specific examples of assets to avoid.

2. Regarding #1, I would have preferred more detail on specific allocations and products he likes and how we should use them best.

3. His own asset allocation at Yale includes a substantially different asset mix but he never gives detail on why Yale buys these things (e.g. Hard Assets) but individuals can or should not.

4. No advice on any sample portfolio.

5. Some mention of DFA would be nice.

In the end, I still prefer William Bernsteins "The Intelligent Asset Allocator" but this book is right up there and is one of the best I have read in years (and I have read most all of them).