Swensen Sees ‘Extraordinary’ Opportunity In Debt

David Swensen is the pioneer of institutional investment who is in charge of Yale University endowment. Because of the recession, Yale endowment dropped $5.9 billion in six months, and now he is pursuing a recovery by acquiring distressed debt. Everything, from bank loans to investment-grade bonds to less-than-investment grade bonds, is priced at really extraordinarily cheap levels in his eyes.

Swensen 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. Upon this situation, Swensen insisted that periodic losses are inevitable in a portfolio tilted toward stocks and built to grow over many years.

The core investment principle of Swensen is the importance of diversifying holdings while focusing on equities. But 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”. “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 a interview, “In the current environment, distressed corporate securities can produce ‘equity-like’ returns.”