Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment [Hardcover]

Now that I have passed my verdict, let us move on deal with what is good and what is less good with this book. Pioneering Portfolio Management is not a text book, nor an exposition of finance theories, nor a manual, and above, it is not a how-to book. It is clearly not targeted at the crowd that seeks the 'How to become rich by investing in stocks' and 'The ten infallible stock market strategies to build a fortune.' Rather, it is more a personal account of how Swensen manages his portfolio, the way he goes about thinking where to invest, and what he pays attention to, as well as a description as how other people fail to be good portfolio managers.

Three major themes surface repeatedly: firstly, the importance of employing an analytically rigorous framework; secondly, the agency issues and conflicts of interest between investors, investment managers and other players in the investment management industry; and thirdly the difficulties of managing investment portfolios to beat the market by exploiting asset mispricings

The importance of the framework is exemplified by the analysis of endowments as a different type of investor, with a big emphasis on their investment and spending goals. It is also clear on the weight give to portfolio selection and management, not to stock picking (the most popular theme in the best-selling financial/business literature). The author also does a masterly job of focusing attention on managing and reducing risk through intelligent diversification rather than on generating returns. A solid framework is also crucial to justify value-seeking strategies, contrarian positions and long-term investment horizons. In fact, without such a framework, there is no underpinning for the old-age maxims 'buy low, sell high' and 'buy when everyone sells, sell when everyone buys'.

Agency issues appear when dealing with active and passive managers. They are also prevalent in the exposition of the investment advisor industry, its structure, performance measurement and remuneration, as well as in its internal organisation and the investment decision-making process of trustees themselves.

The near impossibility of achieving risk-adjusted returns higher than the market for efficiently priced assets leads to Swensen calling for passive investment strategies for fixed-income securities and, particularly, large-capitalisation stocks. Conversely, active strategies are required for alternative asset classes such as absolute return investing, private equity and real estate. Swensen also explains the role of each of the asset classes in shaping the risk and return characteristics of the portfolio.

One of the most interesting aspects of this book is that it is written from a real practitioner's point of view. Not only this, the perspective is that of a trustee, not that of a fund manager. The stress is squarely on the portfolio of assets, not on a given fund. This illustrates an interesting fact: so-called portfolio managers more often than not are just managing a fund; at best, they should be called investment managers, but they never have the entire portfolio-broad view of the assets entrusted to them to manage. Theirs is but a fragmentary picture of the financial situation, goals and needs of their clients.

On the minus side, I have already mentioned that the book is not as well-written as I would like. Its dry style is sometimes tedious and often rather repetitive: for instance chapter 7 'Traditional Asset Classes' reiterates over and over many of the ideas present in chapter 5 'Asset Allocation.' If this constant recurrence is useful in instilling its words of wisdom in your memory, welcome be it, otherwise, it is just tiring. Nevertheless, when measured against the depth, wealth and richness of Swensen's message, it is a small price to pay.

As a final thought, allow me to say that more than on financial theories, on the theory of portfolio management, the author dwells on the portfolio management industry and what working in it involves on a day to day basis. Finance theories are tools to be used to meet some end, rather than an end on themselves. Let me also reiterate that this book will not help you become a great stock picker or be a good fund manager. However, it will help you understand what to look for and pay attention to if you ever have to entrust someone else with your money.