Lessons from David Swensen: Equity bias, alignment of interest & why boring is beautiful

Few Australians can say they were mentored by the late David Swensen - the legendary former Chief Investment Officer of the Yale Endowment Fund with one of the greatest long-term track records in history. Jeremy Samuel is one of them.

Long before it became fashionable, Swensen declared the traditional 60/40 split of equities and bonds dead, pivoting instead to a strong equity bias across a far broader range of asset classes. He backed active managers with skin in the game, and was deeply sceptical of bank-owned and mutual funds where that alignment didn't exist.

More than 25 years later, Samuel still keeps those lessons close to his heart, like a compass guiding him through the cycles, crashes and inflection points of markets.

That philosophy is visible in everything Anacacia Capital does today. The six most senior people in the business have worked together for more than a decade. Their personal wealth sits in the same funds as their clients’. And like Swensen, Samuel is committed to "succeeding unconventionally rather than failing conventionally."

Despite his focus on small caps, he's not chasing start-ups or turnarounds. Instead, the team spends their time finding what Samuel calls "boring but beautiful businesses". Take Direct Couriers, for example, which transports goods between businesses, or MGI Golf, which is quietly building momentum exporting electric golf buggies to the US.

"In some ways, they're kind of boring, because you're not going to read about them on the front page of the newspaper… But to us, they're beautiful," Samuel said.

"We want to invest in fundamentally strong, quality, well-managed companies, whether or not that's in the listed space or the unlisted space. They are boring in the sense that they just produce cash flows, but beautiful in the sense that they're producing cash flows."

If Swensen taught us anything, it's that the most powerful returns rarely make headlines. This episode is essential listening for any adviser who wants to understand why.

5 key takeaways from Anacacia’s Jeremy Samuel

1. The private credit honeymoon is over

Three to four years ago, private credit looked like a free lunch. Who wouldn’t want 10% returns with perceived low risk? That space is now crowded, returns are compressed, and problem loans are surfacing. Samuel believes that sophisticated investors are now quietly rotating back into private and listed equities.

2. Large caps are priced to perfection

Super funds are writing bigger cheques to the top end of town, at a time when ETFs are flooding large caps and many of those companies are trading at stretched multiples. The less crowded, and potentially more rewarding, opportunity for advisers, according to Samuel, is the smaller end of the market.

3. Don’t bet on the macro

Trying to predict where rates are going is a mug’s game, Samuel says. Instead, the team at Anacacia focuses on the bottom-up, deciphering how each underlying company would respond if conditions improved or worsened.

4. There’s an information edge in straddling public and private markets

The majority of managers pick a lane, but Anacacia deliberately plays in both public and private markets. What the private equity team learn through their due diligence of an investment is shared with the public equities team, and vice versa.

5. Boring businesses are having their moment

We live in a world of rising tariffs and increasing prioritisation of domestic production over global supply chains. Jeremy's view is that in this environment, domestically focused businesses with diversified local supply chains may be better placed than multinationals reliant on international trade. For advisers, it's a quiet but timely portfolio tilt worth raising with clients.

Today’s “chart of the week” comes direct from Morningstar. The data shows that in Australian small-to-mid cap equities, the average active manager outperformed passive funds over three, five and 10 years.

As Samuel explained, the study showed that a $100k investment in a passive small-mid blend Australian equity fund would have slightly more than doubled in the last decade. However, the average active small-cap manager returned almost $80k more than a passive fund in the same time frame (so, investors would have ended up with $280k). Furthermore, a 25th-percentile manager added an additional $180k to the investment, bringing the total to almost $400k.

“For the advisers that are listening and watching today, it's a really good way to be able to justify why you're charging fees and how you're able to add value to clients, if you can make sure … you have some small-cap exposure, and you're picking some good-quality active managers,” he added.

In case you missed it, last week we sat down with Shak Lala, the co-founder of Marloo (an AI-powered tool for financial advisers). After interviewing 800 advisers around the globe, he discovered a major structural issue with financial advice - and he thinks AI could be the solution. You can learn why (and how) by watching the interview below.

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