Last year, Larry Kochard shared how his views changed on asset allocation from a decade ago when he wrote the book on endowments and foundations.
Getting back to that question of how I’ve changed, I laid out the different asset classes in the first few chapters of the book, whether it was private equity, hedge funds, real estate, etc. The evolution that I’ve made from then to today, which started at Georgetown and has continued here, is the notion that endowments should not be filling up buckets.
Instead, we have an overall level of market risk, which is influenced by these three broad asset classes, which are public equity, public bonds and public real estate. Equities, bonds and real assets. That sets a certain level of market risk that we want to attain, but then we manage to that level of market risk by finding what we think are the best assets across an array of different levels of risky assets. The riskiest are venture capital, and the lowest risk being cash, in terms of just volatility. That sets a market risk budget.
Then we separately have a liquidity risk budget that is a maximum amount of illiquidity we’re able to handle, in terms of unfunded commitments, as well as percentage of our pool that can be turned into cash within a certain period of time. When we assess whether we should allocate to a real estate manager, a resources manager or a buyout manager, they’re all competing for this unfunded commitment capital. This is a certain cost to us.
It leads to a very different way of thinking about investments, as opposed to just saying, we’re gonna have a certain target allocation to real estate, a certain target allocation to buy-out, a certain target allocation to venture. We try to allocate and commit to a level that gets us to that target. It allows us to be a little more thoughtful and play some of those opportunities against each other.
It does help that the school can rely on its alumni network to find those investment opportunities.
The University of Virginia has long been a proponent of investing in hedge funds. Most CIOs would eschew the average hedge fund, and at the same time prefer their selected stable of managers to more traditional long-only managers. In his time as CIO before departing for Makena Capital Management earlier this year, Larry Kochard espoused the legacy and ties that many of the best long-short equity managers hold to UVa. While neighboring school University of North Carolina bestowed a degree on Julian Robertson, many of Robertson’s protégés graduated from Virginia. Recently retired star John Griffin and legend Paul Tudor Jones have long taught investing classes at the school. Tapping into this esteemed alumni network has proven fruitful for Virginia for decades.
You can find out how other endowment and foundation CIOs invest their portfolios by reading his book.
To learn more about the University of Virginia Investment Management Company (UVIMCO) and how they manage the endowment, listen to Larry Kochard on Capital Allocators.
Post by Marcelino Pantoja