Risk Management at UVIMCO

It cannot be emphasized enough how important risk management is, especially during a crisis.

UVIMCO measures and controls for market, liquidity, and manager-specific risks based on the risk tolerance of the University. We recognize that no single risk metric paints a complete picture, and therefore we utilize numerous quantitative and qualitative analyses to assess and control risk.

UVIMCO manages market risk in the Long Term Pool by diversifying across three broad asset classes: equity, real assets, and fixed income. We balance the short-term risk of a significant drawdown in the value of the endowment against long-term risk, which we define as a decline in the purchasing power of the endowment over time.

UVIMCO defines liquidity risk for the Long Term Pool as an inability to fund investor withdrawals, capital calls from private funds, rebalancing activities, and attractive new investment prospects. We manage liquidity risk in the Long Term Pool by maintaining a portfolio of U.S. Treasury bills and notes, retaining sufficient liquidity with our public market managers, and carefully monitoring the pace of our commitments to private investments. We also maintain sufficient liquidity to avoid becoming a forced seller of assets at distressed prices.

Manager-specific risks include the risk that the investments selected by a manager will underperform the relevant benchmark, operational or business risks within a manager’s organization, key person risk, lack of transparency, and leverage. UVIMCO mitigates manager-specific risk through diversification and through the employment of extensive due diligence to assess both the investment and operational aspects of our external investment managers. We diversify our investments to acknowledge that markets and partners are uncertain, but we recognize that concentration and conviction are integral to outperformance.

Annual Report 2018-2019, University of Virginia Investment Management Company

The school also shared the core tenets of their investment strategy in their report.

We focus on the long term.

UVIMCO’s investment horizon is measured in years, if not decades, which aligns with the mission of the University as well as the perpetual nature of an endowment. A long-term perspective provides us with a critical competitive advantage, as global markets are increasingly becoming oriented more toward the short term. Our focus on the long term is also especially well suited for investments in less efficient illiquid or niche markets that provide fertile ground for active management. We leverage patience to generate attractive long-term risk-adjusted returns, but we acknowledge that this strategy may sometimes result in short-term underperformance relative to passive benchmarks and peer investors.

We believe in active management.

Consistently outperforming passive indices is difficult, but it can be done. UVIMCO has a long history of partnering with exceptional investment managers who have demonstrated the ability to generate alpha through disciplined investment processes, novel insights, and hard work. Sourcing, evaluating, and developing these relationships is our core competency and the primary driver of UVIMCO’s excess returns over time. The reputation we have cultivated as a value-added partner, our extensive network of market contacts, and the patient capital we provide have enabled us to build relationships with many of the most successful investment managers in the world.

We employ a global, flexible investment mandate.

Our investment process is structured and disciplined, but we also seek to be flexible and innovative in response to constantly evolving global financial markets. The Long Term Pool is a broadly diversified portfolio with capital allocated to well-established investment managers, emerging firms, and securities all around the world. We augment our core bottom-up manager selection process with top-down portfolio overlays and rigorous asset allocation analyses. We maintain a robust co-investment program to upsize particularly attractive opportunities with the added benefit of lower fee structures. We seek to strengthen our existing capabilities while thoughtfully honing our investment model to find new sources of attractive returns in an increasingly competitive return environment.

We evaluate and manage risk.

Our primary function is to identify attractive investment opportunities and assess the likelihood of earning sufficient compensation for assuming the associated risks. As such, we seek to measure and manage risk, not avoid risk altogether. UVIMCO measures and controls for risk based on the risk tolerance and capital requirements of the University. We assume certain risks but avoid others when we are unable to either absorb the associated potential downside or earn enough premium for bearing those risks.

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Post by Marcelino Pantoja