(April 28, 2014) — “You know what they say,” Lawrence Kochard, CEO and CIO of the University of Virginia Investment Management Company (UVIMCO), begins. “If it ain’t broke, don’t fix it.”
And indeed, Kochard’s management of the $6.4 billion endowment has been smooth sailing so far in his tenure of a little more than three years. The fund continually ranks among the five largest public university endowments and in the top 20 for US endowments overall.
With an endowment this strong and stable, Kochard says he’s only needed to make small tweaks to the system to sustain its success. “The point isn’t to change things dramatically, but to operate in a way that isn’t disruptive.”
In the fiscal year 2013, the Charlottesville-based endowment returned 13.4%, outperforming the benchmark return of 11.3%. The fund also boasted an annualized return of 11.8% for the 20-year period ending June 30, 2013.
“This performance is a testament to our strategic asset allocation and risk management activities, the discipline of our manager selection process, and the dedication and expertise of our board and staff,” Kochard wrote in the 2013 annual report. “Although the investment landscape is constantly changing, I believe our portfolio of investment managers is unparalleled, and the [endowment] is well positioned for the future.”
The secret to successfully manage an endowment boils down to a CIO’s chief investment characteristic, he says. For Kochard, it’s knowing how to ride out both the good and bad cycles with as little disruption as possible.
“The biggest mistake an asset owner can make is to overreact in times of stress—being too euphoric or too scared,” Kochard says. “A CIO should understand the risk tolerance of the institution and be adept at communicating to the broader constituents. For endowment CIOs, these constituents are your students, faculty, and university community, including parents and alumni.”
Communications skills are key, especially in turbulent times, Kochard says. For the fiscal year 2009, UVIMCO saw a negative return of 21%, losing almost a $1 billion in assets during the financial crisis. The fund quickly rebounded, recording returns of 15.1% in 2010 and 24.3% in 2011, as its leader put the University of Virginia (UVA) Cavaliers at ease.
“In difficult times such as one we experienced in 2008, the CIO needs to be able to communicate the endowment’s strong investment process and give people comfort,” Kochard said. “It’s a sense of being more than just in the weeds of investing—but being able to communicate the process and risks.”
His close connection with the university community is a skill he honed while serving as the very first CIO at Georgetown University for three years prior to joining UVIMCO.
“It was very exciting that my first foray into endowment investing was at a university that had no internal investment team,” Kochard recalls. “My job was to build in-house capabilities, to steer management away from investment committees and consultants—to start something from scratch. I began with a team of zero, and when I left after seven years, we had built out a full investment team and had grown Georgetown’s assets from $680 million to about $1.1 billion.”
A Virginia man through and through, Kochard also spent time on the investment committee of the Virginia Retirement System in the late 1990s running hedge fund and private equity programs and taught investments and fixed income courses at UVA’s McIntire School of Commerce. As such, it was a natural return to UVA in 2010, but with very different objectives at hand.
“The UVA endowment was operating on eight cylinders already when I took the job,” Kochard said. “My goal was to make sure we wouldn’t rest on our laurels.”
With a team of 33 people—12 of whom are purely devoted to investments—the CIO and the governing board manage $6.4 billion of UVA’s main endowment vehicle with appropriate risk and liquidity characteristics. In addition, Kochard and his team launched a “short-term pool” in October 2012 as a way to manage only university and foundation cash.
“We don’t think we should take risk with short-term cash,” he says. “It isn’t worth it to take on additional risks for a few extra basis points of yield. The risk tolerance for this pool is very different from our long-term endowment.”
The $100 million cash fund functions to provide a “low-cost, stable, highly liquid, and secure investment vehicle to UVIMCO’s investors” and individually tailored portfolios to match each university foundation’s risk and liquidity needs. The pool has been invested in short-term US Treasury notes, bonds, currency, and guaranteed agency repurchase agreements.
The endowment’s investment policy only adds to the strength of the fund, Kochard says. Its risk management system has market, liquidity, and manager risk hardwired in, and its unfunded commitments have held steady at 15%—well within tolerances. The investment team is forever on the lookout for new managers with an edge—ones that exploit an inefficiency—and continually reassess their existing roster.
“While we’re not explicitly investing with socially responsible investing goals, we try to find groups with good people that we can partner with for a long time,” Kochard says. “The quality of people is very important to us.”
However, despite good returns and governance, there is room for improvement, Kochard acknowledges. Its real estate portfolio, comprising 8.6% of the endowment as of June 30, 2013, has struggled.
“Our real estate portfolio has not currently performed as well as other asset classes,” the CIO says. “Although we like real estate, after you consider the fees and the illiquidity, it may not be able to compete with other types of private investments. We’re beginning to rethink our strategy, looking into managers with more subtlety and funds with sufficient upside to be able to compete with other forms of private investments like buyouts and venture. We’re leaning towards investing in direct funds instead of funds-of-funds.”
While real estate may be on his mind this year, Kochard’s focus remains on staying connected with the university and the historic city of Charlottesville.
“I believe it’s significant for me to convey my thoughts on our investments and governance through our annual reports and meetings with our foundation investors and representatives from the university,” he says. “I also try to speak at university events, continue to teach undergraduate classes, and take every opportunity possible to tell the world how we invest at UVA.”
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