The Exchanges

Q When you're sitting in Rochester, So on a day when you're not traveling or a week you're not traveling, what do your days look like?

A There's a cycle. There's a cadence to the work. My daily activity is looking at manager materials, talking to the team. There's a weekly cycle, which is our internal investment committee meeting, which happens two to three hours every week. There is a monthly activity where we're looking at our portfolio each month, closing and just sort of how did we do, knowing that there's Latency on reporting from privates. Quarterly, there's the committee cycle, which we do, and then annually, there's our report. But then there are these biannual activity where we talk to our committee about the big asset categories and what we're thinking and seeing. So preparation for those things, too, that takes a little bit of time. We do a lot of writing in our office. We never present something that hasn't been thoroughly, what we call group edited. We Sit in one of our conference rooms. We put up a screen and we look at every single sentence in the recommendation and we pick it apart and we take a devil's advocate position. So that's a lot of fun, but I like to read those things beforehand and have my comments ready to come into the meeting. And as a team of generalists, we find that it's very helpful to, to get together in that way and talk about decisions.

AI assessment note: “My daily activity is looking at manager materials, talking to the team.”

Q How did that path take you to Rochester?

A The short story on the long path is I worked as an analyst for a few years and literally crossed Nassau Street in Princeton, where I was born, and went from an analyst at a consulting group to Princeton to helping administer the endowment before Printco was started. This was 82 through 86. Back then, there was a lot of physical custody of assets and brokerage custody, and that had to be coordinated. So there's a small team of people that did that, and I managed that team for five years. Then we did some things like adding electronic custody and bringing in spreadsheets to do what was previously done manually. And I knew a few folks from Williams College who were managers at Princeton for the endowment. And when they were looking for somebody in 1986, Williams sounded like a great place to work. So I took that position and rose to the treasurer. Spent 14 years there. And then, uh, was recruited to go to Rochester 20 years ago, and our president at the time, coincidentally, was a Williams alumnus, Tom Jackson, and he was able to do a little extra diligence on me because of the status.

AI assessment note: “was recruited to go to Rochester 20 years ago, and our president at the time”

Q Great. Well, let's dive into the investment process and start with As you worked through some of those basic philosophies and strategy, what does that asset allocation look like today?

A We are about 24 to 25% in the ground invested in net asset value and private equity, including venture, which puts us about in the middle of the larger endowments. We have another 24, 25% in what is a large category that is affectionately known as hedge funds, but it is a wide range of different strategies. If you bucketed those two main components in hedge funds, you'd find about half of it is in long short, typically long short managers with low correlation to each other. And the other half is in return generators that are very, very uncorrelated to our benchmark or anything else in the portfolio, including our long, short book. Then we have a real asset program, which is real estate, oil and gas, natural resources that is winding down. It's a little less than 10% today. Not much money going into that category. So frankly, it's been our most disappointing area. Public equities is about a 33 to 35% Roughly 10 to 11% U.S. equity long, and the rest is outside the U.S., and more than half of the outside the U.S. is in emerging.

AI assessment note: “We are about 24 to 25% in the ground invested in net asset value”

Q There are a lot of firms that you mentioned that 20 years, been around for 30 years. The leaders of those firms are one by one Winding up their careers. What is your portfolio of hedge funds look like 10 years from now?

A I'd say we have about a dozen or so relationships. I'd say there's probably one or two that will have succession, and we'll have to evaluate whether that next team is, is good. We think the bench is good, but we also look at what others are saying, and maybe there's something that we're not seeing. And if there's a runoff in assets, if when change is happening, That gives us some concern. Not always the case that that is a bad thing for future performance, but we treat those firms as if it's a new firm. So we put them through the initial hiring activity. The question was, would we hire that firm today? If it doesn't pass that test, then we exit.

AI assessment note: “we treat those firms as if it's a new firm... If it doesn't pass that test, then we exit.”

Q And you mentioned that when you first came in, it was hard for the university to recruit someone to Rochester. I know you've had a team that's been with you for a long time. How have you gone about recruiting and maintaining your team there?

A The investment team, we don't recruit, we network. If we find someone that is interested in the field and has the right academic and work experiences and wants to learn and sort of evolve with us, we'll talk to them and perhaps bring them in and meet other people. That's only when we're growing and we're fully staffed now. One of the pushes I got from our board was to make sure that there were enough people in the office that if something happened to me or the one or two other people that there was enough redundancy. So we've been able to find great people that have an interest in being in Rochester, family reasons. They went to school there. The lifestyle of Rochester is good. And we're, we're a family friendly office too. We really, uh, try to keep a work life balance.

AI assessment note: “The investment team, we don't recruit, we network.”

Q What are some of those little things that are both positive and negative that you've picked up over the years?

A I think one of them is the way they lead the team internally. Is this a very top-down organization or is it flat and collegial and highly productive? If you've got a very strong leader at the top, sometimes that creates tension and there's defections and turnover. We do like to see a group. Obviously the leaders have to be very strong, but you want to see a productive meritocracy, I guess is the right term. Some folks say that, but they're not really doing it. The other thing we get nervous about is the firms that are always talking their own game and don't have the perspective of maybe some challenging times and are they humble about what happened in those times and do they hang together? Did their investors stay with them? So those are some of the things, Ted.

AI assessment note: “I think one of them is the way they lead the team internally.”

Q So when there's five of you traveling all over the place, and you have your portfolio to monitor, you have managers you're meeting all the time, how do you gather and keep all that information in an efficient way?

A Yeah, this is a point I made because you're managing the torrent, I like to call it. There is an amazing amount of information that comes from current managers and prospective managers. Tracking, getting down to the firms that you're really interested in, and tracking them deeply is part of our work. So we have a system. There's a person that manages that for us. There's a certain amount of inbound inquiries that go through that. They get assigned to an analyst, and then maybe they go up to a, uh, investment officer. But managing that torrent through a system is very important. That system also has sort of a hot button that anyone in the office can click that button on a particular piece of information, news, or manager, and that goes right up to me, and that comes to me daily. So if there's something that needs my attention, I, I know about it right away.

AI assessment note: “So we have a system. There's a person that manages that for us.”

Q from portfolio accounting to reporting to reconciliation, trading, compliance, and more. In the AI era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now back to the show. What have you learned from doing those assessments over the years?

A The biggest takeaway from those is that we tend to release managers, at least on the public side or the hedge fund side, right before periods of really good performance. So I say that with the highest degree of humility. That's not always the case. Some don't do well. We tend to hold managers if they have a performance problem or something went wrong in their process. As long as the people are the same and they're not Dramatically changing. We tend to tolerate shorter term performance glitches as long as we understand the reason. And usually the reason is pricing. It's that something in the portfolio is just being mispriced by the market to a greater degree, and we hang on for those periods.

AI assessment note: “The biggest takeaway from those is that we tend to release managers”

Q If you walk through some of that, on the one hand, you've got an environment where private equity businesses are trading among private equity firms. And so there's this question of, can you keep wringing out efficiencies? How do you play that into your assessment?

A I don't want to paint the broad brush and say that every private equity firm that sells another private equity firm, that that's a bad thing, because it does happen, and track record is mixed on what happens to those companies, but some of them go on to great success under new ownership, because they have different management styles, or they have different abilities to bring in acquisitions and other things. I'd say no broad brush painting here, and we're a little bit agnostic on whether that's a good thing or bad thing. It's In the managers we have, it's not that common, frankly, that there's a sponsor to sponsor sale. It's more that they're selling to strategic acquirers that that company can tuck in and do something for them that they didn't have in the program.

AI assessment note: “we're a little bit agnostic on whether that's a good thing or bad thing.”

Q You also mentioned working with a consultant. How do you derive the benefits of a consultant relationship?

A We started this relationship, I think it's about eight years ago, with the idea that we would not be a standard client. And what that meant for us was we don't want filtering from our lead consultant to occur. We want to sit in their offices at least once a year with our entire team and rotate their asset specialists and their, their best thinkers through us. So there's no coloring of the comment, no polishing it up, To fit our needs. Because when you dig into these consultants and you look at the manager connections they've had and the experience, it's actually pretty helpful. So we think of them as an extension of our team rather than a sort of top down consultant that sits in between an investment committee and a team. It's not how we use them at all. And there are endowments our size that absolutely turn their back on consultants and say, we never want to do that because they're not helpful. I have found them to be helpful and we pay a fair fee. Not a egregiously high fee, and it's been working for us.

AI assessment note: “We think of them as an extension of our team rather than a sort of top down consultant”

Q And you had mentioned earlier that even though long short managers aren't correlated to each other, how do you go about structuring that piece of the portfolio so that's the case?

A Well, we look at the components they're investing in, whether it's sectors or companies, And they get put in to a correlation matrix, and we look at vol and many different factors that are in our model. We have our own modeling software. But then the real part of it is sitting down with those managers after having the knowledge from your existing portfolio of managers and saying, is this really differentiated, and is it likely to continue to be differentiated in the future? It's hard to do, and it doesn't happen very often that we add a long shirt manager. But when you look at the firms we've hired and the Performance. They really are uncorrelated to each other. It's remarkable. So the process seems to work for us.

AI assessment note: “we look at the components they're investing in... put in to a correlation matrix”

Q And what does that mean in terms of numbers?

A Anywhere from a dozen to 20 typically, but there are some firms that have in the hundred range. We like to see managers that have very deep knowledge of their companies, but are also aware of the macro environment. So the staying away from higher priced securities that are likely to have problems if we hit a recession or earnings glitches come along. So there's a value tilt. We think of more value and that's been a little harder for us recently. We also benchmark against ACWI, not the S&P. So it's a global mandate. But we reweight the ACWI based on GDP of the countries that it represents so that it tends to overweight emerging, for example. So the cap weight versus the GDP weight makes the GDP weight benchmark tilt in favor of emerging economies.

AI assessment note: “Anywhere from a dozen to 20 typically, but there are some firms”

Q And then you mentioned that you make the decisions independent of the committee. How do you integrate your whole process with the committee in addition to sort of the thumbnail of a manager?

A I'll tell you, we have an extraordinary committee. We have some very well-recognized investors and leaders of financial firms. They understand the need to delegate and take a governance role rather than a hands-on operating role for investments. And also because I've been there a long time, there's a great deal of trust that's been built up between the committee and me as the chief investment officer. So integrating it, again, this process of The annual report that we do for our committee, you have a copy here in front of you. We do an extensive look back on all of the decisions we've made, and now we have 20 years worth of these decisions, and we evaluate these decisions on whether they were a good decision or not. And when we go into a new investment, we have a phrase we call it perspective hindsight. So we look back when we made similar decisions, and we say looking today, With hindsight on what we've learned, are we fully incorporating all of those things into our process? So I remember you had a surgeon on here not long ago, and he talked about pausing and making sure everybody is together and just stopping. That perspective hindsight is part of that process, and I think our committee really appreciates how we do that.

AI assessment note: “this process of The annual report that we do for our committee”

Q How do you think about your competitive advantage compared to the rest of the allocation world?

A I said something earlier. We want all endowments and foundations to do well. We don't have any proprietary knowledge at the University of Rochester. This is charitable money. It's supports a wide range of activities across the US. It's one of the best parts about our country is how these donors have helped to share the future of activities, you know, whether it's healthcare or education or whatever activity they're enthusiastic about, they can perpetuate it. So when we think about Competitive advantages. I don't really like to think of us as competing against other allocators. I think we should be collaborating with them. Size. If you had to look at one thing about us, 2.6 billion, that's a reasonable size. So we can take bite sizes in 20 to fifty million dollar increments. Whereas a twenty five billion dollar endowment, if they're in the same, same philosophy of concentrating on managers, that's a 250 to five hundred million dollar allocation. That's a lot for a smaller manager to Allocate. But we're also a sufficient size that we can hire good people, like the five of us, and it's a meaningful portfolio.

AI assessment note: “Size. If you had to look at one thing about us, 2.6 billion”

Q So what were those Structural problems or the problems you saw when you were at Princeton in the asset allocation at Rochester that caused the investment performance issues?

A Yeah, and by the way, we don't dwell on that because it's what happened in the past is history. You learn from it, but no one that's running the university today was there when those things happened, and we're only about the future, not the past. But the allocation problems were too much concentration in venture capital when venture cycled out of favor in the seven, well, actually in the eighties. But that was a result of trying to recover from the nifty 50 High equity allocation concentrated in the 19 seventies. And that was an outlier allocation. One of the things that I talk about when I discuss our process and our allocation is we try to be right down the center of the fairway in allocations. And we try to add value through picking better managers. And when you look at our allocations, you'd say, well, this is very similar to most of the bigger endowments in the country, but it was the allocation decisions made in the seventies and eighties.

AI assessment note: “the allocation problems were too much concentration in venture capital”

Q And does that then allow you to dial up or down what the sort of expected returns you'd communicate to the board just based on market conditions?

A We have gone through that exercise a few times. The most recent one was in the GFC, and I think all investment committees had a difficult time. They're struggling with the idea of allocating capital, if you have it, to assets that were on sale versus saying this is an unprecedented change in our financial structure, and we should be really careful in that environment. We tend not to change too much when something comes along like that. We work within allocation bands, ranges, Which are fairly broad for most categories. We may push, if we're getting toward the bottom, we may push upward, and the same way for the top. So those are market-based as well as time-based rebalancing decisions.

AI assessment note: “We tend not to change too much when something comes along like that.”