The Ledger
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Adjusting managers or strategy annually is a fool's errand for endowments
“Because as a long-term investor, you know, if you're doing this every year or quarter or something, I think you're on a fool's errand.”
Phillips finds no evidence that performance pay improves endowment investment teams
“I do think that there has been no proof that I've ever seen that the investment team, some folks say, well, the investment team should be aligned with performance. So there should be performance compensation and deferred bonuses and carried interest and sort o…”
Rochester's endowment avoids large buyout funds and household-name hedge funds
“We tend not to invest with large firms just at the outset. No bad feelings about any of the large buyout funds. For example, we don't have any of those. We tend not to be in the asset gathering mutual fund Or the larger funds, the hedge funds that are more hou…”
Long/short funds should not generate alpha against long-only benchmarks in bull markets
“One of the things we don't expect our long, short managers to do is to generate alpha Against our long equity benchmark in a rising market. That would mean that they're pushing it too hard on the long side.”
Venture returns depend entirely on access to a handful of elite firms
“That's all that matters. If you don't have access to the best firms, Either create a roster of sort of up and coming firms and hope that a bunch of them do well, but our view in the office is that there are probably only a handful of firms that can operate ven…”
Up to 80% of university endowment growth stems from new capital
“Growth of endowments, educational endowments in this country at private colleges and universities is not so much related to investment performance, but it's related to compounding of new money. And David Swenson has pointed this out in one of his books, but it…”
Rochester targets median asset allocations and relies on manager selection
“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.”
Rochester is winding down its real assets allocation after disappointing performance
“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.”
Endowments overlook asking prospective managers to name and introduce their top competitors
“And what I think the fourth circle is that most endowments don't always think of is we ask firms that we're interviewing who they think are good competitors, and we meet those firms.”
Rochester uses consultants for asset allocation and structure, not manager sourcing
“I would say not so much on the manager sourcing. It's more on thinking about allocation and structure, weights on positions, some things we haven't thought about. Occasionally, I think there are two managers that have come through that relationship that we hir…”
Rochester's investment team receives no individual compensation for sourcing managers
“There's no compensation if you source an interesting manager that gets put in the portfolio.”
Rochester's endowment team takes one to two years to hire a manager
“So it's not as if we find a firm and six months later they're in the portfolio. It takes us about a year or two to decide whether we're going to be moving ahead.”
Investment failures often stem from organizational behavior rather than traditional risks
“And the things that, that go wrong with investments are typically not always identified in our risk section. So we look at organizational behavior and just other things that might come into play.”
Rochester has historically fired managers right before strong periods of performance
“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.”
Trimming allocations to in-demand managers typically means permanently losing that capacity
“It's almost always the case that when we trim, we can't put that money back.”
Rochester benchmarks public equities against a GDP-weighted MSCI ACWI
“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 …”
High EBITDA multiples and $4.4 trillion in dry powder threaten PE returns
“The EBITDA multiples are record high, and there's a 4.4 trillion of uncalled capital out there. All of this is bad for private equity going forward, unless you can find firms that have really superior operational capabilities.”
A $2.6B endowment size uniquely enables optimal $20M to $50M manager allocations
“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 man…”
Rochester allocates 24% to 25% of net asset value to private equity
“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.”
Rochester reduced its manager count from one hundred to the low sixties
“Well, total headcount on manager of the roster is currently in the low sixties. It's going to stay there. That's come down from close to a hundred.”
Rochester sources manager ideas from peer endowment visits rather than conferences
“Of the circles, the one that probably has the most weight, the biggest, deepest circle is from the peers. And again, not going to conferences or looking at surveys, but just going around when I'm here in the city, visiting our friends at other endowments.”
Rochester's team projects and edits every manager memo sentence-by-sentence
“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…”
Rochester conducts 20-year decision look-backs before making new investments
“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 p…”
Rochester bought 12 VC secondary interests directly after the dot-com crash
“I said, I'd like to buy some of those LP interests, those commitments and sit in, I think we bought 12 of them, Become a limited partner in some of these firms through the secondary purchase, which we did directly, and we also purchased fund to funds.”