Investing Billions - E98: How the $3.5 Billion University of Rochester Endowment Invests

Starting point is 00:00:00 You mentioned your CIO, Doug. What's his superpower and what's allowed him to perform at a high level for so many decades? First, the superpower, I think of him as a brand-assassin man. He does everything well all at the same time and in a modest fashion. You wouldn't know it from talking to him,

Starting point is 00:00:15 but both in his personal pursuits as well as his professional pursuits, he has a measured and thoughtful and incisive approach to our portfolio, but also everything else that goes along with it in terms of monitoring markets and sources of information and communicating with stakeholders and really intimately knowing different areas of the university and how they are related to the efforts that we're undertaking on a day-to-day basis. Tell me about how you build your mastermind of peers and how you

Starting point is 00:00:45 get better as an LP by knowing other LPs. Rob, I've been excited to chat since our friend Jeff Smith from the Smithsonian Institute introduced us. Welcome to the 10X Capital Podcast. Thanks very much. Really excited to be here. Grateful for Jeff's introduction. Excited to have you. So tell me about the University of Rochester strategy. The university was fortunate to get a relatively early start in the endowment business due to George Eastman's success with inventing photography here, founding Kodak, generous donations to the university about 100 years ago. So this made us one of the top five endowments in the country in the mid-1900s. We're a Division III school with a smaller alumni base than the Ivy League and other institutions. So we have not

Starting point is 00:01:29 remained among the largest, but we're still punching above our weight in the top 50, thanks mainly to the generosity of donors who have followed Eastman's example. We have around $3.5 billion in the endowment today and a team of 10 in the investment office. I'm one of four generalist investment officers, plus one analyst, one intern, great team of four in the operations side that work with our CIO, Doug Phillips. On the investment side, we each have responsibility for sourcing and monitoring managers across asset classes. And we're fortunate to have some highly experienced members with significant tenure on our investment committee, along with some engaged and insightful newcomers who are great supporters of the university. At a top level, our strategy is to maintain a relatively concentrated portfolio

Starting point is 00:02:08 of the highest quality managers across asset classes and geographies. Our top 10 is over 40% of the portfolio and over 80% of our portfolios in our top 40. We've managed to perform well over most periods, generally capturing around two-thirds of the upside of the MSCI All-Country World Index, our benchmark on the equity side, while only taking about half of the downside. Compared to your peers, you have a very concentrated strategy. What's the rationale behind your highly concentrated strategy? Both access and focus and being a small team. We do travel the world, but we know we can't cover all the opportunities in every asset class

Starting point is 00:02:44 and every geography and new themes and strategies. So being concentrated enables us to find the best and brightest in different categories to create a diversified portfolio while still having meaningful positions as well as relationships. And with four of us investment officers with primary responsibility for relationships, if we had 200 line items, that would be less meaningful interaction than our 40 to 50 active line items, as well as, again, trying to make each impactful to the portfolio. So those are the main reasons for the concentration. What are the pros and cons of using a generalist strategy?

Starting point is 00:03:20 Well, one main benefit is that we actively source and evaluate managers across all asset classes and geographies. Each of us do that. So we have a good understanding of our entire portfolio and what the best compliments could be to the existing manager group globally, regardless of category. So this brings more voices and perspectives into the room when we're evaluating the portfolio and hopefully leads to better decision making. You managed $3.5 billion at University of Rochester. Tell me about your top level portfolio construction. Sure. Well, when I joined in 2013, we were in the low 50% range in alternative assets as a whole. That's increased slightly to the upper

Starting point is 00:03:55 50% range now, partly from appreciation, as well as a number of additional manager allocations since then. Included in that almost 60% number is about 30% in private equity, split between buyouts and venture with a bit of distress in credit, and then a hedge fund allocation of about 25%, 27% or so, with about two-thirds of that in diversifying strategies of different kinds, and one-third in long-short equity hedge funds. And then besides that, 55%, 60%, we have about 8% to 10% in fixed income and cash, and most of the remaining third or so in long-only equities globally. And these are reviewed every fall when we meet with our investment committee to plan for the coming year.

Starting point is 00:04:34 What are you discussing when you decide whether you want to update your portfolio construction? A number of things. Over the summer, we always reconnect with a number of different stakeholders around the university, investment committee members, of course, but also deans of the various schools, the finance team at the university and other stakeholders. We take their input. We are, of course, doing our ongoing top-down research on market themes and trends. And then our bottom-up view of the opportunity set and managers, both in our own portfolio as well as those that we're tracking that we think might be good complements to the portfolio. We triangulate all that information and have a conversation with the committee and are generally only making gradual changes each year to each asset class.

Starting point is 00:05:14 When it comes to looking at re-upping in your managers, what qualitative and quantitative factors are you considering when making those decisions? One way we think about new allocations is top down. So we're looking for something specific and the manager is specializing in that area. One of my favorite aspects of our role is market mapping, where we seek to identify as many opportunities as possible within a specific country or a subsector like biotech. And then we generally, we have a couple of those going on at any one time and really dive deep in that area of our portfolio as well as the opportunity set. And then another way is bottom up, where we'll get referred to a manager through a committee member or a peer endowment or another source or come across them ourselves from our research and then just get to know them one-on-one over time. Then either way, the initial screen is to try to find an exposure that we don't have

Starting point is 00:06:05 yet in our portfolio that we are actively seeking and evaluate the best managers of that strategy, or something in the area that we already have, but in a different approach or focus that complements our existing exposures there, like a new type of diversifying hedge fund that we don't have yet, or a lower mid-market buyout manager to complement the larger ones that we have. And how much does University of Rochester look at macro factors when finalizing allocations for the next year? It's tempting to say not at all, since we are aware of our lack of ability to predict the future for markets or asset classes.

Starting point is 00:06:39 And we want to maintain a broadly diversified portfolio to minimize drawdowns while delivering sufficient return to meet the university's spending needs. However, each part of the portfolio does rest on the belief that we will be rewarded in the future for exposures in that category, whether it's an industry or geography or strategy. Some of our allocations do come up from a bottom-up conviction in the talent of an individual manager and the organization they have built, such as our own Rochester alum, Paul Singer at Elliott. And that sort of allocation doesn't rely on any future prognostication. But some allocations do arise from the belief that future outperformance is coming from an industry like technology or healthcare or geography or region like India or Asia. So we do do some prognostication after triangulating information from the research sources I mentioned earlier, our own stakeholders, appears we trade notes with

Starting point is 00:07:31 podcasts like this one, of course, and then develop views on the potential of investments in that way. When we last chatted, you said that you're not really active in real assets or fixed income. Why is that? We are becoming a little bit more active in fixed income now since there do seem to be more opportunities for alpha there than there have been in recent years with rates higher and other volatility drivers. Even if the Fed lowers rates as much and as quickly as the market thinks that they will, which I don't personally think will happen, there will continue to be interesting opportunities in fixed income. But we believe that equity-related strategies will continue to deliver higher returns over the long term compared to fixed income. It's definitely useful for liquidity to have a reasonable amount of

Starting point is 00:08:15 fixed income in the portfolio. So it definitely has its place. What about real estate? Is real estate an inferior asset for non-taxable investors like University of Rochester? I certainly can't say it's inferior, but it's our strategy where we used to have an active real assets program, private investments in energy-focused funds and real estate-focused funds. But on a relative basis, those areas consistently underperformed our portfolio of venture and buyout funds so that we gradually refocused our efforts onto private equity for the marginal illiquid dollar. Tell me about your venture portfolio. Sure. We have a concentrated program, as we talked about before, within private equity overall,

Starting point is 00:08:57 with just a few long-term relationships holding most of the assets in that portfolio for us. We try to capture as much of the opportunity set as we can with a few line items, keeping the manager numbers to a minimum and staying within our liquidity constraints. Within venture, it's about 90% Sequoia for us and 10% opportunistic compliments that we found every few years. And I would expect that will continue, meaning we'll continue investing with Sequoia, as well as continue our efforts to find interesting complementary exposures every so often. You've gotten into the most difficult to access, arguably, venture fund in the world. How have you built that relationship? And how do you retain access? Well, initial credit, certainly, to our CIO, Doug Phillips. One of the first things

Starting point is 00:09:41 he did when he joined here in 2000 was develop some of the relationships that we maintain today, Sequoia being among the first. And then since then, consistently investing with them across their platform and across cycles, and then remaining engaged with all geographic and strategic areas of their firm, acting as a value-added partner, making some introductions as appropriate to areas of our university, for example, certainly maintaining confidentiality. And then importantly, our fortunate position as a university that has a leading medical center, music school, business school, engineering school, so much more. And they're very mindful of where the profits that they generate are going, which really helps us in that sense. So we're far from being among

Starting point is 00:10:23 their largest LPs, but we seek to maintain a mutually productive relationship. Mentioned that your CIO built that relationship in 2000. What's the best practice as it comes to building relationships with top GPs? And try to be mutually productive. Be mindful of what they're trying to accomplish. And to the extent it's in your power, help them do that, whether it's not overburdening them with inquiries, but maintaining communication and connectivity to your own special sauce. So in our case, again, we have a world-leading medical center and business school in other areas. And to the extent their portfolio might benefit from connections there, we do that. We try to give them any insights that we have. There aren't many that we have that they don't, but anytime we can offer those, we do that. And then continue

Starting point is 00:11:10 communicating to them what sets us apart to make sure that they're aware that their efforts are going towards the great causes that we support and develop ourselves. You guys are extremely selective when it comes to new managers. What do you look for in new managers? I would say top down and bottom up. So top down, we're looking for something specific sometimes, whether it's a geography or industry that we feel optimistic about based on our research and also see is not as well represented in our portfolio yet. Again, back to the market mapping exercise where we'll say we don't have any biotech exposure. Let's get to know every biotech manager across private to public and compare and contrast and see if any of them are a fit in our particular portfolio. And then there's certainly

Starting point is 00:11:54 the bottom up where we'll get referred to a manager through an investment committee member or a peer endowment or foundation or some other part of our research, just one-on-one, get to know them over time. So it's about the fit in our portfolio. And then, of course, we do the usual steps of diligence once the potential top-down fit is established. So what are some of your pet peeves for emerging managers? I think I might be an outlier here a bit since I hear a lot that people want punchy, high-level, short summary information as an introduction. But for me, I prefer to get all relevant information in the introduction so I can better evaluate the potential fit and save both

Starting point is 00:12:31 of us time in case I can discern an issue that wouldn't work for us. The backgrounds of the team, their connectivity to the strategy they're trying to execute, why they are right for this particular time and place in the industry that they're targeting, competitive landscape, edge. As much detail as possible is helpful for me to screen. So the pet peeve is sending one high-level paragraph, maybe a one-pager to go with it, and saying, hey, can we have an hour-long conversation? And again, we learn a lot from every conversation we have. It is a privilege to speak with these experts in their craft. It's not at all a waste of time, but the math doesn't work

Starting point is 00:13:08 to have discussions with everybody. So for me, more information up front is always helpful. Congratulations, 10X Capital podcast listeners. We have officially cracked the top 10 rankings in the United States for investing. Please help this podcast continue climbing up in the rankings

Starting point is 00:13:22 by clicking the follow button above. This helps our podcast rank higher, which brings more revenue to the show and helps us bring in the very highest quality guests and to produce the very highest quality content. Thank you for your support. Do you think there's a bias against strategies and asset classes where you can't explain it, you know, standing on one foot? And do you think that there's an inverse relationship between the simplicity of a strategy and its ability to produce alpha? I think two different questions there. I don't know that there's a upfront bias, but people find their own ways to do their jobs most efficiently. So it is certainly an uphill battle to try to educate someone like me that doesn't understand the strategy as well as the other more commonplace

Starting point is 00:14:06 strategies that generally find themselves into a portfolio. So it's certainly more challenging. And I've experienced that on both sides of that equation to explain the fit in the portfolio and the value. I would say, on the other hand, there are a lot of people in our seat on the LP side actively searching for strategies like that. By definition, following the crowd, you're going to perform like the crowd. So a lot of us actively seek out those strategies that might be a little bit harder to explain, but have alpha potential that many others might not. You mentioned your job is reading, writing and relationships. Can you break that down for me? Sure. Well, reading first, make sure we're up on current opportunity sets and including them

Starting point is 00:14:46 into our portfolio. There's the required reading that our managers and letters and reports and all that, of course. And then we try to source interesting and differentiated additional sources of information, whether from our managers or research services, news reports, conversations with peers, your podcast, of course. So reading is a big part of the job. Then writing to report on our existing portfolio and the changes that we're planning to the stakeholders around the university. Of course, the investment committee, also any others that

Starting point is 00:15:16 aren't involved in or affected by our results. Clear and concise writing is a skill that will outlast GPT-4 or 5 or whatever it is. And then relationships, a key aspect of sourcing new opportunities, evaluating and maintaining them, as well as our relationship with stakeholders and peers and across the industry in general. So relationships are very key as well. To me, those are the three pillars of success. I know you know several of our previous guests. Tell me about how you build your mastermind of peers and how you get better as an LP by knowing other LPs. Oh, yeah. How much time do we have here for this? I'm really lucky to have a number of mentors. For example, CIOs, Doug Phillips here at Rochester, of course, being the most influential for me.

Starting point is 00:15:58 It's been amazing to spend over a decade with him and the team here so far. And learning from other great investors through the years. When we meet them, we have separate one-on-ones, or we'll see each other in the halls at a conference, or when some of them are very generous with their time and expertise, like Ken Miranda at Cornell and Tom Lenahan at Wallace, Stefan Strein at Cleveland Clinic and Carl Scheer at Cincinnati, and so many others I can name that I'd love to. And then some who aren't CIOs yet, but who will be.

Starting point is 00:16:25 And some of my closest friends, like you mentioned, the two that connected me to your podcast, definitely must-listen episodes. Jeff Smith from Smithsonian, as you mentioned. Also, Harish Shahe from Northwestern. They did such a great job on here describing the unique parts of their program. And then, of course, my wonderful colleagues, Richard Salaco and Steve Groves and Claudio Rossello and Ryan Kirchhoff and our operations team. They're also out there in markets learning things. Interactions around the office are both fun and meaningful.

Starting point is 00:16:54 And we'll get into IDI as well, hopefully, too. Our co-founders, Stephanie Weston and Sophia Tsai and Paktimir Chandani, who have been so energetic and passionate in that effort. You mentioned your CIO, Doug. What's his superpower and what's allowed him to perform at a high level for so many decades? First, the superpower, I think of him as a renaissance man. So I don't know if he'll hear this and it's like kissing up to the boss, but he does everything well all at the same time and in a modest fashion. You wouldn't know it from talking to him,

Starting point is 00:17:26 but both in his personal pursuits as well as his professional pursuits, he has a measured and thoughtful and incisive approach to our portfolio, but also everything else that goes along with it in terms of monitoring markets and sources of information and communicating with stakeholders and really intimately knowing different areas of the university and how they are related to the efforts that we're undertaking on a day-to-day basis. And then he's so intellectually curious in other parts of his life as well. He's an accomplished athlete across a number of different sports and he will know interesting stories about any topic that you will be able to bring up over dinner.

Starting point is 00:18:07 So I think it's the zest for life and continuous learning and measured approach, Renaissance Man. You've been at University of Rochester for over 11 years. What makes you so excited to invest out of the seat? I'd say Rochester being really closest to my heart. Transplanted Rochesterian, didn't grow up here, but my wife did and my kids are. And this university is just an amazing place to be a part of.

Starting point is 00:18:28 It's also a renaissance person in its own right. We have a world-leading medical center, music school, Eastman, that's right there with Juilliard and the other world-leading schools. A business program, similarly well-situated engineering, the Hajim School. Optics was developed here in ways that unparalleled globally. So there's so many exceptional programs here. And then when we're trying to support all of these different efforts, the privilege of working here and getting to know the opportunity set globally and applying it to all these ways that the university makes the world better. We're privileged to come to work here every day and partner with each other and partner with our external managers and benefit current and future generations of students, faculty, staff, and other stakeholders here. So it's just a joy to be a part of. You're co-founder of IADEI. Tell me about the

Starting point is 00:19:18 organization that you co-founded. Sure. It came about in 2020 in response to a call to action across our university from our president, Sarah Mangelsdorf, after George Floyd's murder and the resulting upheaval in society. And we all looked internally to see what we could do better. Long story short, in our area, we looked at our portfolio and how we source and evaluate opportunities to see how we could do better, what else we can include that made sense. We partnered with Pakti Mirchandani and Sophia Tsai at the Trinity Church Endowment in New York, who are working on similar projects, are undertaking a number of different activities, like a series of pitch session events where we allow our members to nominate and vote on managers in different categories to present. Out of our database, we generally get around 100 LPs plugging into these events out of the over 700 that have signed up in our membership.

Starting point is 00:20:08 And we have over 1,300 GPs listed in our database so far, which has turned from a spreadsheet that Stephanie had created into a really nice searchable database from Clay, a wonderful software firm that's kindly doing it pro bono. You're looking to amplify diverse managers by giving them access to a broader set of institutional LPs. That's exactly right. Any one of us, our programs aren't going to change the world by ourselves, even if we turned our focus to actively seeking managers out, which we don't. We don't have a mandate to do that. We're just one small corner of the market. So we want to convene as many as we can and highlight the efforts, as you rightly noted,

Starting point is 00:20:49 of women and minority-led funds. When you look at investing, is it all about picking managers that will perform for several decades? Is there ever a rationale to picking a manager or strategy for a certain market cycle, call it three years, five years, 10 years? There's definitely a rationale or strategy for that. I would say it's almost a weakness if you don't do it, if you're not able to do something like that, because we should be through our research, through our connections, we should be able to find dislocations, some of which might be temporary to take advantage of. It is challenging for smaller teams, back to your question, generalists versus specialists, and challenging for generalists sometimes as well to identify

Starting point is 00:21:29 those, evaluate them, get them into the portfolio quickly enough that the opportunity hasn't played itself out. Because we do find strength in our long-term relationships and long-term focus for our portfolio, but that doesn't lend itself as easily to taking advantage of near-term market trends. What would you like our listeners to know about you, University of Rochester, or anything else you'd like to shine a light on? We've talked about IADEI. That would have been one of them. Anybody that wants to get involved, whether it's a GP that wants to sign up easily, so through our website on the database curated by Clade and hopefully participate in some of our LPGP interactions that we support,

Starting point is 00:22:05 or whether it's an LP that wants to have that resource to source new investment opportunities for their portfolio, as well as network with their peers, trying to figure out the challenges related to portfolio construction that that presents. So that was certainly one area. And then Rochester would be the other one. We'd love to collaborate, whether it's with peers or new investment strategies and styles. Thank you, Rob, for jumping on. Look forward to meeting in person Rochester, New York City very soon. That'd be great. Thank you very much. For more ideas on how to raise venture capital in this market, make sure to subscribe below.

Investing Billions - E98: How the $3.5 Billion University of Rochester Endowment Invests

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