Larry Kochard is the chief investment officer for Georgetown University's endowment fund. With writing partner Cathleen Rittereiser, he's written a book that ought to pique the interest of any individual investor who wants to learn from some of the nation's most successful institutional players. In Foundation & Endowment Investing: Philosophies and Strategies of Top Investors and Institutions, Kochard and Rittereiser profile 12 of these luminaries, serving up practical investing takeaways gleaned from interviews with each of them.
In the following excerpts from our own recent interview with Larry, we touch on investment performance, the key built-in advantage institutional investors have, and how these investors prevent their competitive edge from being "arbitraged away."
Shannon Zimmerman: Larry, for many years, endowment investing performance was notoriously mediocre. But more recently, returns have improved sharply. What accounts for the change?
Larry Kochard: Harvard Management was really the first to set up a professional investment office back in the 1970's. You had a number of others -- Stanford, Yale, and Duke -- and then the trend has really gathered a lot of steam recently. Ultimately, what contributed to a lot of the early fantastic returns was being very early into a lot of the alternative asset classes, whether venture capital, hedge funds, or real estate -- the original alternative asset back in the '70s and '80s. They were probably a little earlier than many of the other large pools of capital, whether they were corporate or public pensions. A lot of wealthy individuals were also early, but in terms of institutions, these were really the earliest early adopters of alternative asset classes.
Zimmerman: What caused endowment money managers to wake up and smell the coffee, so to speak, in terms of how they should be managing their assets?
Kochard: One of the edges of universities in particular is that they are very long-term pools of capital. We pay a small amount to support the operations of the university, but the goal is to pay out the same amount over time, and provide a comparable level of support for today's students and future students as well. We recognize that we have an edge in terms of handling volatility, and we have an edge in terms of handling illiquidity, because we have the longest time horizon.
Zimmerman: What do top institutional investors do to prevent their advantages from being arbitraged away?
Kochard: The greatest challenge right now is the fact that everyone wants to be like Yale. But a lot of the ease that Yale had when they were among the first few investors in a lot of those asset classes really [has] been arbitraged away. Now our edge is not that we are investing in alternatives, because that would have been the edge a long time ago. Really, the edge is the fact that we are long-term pools of capital -- we can be opportunistic -- and the fact that we have what I think is a superior governance structure. Ultimately, it comes down to governance. Do we have the ability and the fortitude -- the institutional fortitude -- to stay in bets for a long period of time, when over a shorter period of time, they are not necessarily working? Do we have the fortitude to do things that are slightly different than what everyone else is doing?
Zimmerman: Alternative asset managers often have their greatest success in their earliest days. As you vet managers for Georgetown's endowment, how do you balance that dynamic against the need to understand how a particular strategy will play out in different market environments?
Kochard: We are looking for managers who have worked together for a while, haven't gotten too much money, and aren't just purely doing it for the money -- though they are still just people who are naturally competitive. They want to win. They want to succeed. Oftentimes, we are looking for someone who has a fairly narrow degree of expertise. They are focused on a certain industry sector or a certain geographic sector. They are focused on something that is narrow enough that we have a high-level conviction that they will have an edge over everyone else. Either they are getting superior information -- not inside information, but superior legal information -- or they are evaluating that information in a more effective way.
Zimmerman: In your book, you examine the techniques and the strategies of 12 institutional investors. What's one core principle that individual investors can use as they manage their portfolios?
Kochard: First, I think too much has gone into the fact that foundations and institutions have invested in alternatives. That has ended up being a byproduct of the fact that they have a governance and kind of a cultural bias to be early adopters. And one of the messages there -- and this is always one of the messages that I give to my students -- is that ultimately, over longer periods of time, you can be rewarded for taking certain types of risk that other people don't want to bear. You have to have a strong sense of the institution's ability to bear risk, but we don't think of ourselves as short-term investors at all. We're in it for the long term.