Access here alternative investment news about Exclusive Q&A: ​Lawrence Kochard, CIO & CEO At University Of Virginia Investment Management Company
Lawrence (Larry) Kochard is the chief investment officer and chief executive officer at the University of Virginia Investment Management Company, which manages $7.5 billion for the university. 

Kochard most recently served as the chief investment officer at Georgetown University and was the managing director of equity and hedge fund investments at the Virginia Retirement System before that. Kochard holds a B.A. in Economics from the College of William & Mary, an MBA from the University of Rochester and a Ph.D. in Economics from the University of Virginia.

Mr. Kochard was recently named on Trusted Insight’s ranked list of the Top 30 Endowment Chief Investment Officers. He graciously spoke with Trusted Insight on March 18, 2016. The following interview has been edited and condensed for clarity.

Trusted Insight: There is a great degree of uncertainty in global markets from factors like volatility, QE, ultra-low and now negative interest rates. To what degree are those factors a concern when you're trying to plan and strategize from a long-term perspective?

Lawrence Kochard: There are always these kinds of global macro risks, and everyone thinks that at a point in time they're more dangerous than they have been at other points in the past. I don't think that's actually the case. I think a lot of these macroeconomic risks, geopolitical risks are always present. Sometimes they're more obvious than others, but I think they're always present. 

The question is: how capable are we going to be able to predict some of those outcomes that could guide us in a way that would add value. I think what you need to make sure is that your portfolio is diversified with assets that truly are diversifiers. Have a risk level that you can actually tolerate such that if you have a risk realization due to a policy mistake somewhere in the world or some act of terror and all risk assets go down, that you have a portfolio that's diversified enough and has enough protection in it that you can fair well. You're certainly going to lose money, but be okay and be able to have the sufficient liquidity to re-balance. It drives what you should think of in terms of your level of risk tolerance and what that right policy portfolio is for you.

There are always these kinds of global macro risks, and everyone thinks that at a point in time they're more dangerous than they have been at other points in the past. I don't think that's actually the case.
I do think that there are many investors that have become too fixated on spending time thinking about some of these big global risks and thinking that they could actually predict the outcome. I think there are managers that do the same, have done the same. 

The managers we're looking for are all about security selection, or private managers that can add value at the company level -- going for the singles and doubles at the security level, as opposed to trying to predict a big macro theme. 

It's really more of understanding there are going to be risks. We're never quite sure what is going to be the risk that causes a big drawdown in the market, but there will be something. It won't be predictable, and you just want to make sure you have a portfolio that you can live with that level of drawdown and not panic and be forced to dial back risk during a downturn. That's the worst time to do that. 

TI: Other media outlets have paraphrased you as saying you're not a believer in private market investments as a diversifier of a portfolio. What led you to draw that conclusion and how's that working out in the current market conditions?

LK: Current markets would be consistent with that. We do private investments. If you look, we're a big believer in that you get paid for illiquidity. Really more so than just the illiquidity that you're getting compensated for, private managers have more of an ability to be hands-on with the underlying assets and really add value to drive the investment returns. That's what you're getting paid for. 

When I say, “I don't believe they're a diversifier,” I mean they tend to be risky. And when risk assets are going up, whether they're public or private, we want our private investments to generate returns above what a public can do because they are not as liquid and you want to be compensated for that. I don't think there's any sense in the argument that the reason we're doing private investments is to diversifying and reduce risk. They are risk assets. The reason I do it is because I think they can generate even higher returns.

With that said, the challenge is, even though a lot of benefits of the value-add that managers can have, the fees are pretty high, and the managers need to be able to be good enough to overcome those fees. For most strategies, just being an average manager means the fees are going to offset any benefits you have from the value add. We're very much a believer in the Endowment Model that private investments play a big role. Because of the fees, you really need to be intent on either A) getting the best managers, which we're always 100% focused on, or B) doing things you can do that are somewhat clever by reducing fees, by doing co-investing, by buying secondaries at attractive prices to kind of augment that. 

In my mind, the reason you do privates is less about diversifying. I think people would be fooling themselves if they think they're reducing risk by doing private investments. It's to play offense. It's to be able to generate even higher returns than you can on the public side.

TI: What are the key characteristics you look for when you're looking to invest in a manager? How does that differ between the private side and the public side?

LK: Fundamentally, you're looking for this very hard-to-define edge that a manager has. In a very competitive investing environment, they have some unique way of processing information, or adding value at the company level that is better than anyone else. Oftentimes, that's really hard to achieve.

Then, in addition to the skill that they have, do they have skills as an analyst that also translates to them being a good portfolio manager and risk manager? Do they have the behavioral aspects and temperament that will enable them to manage through trying times? Can they manage their team? Do they have a size of the organization and portfolio that's consistent with the strategy that we'll be able to, if they've generated good returns in the past, continue to generate returns at that same size level? Or have they gotten too big? If it's a partnership with other people, were they able to keep those partners? Did they pay those partners well to keep them involved? Is the investment manager a great investor, or is he just a great business builder? Meaning, he's able to spot that this is a hot investment fad that he can exploit, and so it starts adding new investment products, which dilutes his effort in what he may have been good at to begin with. We're really looking for singularly focused managers that are just focused on one fund. Are the fees fair? Does he make money exclusively when we make money?
It's a lot of those common sense things that a lot of us are all looking for, and it's hard to find. That's why we have a very good portfolio. We don't need to make a lot of changes, and it's really more when people ask me, "What are your big themes or issues?" It's really more focusing on trimming some ideas, the managers that may no longer be quite as attractive, and adding a couple new ones that have a much longer runway to them. Meaning they're smaller, they have a longer career ahead of them and they may be operating in a better opportunity set. It's hard to characterize that there's this one silver bullet, or formula that we'll look at. It's making sure that there's skill, and then making sure that the incentives are aligned so when that skill is exploited, that we get compensated appropriately.

TI: What sets the UVIMCO investment office apart from your peer institutions?

LK: One of our advantages is that we have a sweet spot in terms of AUM. It's a little over $7 billion. It's a nice size, we can have a very good team at that size, but it's not so big. Once you get too big, it's harder to find the same amount of good ideas that can move the needle. I think our size is an advantage. 

We have a really good team. I think a lot of our peers have really good teams, as well. That is really an important part. We're with a great university. I think that's helpful. We have tended to hire a lot of graduates from our university. The vast majority of the investment team are all UVA alumni. Again, that's not unique. There are a lot of other university investment offices that are doing the same thing. I really do think it's certainly relative to other asset owners, that's a competitive advantage.

One thing that we do a little differently than others is we really don't target certain buckets. We don't have a target allocation to public equity, a target allocation to hedge funds and a target allocation to private equity. We have an overall level of market risk that we manage to that's consistent with our policy portfolio, which is all public -- it's just equities, bonds and real estate. All that can be done passively, and we manage a level of drawdown risk that's consistent with that. Then we have a level of liquidity risk that we think of in terms of what is the most liquid we can become and still feel comfortable? As opposed to targeting private equity, we just target the level of risk assets that we want, as well as level of liquidity.

Therefore, I think it makes it easier, more interesting. It forces you to make these comparisons of how does this real estate fund stack up compared to a venture capital fund? Even though it looks like apples and oranges, it forces you to make those types of comparisons in a really interesting, intellectual exercise. That may be a little different than what others are doing. 

It forces you to make these comparisons of how does this real estate fund stack up compared to a venture capital fund? Even though it looks like apples and oranges, it forces you to make those types of comparisons in a really interesting, intellectual exercise.
Ultimately, there are a lot of other good institutions that do things very similar to us, similar size, that we have a lot of respect for, because ultimately I think it's the size of our institution, the quality of our institution and the people at our organization that really help, as well as these long-lived relationships that we have with our partners, the external investment managers.

TI: A strong governance structure is often brought up. Tell me about UVIMCO’s governance.

LK: I think we have a very good governance. We were spun out as a separate management company in 2004, and we have a very strong board. It's a very strong relationship between the board and the team in terms of the board setting the investment policy statement and overall philosophy. Then the investment team has the ability to make the individual investment decisions, subject to meeting the constraints of the investment policy statement. What makes that work is making sure that there's a high level of quality information that we provide to the board to make them comfortable that we're living up to what we had promised.

TI: Where is the line drawn between a good governance structure and a less good governance structure?

LK: I'll give you a symptom of a bad governance structure. A bad governance structure can also be part and parcel a bad investment process. If you find an institution that tends to, when the markets are going well, be adding risk, and it might be that they're adding risk because they felt like their performance had been lagging peers. When the market's doing really badly, all of a sudden they de-risk. That's kind of a symptom of a bad governance structure. 

A good governance is one that enables you to think long-term, manage risk appropriately, meaning keep it within a pretty tight band, never getting too euphoric or never getting too negative, but making sure it stays consistent with the risk tolerance of the institution and truly thinking long term. All these are commonsense things that people say they do, or try to do. When that doesn't occur, it's usually the result of a bad governance process. 

As opposed to just saying that, "XYZ institution is bad and this one's good." I think it's really more looking at the symptoms. If you look at the symptoms and you see what I laid out, that's more indicative of a bad governance for an institution.

TI: What does your day-to-day as CIO consist of?

LK: Day-to-day? When you think about the job, it's a mix of managing and leading people. A mix of investing and talking to constituents, clients of our portfolio.

The latter part is related to working with our board, working with the other investors in the fund, which are all university-related foundations who have their own boards and then dealing with a sort of broader university constituents. That's kind of a big part of the job, which is getting people comfortable with our process and the risks and opportunities in the portfolio. 

We have about 40 people in the team in total, making sure that everyone is working toward a common purpose of generating great risk-adjusted returns for the university, working well as a team and really emphasizing the team approach.

Then, finally, being able to be thoughtful and think about investing in terms of reading material that is produced internally, reading research that's done externally.

When you think about the day-to-day, it really varies. Some days are very skewed in one of those big buckets. I like to think that I spend well more than half of my time on the investment side, meaning either reading or meeting with people on the team, discussing investments. Then, smaller portions are related to recruiting and managing people, as well as being the spokesperson for the organization by managing and communicating with constituents. The day-to-day really varies, but those are the three big buckets of activity.

TI: What has been the key to success for you as an endowment CIO?

LK: I think the key to success is having an ability to be able to multitask. It's getting back to the beginning of those three different buckets of responsibilities and having an idea of when something needs relatively more attention than the other bucket and using your time wisely. Ultimately, recognizing that if the investment performance isn't good, that everything else is going to fail. Making sure you give adequate time, more than adequate time to that. Also understanding that it's very important to lead the organization, and it's very important to establish very strong lines of communication with your board and the rest of the university. Having an ability to juggle all those balls and allow you to be very clinically detached and not subject to the natural behavioral biases that you have with this investment decision making is the most important part.

It ends up all about people, having a strong team that's collegial, recruiting them, keeping them, managing and leading them, and then the people interaction with the rest of the university. Being able to manage that, while still being very focused 24/7 on what the portfolio looks like, what could go wrong, where do we really need to be spending time. 

Again, a lot of this is common sense, but it's really that kind of time management, prioritization, making sure you tend to all three of those buckets. There are certain people that are really good at one bucket, not as good as another bucket. If that's the case, you need to work on that bucket and make sure you become as adept at that as you are on the other two.

TI: Throughout your career, what individual or individuals, whether it be a mentor or someone you idolized from afar, had an influence on your investment philosophy?

LK: Wow. That's an interesting one. Let me mention a couple people. Years ago, I worked in the Virginia Retirement System, the state pension, and Nancy Everett, the CIO, was my boss. Getting back to those three buckets, she was as good as anyone I'd seen, at least from my vantage point, of being able to manage people and encouraging a very collegial environment, as well as managing constituents, the board, the state, the politics. When you manage a very public portfolio, everyone's taking a look at what you're doing. You're always going to be subject to second-guessing, and understanding the level of communication that has to go into that deserves acknowledgement. She was very good at that. Just watching her succeed was very impactful on me.

Beyond that, it's the kind of usual assortment of endowment greats. Whether it's David Swensen, or Scott Malpass at Notre Dame. Years ago, you had Bill Spitz at Vanderbilt, Alan Bufferd at MIT and Alice Handy here at UVA. I think all did just a wonderful job at their institutions and becoming very involved at the university. 

One of the best parts about these jobs is the active relationship you build with the university. I've continued to teach classes at UVA. I've hired, I think there's six of our team members that are former students of mine. That closeness that you develop with the institution, which is what a lot of those peers at other endowments that I mentioned have done very successfully. They have been great role models and it's part about what helps us succeed, but also part about what makes the job really satisfying.

TI: You have an investment staff of 40 or does that include operations staff?

LK: The whole team is 40. That includes the non-investment people, which is actually more than half of that group. It includes IT, human resources, accountants, the chief operating officer, general counsel and the people that are involved with helping with the communication, the written material. In terms of pure investment people, it's 16 in total.

TI: How have you structured that team? Are you more generalists or specialists?

LK: We have six managing directors that report to me on the investment side. They will have a primary focus. 

Take one person as an example, Sargent McGowan. His primary focus is on the public equity side. Meaning long-only public equity and long/short equity, but he also has a focus on growth equity, which is more private managers because there are a number of managers in the portfolio that have a more hybrid model. You need people that have an ability to think about investing on public as well as private.

I've got this approach where people have a core expertise. Then, over time, I want them to broaden out and become more generalist. Sargent McGowan is head of long-only public equity, co-head of long/short equity with Lindsey Larsen and co-head of growth equity with Rob Freer, who spends all his time on the private side. Then, Lindsey Larsen, as an example, is co-head of long/short equity and co-head of venture capital. 

I'm trying to, with Lindsey and Sargent, have people that are getting involved, not only just on public, but also on private. Over time, I want everyone to really think of what are the best ideas for the fund as opposed to thinking narrowly within a certain bucket, but not completely generalist meaning they can work on anything at any point in time. I want everyone to have a core level expertise.

Then, as you become more junior in the organization, below the MDs, we have associates and then below that, senior analysts and analysts. Those people tend to be very generalist. They work with all the managing directors on different projects and really will have an opportunity to work on every part of the portfolio.

TI: What's the biggest challenge you face as a chief investment officer at UVIMCO?

LK: Obviously, the markets are always a challenge, and you have to make sure you're always on top of that. Managing a portfolio really is like moving a battleship. Not because it's so big, because $7 billion is not that big, but because it's not that liquid. The decisions you're making have very long-term consequences, and you must keep that in mind every time you make a decision. You just can't make a decision and then reverse the decision, as if you were managing a bond portfolio. Making sure you keep that in mind in every decision, that we're always long-term investors because the temptation is to be sucked into being a short-term focused investor. 

I think the second thing is just, again, the sort of constantly making sure you're getting the people side right. We're constantly trying to recruit junior people into the organization, again, primarily UVA people. Making sure you spend a lot of time on the recruitment of your younger talent, which is easy to stop doing that. I think you need to continue to constantly do that.

TI: What is the number one lesson you've learned in your career as an institutional investor?

LK: The number one lesson I really think is the balancing act you need to learn from what other people have done. Meaning, you look at other great institutions and investors and try to learn from that. Then, not just imitate, because everyone has a slightly different view and a slightly different way they're going to react in a stress situation. 

You need to be, sort of, in constant learning mode, assume that there's something you can learn from anyone in the business.
You need to be able to separate. It's so easy to become this herd and say, "Okay, everyone's doing it this way, so we're just going to do it that way." Being able to get the right lessons from best-in-class without getting sucked into being part of a herd. Understanding that nuance is really difficult to do because some people put up their blinders and say, "I don't really care what anyone else is doing. I'm smart enough, I can figure this out." They're not constantly learning. You need to be, sort of, in constant learning mode, assume that there's something you can learn from anyone in the business. Also understanding that it's so easy to get sucked into group-think. Then morphing into the herd mentality and the downside of being part of the crowd. Understand that there's this nuance that there's benefits and costs to both of those.

TI: What have I failed to ask that I should know about, either you, about UVIMCO, about being a CIO, or about endowment investing in general?

LK: What distinguished us as endowment CIO's is being part of a university and taking full advantage of that. Whether it's the students, the faculty or the alumni, that is ultimately the value add. When I think of the Endowment Model, a lot of that benefit comes from being part of these institutions and making sure that anyone that has this job, that that should be their long-term goal. It takes time, but that should be their long-term goal. That's really what I think is part of the secret sauce.

To learn more about the the Top 30 Endowment Chief Investment Officers, click here.