NORTHAMPTON, Mass. - Smith College is putting a new emphasis on alternatives, which are targeted to jump to 25% of assets from the current 5%, said Jay Yoder, director of investments.
The plan, part of an overhaul of the college's $950 million endowment fund, calls for:
* 10% of assets to go into absolute-return strategies, which will give the endowment its first exposure to hedge funds, primarily in funds of funds;
* 15% of assets to be invested in private equity/venture capital funds. Currently the endowment's entire 5% alternatives allocation is in private equity/venture cap. The fund plans to commit $40 million to $50 million a year to private partnerships over the next five years.
* 10% of assets to go into a new asset class called inflation hedges, which would include real estate, energy, timber and inflation-linked bonds.
Mr. Yoder would not reveal other targets of the overhaul. He has been developing a new investment policy for the endowment, which he will present to the investment committee over the next few months. The other new policy targets will be revealed after the presentations are concluded.
Mr. Yoder, who joined Smith in September, is doing all of the hiring himself. He will interview absolute-return fund-of-funds finalists within the next few weeks and expects to make his selections by the middle of the year.
"We don't have any hedge fund exposure currently, and are looking for absolute-return strategies that are on the lower end of the risk-return spectrum," he said. He plans to hire two to three fund-of-funds managers that invest in strategies with low correlations to traditional U.S. stocks. "We want managers who are widely diversified in terms of strategies, whose overall returns are in the 10% to 12% range."
After the absolute-return fund-of-funds managers are chosen, Mr. Yoder will search for individual managers, to add styles that aren't included in the fund of funds.
He expects to complete the absolute-return portfolio selections by the end of this year, and then he will focus on the private equity portfolio.
Funding for alternatives will come from U.S. equities and U.S. bonds, Mr. Yoder said.
Smith's current allocation is 50% U.S. equities; 12% non-U.S. equities; 28% U.S. bonds; 5% private equity; and 5% cash. Smith has 12 external managers. None of the assets are managed internally. Around 5% of the U.S. equity portfolio is indexed to the Standard & Poor's 500 benchmark.
In private equity, Mr. Yoder so far has committed $10 million to an early-stage venture cap fund run by Mohr, Davidow Ventures, Menlo Park, Calif., and $15 million to a distressed debt fund run by Regiment Capital Ltd., Boston. He does not intend to add any more distressed debt, but will make additional commitments to venture capital funds and to middle-market buyout funds.
Because Mr. Yoder is running a one-man office, managing the endowment while he restructures it, he has had no time to meet with executives at partnerships he hasn't dealt with previously, he said. "I'm dealing mostly with managers Smith had been using, or who I knew from Vassar." He was director of investments at the $706 million Vassar College endowment, Poughkeepsie, N.Y.
The Smith endowment will invest mostly in individual private equity partnerships and in only two private-equity funds of funds. It already has committed $15 million to a fund of funds from Massachusetts Institute of Technology, Boston, and will make a commitment to Commonfund Capital Inc., Wilton, Conn., which Mr. Yoder used at Vassar. The size of Smith's commitment has yet to be determined, Mr. Yoder said.
His primary focus has been alternatives, but he made one change in public equities, terminating emerging markets manager Templeton Worldwide Inc., Fort Lauderdale, Fla., which he replaced with Capital Guardian Trust Co., Los Angeles, to run a $15 million mandate. He declined to give a reason except to say he likes Capital Guardian.
Mr. Yoder also is on the lookout for two professionals to help him run the endowment: an experienced investment analyst and a senior investment officer. He expects to hire the analyst by July and the investment officer by the end of the year.