CHICAGO - Endowment officials offered insights on risk management at their respective funds at an investment conference sponsored by The Common Fund.
A panel representing Dartmouth College, the University of Washington, the University of Michigan, St. Louis University and Harvard University, discussed risk management-related changes from the previous year.
Jonathan King, director-investments for Hanover, N.H.-based Dartmouth, discussed risk and how perceptions of risk need to be examined. People tend to underestimate the risks of things they know a lot about, and overestimate the risks of things they know less about, Mr. King said.
People get more nervous about flying than they do about driving, even though the chances of getting into an automobile accident are much higher. Likewise, people view large-capitalization stock investing as less risky than the typical alternative asset classes, he said. But endowment investors could improve their risk management, then, by learning more about alternative asset classes, and then by increasing diversification, he said.
The Dartmouth fund has added a few asset classes in the past year, with alternatives comprising 25% to 30% of the fund, and heading higher, Mr. King said.
V'Ella Warren, treasurer for the University of Washington, Seattle, said the fund is diversifying its investments as well, including hedge funds and absolute return investments.
Endowment officials have trimmed back the reporting package for university regents in order to focus on newer types of manager due diligence. The Washington fund also has worked on risk management education, and switched from an internal compliance software system to one at its custodian, Ms. Warren said.
Elizabeth Hokada, director-investments, said the Ann Arbor-based University of Michigan endowment is taking a "turtle approach" in its risk management.
Officials there have focused on operational risk, in a broad-based way that involved the entire staff.
Risk management involving external managers has come easier. Fund officials created a matrix of operational risk to evaluate the endowment's 70 external managers, and then used it to rank them. Those ranking highest get the closest attention in terms of due diligence and on-site visits, she said.
Jerry Woodham, treasurer for St. Louis, said his fund faces the challenge of tackling risk management with a very limited staff. While they have made strides on managing market risk, they haven't, so much, in managing operational risk.
He said the fund's recent hiring of Bankers Trust Co., New York, as custodian will open up that company's risk management processes to the St. Louis endowment, which should be useful.
Verne O. Sedlacek, executive vice president and chief financial officer for Harvard Management Co., Boston, which oversees investments for Harvard, said the endowment seeks a high degree of risk management and control because of its heavy reliance on internal management.
Most of his talk concerned the use of value at risk, which Harvard found to be "a very effective tool." Value at risk is a statistical attempt to determine the most a portfolio is likely to lose over a certain time period and with a certain degree of confidence. A $100 million portfolio might have a value at risk for a one-week period of $3 million, with a 90% degree of confidence. Outside of that confidence level, the expected losses will be greater.
Among the ways Harvard uses VAR is to compare the riskiness of different asset classes and to compare the riskiness of portfolios over time. (Pensions & Investments, Oct. 13).