Stanford Management Company (SMC) announced that its merged pool, the University’s principal investment pool, secured a 14.4 percent investment gain in the year that ended June 30, 2010. The merged pool, which includes most of the endowment, was valued at $15.9 billion.

The endowment itself had a reported $13.8 billion value as of Aug. 31, 2010, representing a 9.6 percent increase over the previous fiscal year.

These figures show a solid rebound from the 25.9 percent loss the merged pool suffered last year, the largest single-year plummet in the University’s history. The endowment dropped sharply from $17.2 billion to $12.6 billion during this period.

According to John Powers, chief executive of SMC, the recent gains are well aligned with the management company’s goals. SMC aims to enable Stanford to meet its payouts, to build up the endowment to increase the University’s resources and to operate at an appropriate level of risk.

“At 14.4 percent, we’re both meeting all of our obligations to the University and significantly growing the value of the endowment…so we met our goals, absolutely,” Powers said.

The Road to Recovery

Stanford’s investment gains this past year had much to do with improved market conditions, as well as deliberate actions by SMC.

“It was a strong year for both equity and credit in general, but what made it a good year for Stanford was a decision to overweight value credit significantly,” Powers said.

He said many market players—including individuals, corporations, investment management firms and sovereign wealth funds—attempted to lower their levels of indebtedness in late 2008 and early 2009.

“That meant that people were selling off credit exposure because they had to, not because that made good economic sense,” Powers said. “During that period of time, we were buying some of that exposure, and that exposure has performed really well over the last year and a half.”

He added that Stanford chose to underweight real estate at a time when these assets experienced a relatively tough year, a decision that ultimately helped bolster the University’s financial position.

All in all, the robust investment returns have relieved some of the pressure on the University pocketbook. From a risk management point of view, gains in the merged pool have helped improve Stanford’s liquidity position, Powers said.

Moreover, with the budgeted payout for fiscal year 2011 set at 5.5 percent of the endowment’s beginning-of-year value, growth in the value of the endowment enables a higher level of payout. The endowment payout for 2010-2011 is slated to be approximately $758 million.

Stanford’s investment gains are also strong relative to returns at peer institutions. Stanford outperformed Harvard, Yale and the Massachusetts Institute of Technology in the 12 months that ended June 30, 2010.

Harvard reported an 11 percent investment return, placing its endowment at $27.4 billion. Yale’s endowment grew to $16.7 billion and took in an 8.9 percent investment gain. MIT announced a 10.2 percent investment return and an endowment of $8.3 billion.

Columbia outpaced the pack; the New York-based university saw its investments increase by 17.3 percent and boosted a $6.5 billion endowment, according to the Columbia Spectator.

Despite Stanford’s strong showing, its endowment remains $3.4 billion shy of its $17.2 billion value two years ago.

Looking Forward

While the recent investment returns are impressive, it is uncertain whether they can be sustained in the long term.

“We’re optimistic about a long-term ability to grow value,” Powers said. “But 14 percent is a great year and we should appreciate it as such.”

“It’s important to keep in mind that what we’re trying to do is to compound over five-, 10-, 20-year periods,” he added.

In that vein, the merged pool has increased from $5.8 billion to $15.8 billion in the past decade, earning an annualized return of 6.9 percent.

In the current fiscal year, the Stanford Management Company hopes to complete a top-to-bottom overhaul of its approach toward asset allocation and risk management.

According to Powers, the SMC has made incremental improvements in its liquidity position and will continue to shift towards a mix of assets that have lower correlation to global equity markets.

These strategies, coupled with the guidance of a strong investment team, will largely define SMC’s agenda in 2010-2011.

In “Powers talks investment” (Oct. 4), the graphic misstated Stanford’s investment gains as 5.5 percent for the recent year. As the story correctly reported, the University’s principal investment pool gained 14.4 percent in the year ending June 30, 2010. The endowment grew 9.6 percent in the year ending Aug. 31, 2010. The budgeted endowment payout for fiscal year 2011 is set at 5.5 percent of the endowment’s beginning-of-year value.