Endowment grows with 22.4-percent return

Oct. 10, 2011, 3:04 a.m.

The Stanford Management Company (SMC) reported a 22.4 percent return on the Stanford endowment for the fiscal year that ended Jun. 30, 2011, up from the 14.4 percent return recorded for the previous fiscal year.

SMC is a division of the University responsible for investing the Merged Pool (MP), a pool of money including the endowment as well as other monies suitable for long-term investment–for example, the savings of the Stanford Hospital & Clinics and Lucille Packard Children’s Hospital.

(SERENITY NGUYEN/The Stanford Daily)

“The merged pool includes endowment assets and then some additional assets that the various schools and endowments have chosen to treat like endowment assets, but are not, legally speaking, endowment,” SMC CEO John Powers wrote in an email to The Daily. “That’s why this merged pool number is $19.5 billion, and the endowment is about $16.5.”

This return comes after Stanford’s record losses in fiscal year 2008-09, when the investments lost 25.9 percent of its value in that year’s economic downturn. After two years of growth, the performance over the past three years shows growth of only 1.3 percent; the $19.5 billion total of the MP today remains less than the $20.6 billion value reported Jun. 30, 2008.

Expanding over 10 years, Stanford has achieved 9.3 percent MP growth, starting from $7.9 billion in 1999. This growth is in line with what Stanford expects in the long-term, Powers said.

“Our long-term goal is to allow for about a 5.5 percent yearly payout, and then there is inflation above 5.5 percent; and then we want to grow the endowment some,” he continued. “So, a minimum threshold to allow us to make payout and meet inflation and grow the endowment is at 8 percent or so.”

Other universities have shown comparable endowment volatility. This year’s investment return of 22.4 percent is more than the any of the schools with larger endowments, including Harvard‘s 21.4 percent, Princeton‘s 21.9 percent and Yale‘s 21.9 percent. Stanford’s 2008-09 loss was shared by all of these institutions as well, with Stanford losing less than Harvard’s 27.3 percent but more than Yale’s 24.6 and Princeton’s 23.7.

Overall, Stanford’s 10-year gains are the lowest of the group, with Harvard at 9.4 percent, Yale at 9.8 and Princeton at 10.

“It’s like a poker game with friends,” Powers said of the investing relationship between the universities. “You want to win the hand, but you enjoy the company as well.”

Education professor David Plank, who researches education policy, eschewed the idea of endowments as a competition to see “who has the biggest pile.”

“The broader context is that these are great problems to have,” Plank said. “Most students are going to universities and colleges without any endowment at all.”

Powers, who took over the CEO position at SMC in 2006, cited SMC’s ability to grow the endowment, even in a decade with several years of losses. In the fiscal year 2000-01 Stanford reported a 2.1 percent loss and in 2001-02, a 2.6 percent loss.

One way SMC said it is planning for the future is by focusing on the liquidity of its assets. Hundreds of staff lost their jobs during the 2008-09 crisis, and funding was pulled back in departments across Stanford. This was necessary because, while the endowment can be invested as a large pool of money, it cannot be spent as such, Powers said.

“One of the things that worried us the most at the bottom was just having enough liquid assets to meet our various liabilities,” Powers said. “Our liabilities are our payment obligations that we have to the operating University, as well as a commitment that we have to a variety of investment funds to provide them capital for investment activities on our behalf over time.”

Looking forward, Powers is cautious.

“I’d like to think that the huge volatility of the early part of the decade and the latter part of the decade was abnormal,” Powers wrote in a follow-up email to The Daily. “But given how much we see the market moving around these days and how interconnected and dynamic the global economy is…, it is better to plan for volatility and be surprised by the lack thereof than plan for smooth sailing and be surprised by storms.”

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