SMC continues to diversify its portfolio

Jan. 10, 2012, 2:35 a.m.

The Stanford Management Company (SMC) has continued to re-align its portfolio in response to losses sustained during the recent recession, according to SMC president and chief executive John Powers.


The SMC has attained an annualized return of 9.3 percent over the past 10 years, with its merged pool — including most of the University’s endowment, as well as funds from Stanford Hospital & Clinics and Lucile Packard Children’s Hospital — growing to $19.5 billion as of June 30, 2011.


However, the height of the recession saw the SMC sustain heavy losses, with the merged pool shrinking by 25.9 percent in the fiscal year ending June 30, 2009. As of the 2011 fiscal year, Stanford’s endowment has not yet returned to pre-recession levels.


“What was really singular about that fiscal period was that, with the exception of treasuries, there really was no safe haven,” Powers said. “All asset classes got pummeled.”


Since then, the SMC has sought to lessen its exposure in private equity and real estate, two asset classes that were principal contributors to losses sustained, in the aftermath of the recession. The SMC’s real estate investments had reached a plateau in the years before the economic crisis.


Powers stated that the SMC was looking to gradually reduce the pace of new commitments to both assets until their share of the portfolio was re-aligned appropriately, but he emphasized the incremental nature of the adjustment and the potential for future investments.


Endowment managers at peer universities have also sought to limit their exposure to risk. Last November, Bloomberg Businessweek reported that Harvard Management Company, which manages the $32 billion endowment of Harvard University, was seeking to sell $1.5 billion of its holdings in private equity funds.


“If the question is whether we’ve lost our enthusiasm for private equity or real estate, in the case of private equity, no,” Powers said. “In the case of real estate, we’re changing the risk profile of our real estate portfolio, which probably will never be as large [as the stake held before the recession], and then from time to time we’ll opportunistically increase exposure when the time seems right.”


Losses sustained in the recession have affected the SMC’s portfolio composition and investment philosophies in the years since. Powers noted a renewed emphasis on investment diversification and an aversion to certain asset classes.


“We’ve increased our exposure to hedge fund strategies that have historically shown low correlation with equities, and we are overweight with our market allocations in natural resources,” Powers said.


The SMC’s speedy recovery from the recession — it recorded a gain of 14.4 percent in the 2010 fiscal year — can be attributed to both market conditions and SMC investment decisions. Powers stated that the development of a “very heavy value credit exposure” was a critical component in profits generated during the economic recovery.


Powers said that negative experiences with illiquid assets during the recession had increased the value that the SMC puts on flexibility within the portfolio. He acknowledged, however, that the SMC is “still in the process of getting back to the level of liquidity that we would like to have.”


Extensive exposure to equities, however, may be necessary to satisfy the SMC’s objectives, Powers said. The SMC aims to enable the endowment to pay off approximately 5.5 percent to the University to cover inflation and to then grow the endowment’s real value. The high levels of growth expected necessitates significant equity exposure, according to Powers.


“The portfolio will always have a significant equity component to it,” Powers stated. “That was the case before the market mess, and that will be the case going forward too. Within that, we think we can prudently diversify and lower our risk, but we will always have a significant amount of long-run equity exposure.”


While the SMC currently has a little over half of its portfolio invested in the United States, Powers stated that in the long run investments would become increasingly tilted towards Asia and other emerging markets.


“We’ll look to be broadly reflective of global market capitalization,” Powers said. “We will continue to slowly become less and less U.S.-centric, while recognizing that there will [still] always be, from time to time, opportunities.”

Marshall Watkins is a senior staff writer at The Stanford Daily, having previously worked as the paper's executive editor and as the managing editor of news. Marshall is a junior from London majoring in Economics, and can be reached at mtwatkins "at" stanford "dot" edu.

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