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Strong financial markets boost Stanford's endowment

A booming stock market helped boost Stanford's endowment from $3.8 billion in fiscal year 1996 to $4.7 billion in fiscal year 1997, Stanford Management Company CEO Laurance Hoagland told members of the Faculty Senate on Feb. 19.

Stanford's endowment earned 23.4 percent on its investments during the 1997 fiscal year, a figure that far exceeds the total long-term target return for the endowment of 10 percent. This translates to about 6.25 percent in real (inflation-adjusted) dollars, Hoagland said.

"That may sound like a fairly low number after 15 or 20 years of a bull market," he said. "But if you look at a very long-term horizon in the investment business, that's about the kind of return that's reasonable to expect."

The endowment produced $878 million in returns, according to the university's annual financial report, which was released last week. Of this, $686 million was reinvested and $192 million ­ representing 14 percent of the university's total operating expenses compared to 12 percent last year ­ was used to support operations.

"We're making progress here," said Hoagland, who began his talk with a brief historical overview of Stanford's investment practices and concluded with a discussion of investment strategies aimed at protecting the university from inevitable downturns in financial markets.

The typical university investment portfolio in the 1950s was made up mostly of bonds, Hoagland said. This picture began to change in the late 1960s, when universities began to invest in equities for higher returns. In recent years, university portfolios have diversified to include nontraditional assets such as venture capital partnerships and international equities.

Stanford's $6.2 billion portfolio includes the endowment, trust assets, working capital, temporarily invested expendable funds and commercial real estate investments.

Most of Stanford's endowment is managed in a multi-asset fashion designed to generate optimal total return relative to the risk taken, Hoagland said. "About 30 percent is invested in domestic stocks, 23 percent in international stocks, 18 percent in alternative investments, 16 percent in real estate equity, 9 percent in domestic fixed income, and 4 percent in collateralized commodities and inflation-linked bonds.

"If one of those markets has a very rough time, hopefully the rest of them will carry the day," he explained.

This diversified approach seems to be paying off, said Hoagland, who noted that the university's endowment returns have been consistently higher than applicable benchmarks for the past 10 years. Recent data compiled by Cambridge Associates on 20 large endowments for the past 10 years show that no other institution produced a greater return with less risk, the financial report states. Four had a higher return but took more risk to achieve it.

Hoagland closed with a brief discussion of some of the Stanford Management Company's real estate activities, which includes Shopping Center, Stanford Research Park and the Sand Hill Road projects.

"This has been a great period for building the real value of the endowment," Hoagland said. But Stanford still has a long way to go if it hopes to equal Harvard's endowment, he conceded.

"I see a university like a business, and the leader in any business has huge advantages and a lot of momentum," Hoagland said. "On the investment side, [we have] a long way to catch up. Harvard's peer endowment is about two and a half times what Stanford's is and they are in the middle of a campaign which is generating a lot of new endowment money."


By Marisa Cigarroa

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