11-6-09: Stanford: Powers briefs Senate on endowment

Since the announcement two months ago of a nearly 26 percent decline in the University endowment, Stanford Management Company (SMC) CEO John Powers, who also manages the majority of Stanford’s $12.2 billion endowment, has been fielding questions regarding the state of the endowment and the prospects of recovery. Thursday, he explained the endowment investment situation once again, this time to a different audience: the Faculty Senate.

Powers summarized the workings of the SMC and the endowment results of the past year, and addressed a number of potential concerns regarding the performance and management of the endowment.

“We are a fund of funds,” Powers said. “We don’t pick stocks; we pick managers who run portfolios for us.”

He said the investment model the University had been following, which capitalized partially on illiquid assets to achieve higher returns, provided better returns than most equity indexes and the 10-year Treasury over the long-term.

However, part of the liquidity risk of investing in higher-returning illiquid assets is the uncertain timing of capital calls—the legal right of an investment firm to demand a portion of the money promised to it by an investor.

“When you commit to a private equity manager—say you commit $100—that money gets drawn over time,” Powers said. “You may have put in $25, but you still have the obligation of satisfying the remaining $75, and that may be called anytime. It’s a tricky liability because we don’t know when it’ll be called.”

Powers, however, dismissed some media reports that have interpreted Stanford’s exploration of an illiquid assets sale to mean the University does not have adequate liquidity or cash; Powers assured that the University had ample liquidity reserves and was exploring the option from a position of strength, “not [as] a distressed seller.”

When questioned about the underlying goal of the endowment managers, Powers replied that it was to achieve the best and highest returns on the endowment at tolerable levels of risk.

“Excellence is a luxury, you have to pay for it,” Powers said, explaining that the endowment is meant to maintain the long-term purchasing power of the University and has to balance today’s spending and endowment payout with investment for tomorrow.

Powers also recognizes the obstacles that remain ahead, saying that “climbing up the hill is not as easy as sliding down the hill,” as an endowment decline of 26 percent would require returns to be up 33 percent before breaking even. Echoing Provost John Etchemendy’s comments at a Faculty Senate meeting last month, Powers said the University will be taking a sober approach to endowment growth and will not expect an immediate recovery.

Sustainable Energy

Sustainability and Energy Management Director Joseph Stagner presented a report on the energy consumption situation at the University, addressed the increasing demand for energy and water, and explained potential long-term energy strategies, which he called “the perfect storm.”

Currently, most of Stanford campus’ energy is supplied by the co-generational plant Cardinal Cogen, whose contract expires in 2015.

The current energy plan is fueled all by natural gas, which is expected to start rising rapidly in price and take up more of the operating budget. It also has a high carbon cost.

Stagner also mentioned water as an issue. Although Stanford continues to pursue water conservation, it is estimated that in 20 years, water requirements may start exceeding allocations.

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