Fourteen years ago, a profile of Laurie Hoagland was published on Institutional Investor. Laurie was the first CEO of Stanford Management Company, the investment office of Stanford University.
Though Hoagland has long since departed Stanford for Hewlett, he left behind one especially memorable investment. Through Kleiner Perkins and Sequoia, the endowment participated in an investment in Google, which has soared since its IPO last August. Stanford University made its own fortune. In 1998 it had licensed the patent used in Google to the two Stanford graduate students who founded the company, receiving cash and stock in exchange. Stanford received about 1.8 million Google shares. It sold roughly 10 percent when Google went public, for about $15 million. Its remaining shares are worth approximately $290 million.
Under Hoagland's leadership, assets of the Stanford endowment rose from $1.87 billion to $8.56 billion. The portfolio's annualized 18.4 percent return over nine years ended July 2000 far surpassed the National Association of College and University Business Officers index's 15.6 percent annualized return for the ten years ended July 2000. (A comparable nine-year Nacubo average is not available.) On Hoagland's watch all but one asset class in Stanford's portfolio, U.S. equities, outperformed their benchmarks.
Laurie later became the Chief Investment Officer at The William and Flora Hewlett Foundation. Before finally retiring in 2013, he was profiled in a book called Foundation and Endowment Investing. In it he shared how there are less opportunities to invest in alternatives.
Hoagland frequently speaks at industry conferences and over time has developed an analogy that sounds like one of the tales of the Arabian Nights to describe past investment conditions and forecast future conditions.
“The really good news for endowed institutions is that the results for the last 15 years, a well-measured period now, are superior. If you took all the returns of all institutional investors in the United States, you would find that the endowed institutions are a step ahead. It has been great that they have generated outstanding results for achieving their purposes. After about 10 years of these results, people began to notice; over the last 5 years people have really begun paying attention.
“Now, let’s look at what happened during the 15 years and what’s likely to happen over the next 15 years. A lot of what drove this actually goes back 30 years. Imagine a low valley with two fields, one called U.S. stocks the other called U.S. bonds. All institutions, including the endowments, were plowing these fields trying to get good returns.
“The endowed then looked up the valley and saw an orchard with a lot of low-hanging fruit called venture capital and another field called international investments. Some of the first new asset classes they pioneered in the late 1970s and early 1980s. After a few years, they looked further up the valley and found leveraged buyouts, real estate, and absolute return funds, and started plowing those fields.
“During the last 15 years, this valley was fertile and productive. The first half of the 1990s, asset allocation policies were in a state of foment as a number of new asset classes were judged suitable for institutions. The last half of the 1990s, we saw the implementation period as institutions executed their plans by finding and hiring outside investment managers. Between 2000 and 2005, we harvested.
“In the last 5 years, the endowed institutions have looked down the valley and seen the hordes storming up. Other institutions have caught on, and everybody wants to reverse-engineer the Yale portfolio. They’re pouring up the valleys, stripping the trees, overplanting the fields. Productivity hasn’t slipped yet, but it will be slipping before long.
“Endowments have looked up the valley for the next place to go and haven’t found new fields of assets that can take the huge amounts of money we have to invest. It’s kind of a box canyon.”
Like Scheherazade, Hoagland leaves the conclusion open-ended.
“That’s the dilemma we face. Over the next 15 years, instead of having these beautiful fields and orchards to ourselves, there’s going to be a lot more money and a lot more competition. One has to predict that it’s going to be much tougher for endowed institutions to preserve their performance advantage. That’s a little painful, but that’s my analogy.”
It's been ten years since the book was published. Not much has changed.
Post by Marcelino Pantoja