The Stanford Merged Endowment Pool, the primary investment pool for the University’s endowment, generated a return of 18 percent for the 12-month period ending June 20, 2004, according to the Stanford Management Company. The high return may signal an improvement in the University’s financial situation, which suffered during the low points of the nation-wide recession that began in 2001.

Michael Ross, the chief investment officer for the Stanford Management Company, which oversees the MEP, attributed the pickup in investment returns largely to the performance of equity markets over the past year, particularly international equities that were boosted by the strengthening of currencies like the Euro and the Yen against the U.S. dollar.

“We believe that international equities underperformed versus U.S. equities for a long period of time and there’s a certain amount of catch up involved,” Ross said.

Although the MEP forms the lion’s share of the University’s endowment, there remain separately invested department and school funds as well as small pockets of capital that are not a part of the MEP, according to Ross.

While the University’s financial managers are pleased with last year’s returns, they stress that it is important to put them in the context of a long-term investment strategy.

“In our business of investment, one year is not meaningful since we are trying to preserve the capital of the endowment for generations to come,” Ross said. “At a minimum, we look at three-year performance, and five and ten year data are more meaningful. We don’t invest on the basis of a one-year forecast.”

According Ross, the MEP grew from 2.6 billion to $10 billion over the last decade. The annualized return for the ten-year period ending June 2004 was 15.1 percent. An annualized return refers to the return gained, on average, each year over a multi-year period rather than a cumulative return.

Yet, Ross is careful not to be overly optimistic.

“The 10 years we just passed through was an extraordinary profitable period for the endowment and we would not expect that degree of success to persist over the next decade.”

The growth of the merged endowment pool will not necessarily have a direct effect on the University’s budget, according to Vice President for Public Affairs Gordon Earle.

“It’s important to remember that an endowment is not a checking account,” Earle said. “It is more like a trust fund for future students.”

In fact, the endowment growth will not have any effect on the budget until the 2005-2006 academic year, when last year’s growth will be factored into the payout rate, the percentage of the endowment that is allotted to be used in the University budget for a given year.

The target for that rate is usually around five percent, though adjustments are made for market fluctuations.

Meanwhile, other universities have received similar boosts in their investments over the past year. The New York Times reported that preliminary numbers for half of the 25 universities with the largest endowments earned returns of at least 17.1 percent in the latest year.

Harvard’s endowment, already the largest of any university, pushed above $22 billion last year, thanks to a 21 percent return. Unlike Stanford and most other universities, Harvard does not rely on outside investment mangers — its investments are made by in-house personnel. Recently, Harvard has been criticized by its own alumni for paying out compensations of up to $35 million dollars to some of its managers.

Ross would not say how much Stanford pays the 15 senior professionals who manage the endowment at the Stanford Management Company, but said that “the compensation is substantially less” compared to that of Harvard Management Company employees. However, Ross said that the University also pays fees to more than 150 outside managers who control the individual funds in which Stanford invests.