Stanford’s endowment surged in value by 15.4 percent, or $1.8 billion, last year, according to numbers released by the National Association of College and University Business Officers (NACUBO) this week. The growth solidified Stanford’s position as the university with the third largest endowment, with $14.1 billion, behind only Harvard and Yale.

“SMC [The Stanford Management Company] has done a really exceptional job in their asset allocation and selection of investment areas,” said University Chief Financial Officer Randall Livingston, referring to the division of Stanford responsible for the endowment.

Last June, after a six-year tenure, Michael McCaffery left SMC to found a private company — Markena Capital — which does similar endowment-style investing. He was replaced as president and chief executive officer by John Powers, a well-respected, proven investment strategist who earned his MBA at the Graduate School of Business.

“It’s a little bit early to judge John because he just took over last June and these numbers are only through August,” Livingston said. “Really the investment returns for fiscal year 2006 are attributable to McCaffery and the leadership team that was there.”

Powers, who has been at the helm for nearly seven months, welcomed the results.

“Obviously the returns over the last couple of years are a phenomenal testimony to the quality of the portfolio that McCaffery and his team built,” he said Wednesday. “It’s a stable, long-horizon portfolio.”

While many institutional investors frequently turn over holdings, endowments like Stanford’s are noteworthy for the long-term nature of their investments. For SMC, the focus has been on long-run, diversified investing. This patience has proved a virtue for Powers and his predecessor.

“Any decision plays out over a couple years to 10 years or more,” Livingston said.

The endowment’s investment returns were close to $2.2 billion last fiscal year, according to Livingston. He said about $534 million of the endowment was spent to support University operations. A year of strong fundraising — partly attributable to the kickoff of the Stanford Challenge meant that about $250 million in new gifts became available for investment. Approximately $290 million in additional funds were transferred from reserves and expendable funds.

“The strong growth of the endowment is translating into increased support for faculty and financial aid,” Livingston said. “It has been very beneficial.”

Powers warned that the endowment will not necessarily always generate such high returns.

“The number of years you’re going to hit on all cylinders is going to be pretty small,” he said. “You’d only have to go back to the early 2000s when the endowment was struggling to keep its head above water” after the tech bubble burst.

The old adage that it takes money to make money holds in the world of institutional investing. Investments pools of greater than $1 billion outperformed those between $500 million and $1 billion by 1.6 percent annually over 10 years.

“They’re able to devote more resources to management and selection of outside managers,” said Matthew Hamill, the senior vice president of NACUBO.

Powers sees Stanford’s large endowment as an opportunity to gain leverage and market clout.

“Stanford and other great universities have brand names and have a chance to invest with the best managers out there,” he said. “I’d say that is an important part of Stanford’s ability to generate the returns.”

The average one-year investment return for higher education endowments was 10.7 percent last year, according to data released by NACUBO in conjunction with TIAA-CREF, a financial services company.

The University of California’s endowment grew by just less than 10 percent to $5.7 billion, the eighth largest. Harvard’s endowment is valued at $28.9 billion, more than twice as much as Stanford’s.

“The biggest thing we see is that there wasn’t a shakeup on how investors are managing their portfolios,” Hamill said. “By relatively small increments, institutions are further diversifying their portfolios out of stocks and bonds and into an alternative mix of investments, from natural resources to hedge funds.”

That is true at Stanford as well, where investments in private equity funds, natural resources and real estate have helped the endowment nearly double since 2000.

Stanford has long heavily weighted itself on international investments.

“The last year was a really strong tilt to the international markets,” Powers said. “That was a really big part of what pushed Stanford into the top echelons.”

For a list of how the top 765 education endowments fared in the past year, visit: http://www.nacubo.org/documents/research/2006NES_Listing.pdf

To read the transcript of an interview with SMC CEO John Powers, visit: http://stanforddaily.com/article/2007/1/26/onlineExclusiveStanfordManagementCompanyCeoPowersTalksAboutHisQuieterStyleAndSharesInvestingInsights