John Powers, a well-respected, proven investment strategist who earned his MBA at the Graduate School of Business, took the helm of the Stanford Management Company in June. As president and CEO, Powers is responsible for managing Stanford’s endowment, the third largest among education institutions.

He replaced Michael McCaffery, who left with other senior managers to found his own company — Markena Capital.

Powers spent about an hour in November talking with The Daily about his transition and the endowment’s strategy.

What follows is a transcript of that interview (published for the first time) with some questions edited for clarity. Portions of the interview (questions and answers) were omitted for space. The transcript was prepared from an audio recording of the meeting.

Powers is an intelligent and quiet man, thoughtful and careful in his choice of words about the economy, University and endowment.

The interview was conducted by James Hohmann with Joaquin Hernandez.

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The Daily: How has the new job been going?

Powers: I’m an alum of the business school so it’s great to be back on Stanford territory. The endowment is a fantastic place to be investing from so I’m really happy to be here.

The Daily: How is this a change from what you have done in the past?

Powers: What I had been doing previously was endowment-like investing for very high net worth families and individuals. So a lot of commonality in investing style and process, but I’m excited to do it on behalf of a nonprofit with a great mission like Stanford, as opposed to for rich people.

The Daily: And is that why you were attracted to Stanford and accepted the offer?

Powers: Its three things. In general, the appeal of working for a nonprofit. In particular, the attraction of Stanford with my personal affinity. And then, importantly, Stanford is a prestigious source of capital. It’s a great place to invest from because money managers so want to work with the best, most patient, long-term oriented endowment investors. And Stanford is clearly in that cadre.

The Daily: How would you say your personal style differs from that of your predecessor?

Powers: I know Mike reasonably well, and Mike is a great, charismatic leader. I’d only hope to be able to provide some of that…Mike came into the portfolio at a kind of crisis, as the dot-com bubble was bursting. So Mike had to really take charge in a sort of battlefield commander sort of way. And I’ve come into the portfolio at a period of time when the portfolio itself has been performing great and is much more stable so I’ve got less in the way of immediate battles to fight and maybe a focus on sharpening up processes and putting in place some mechanisms for continued long-term success. So I think that sort of suits my slightly quieter style than Mike’s.

The Daily: So the endowment fund is almost maturing?

Powers: Maturing is not a word I would use. I would say the endowment is very well structured on a highly diversified basis across a bunch of different asset classes. You’re never immune from risk, but it’s a broadly diversified, materially structured portfolio. We’re always in the process of making new investments and harvesting old ones so the portfolio continues to be replenished and rejuvenated, but structurally it is relatively secure.

The Daily: You have said that SMC was investing more internationally than in year’s past. Is that still true?

Powers: It is still true. Not so much in Europe, but in the rest of the world, economic growth rates in many cases are significantly higher than in the US. Valuations are in the same ballpark. Three years ago when the push to internationalization really started, then growth rates were higher and valuations were a lot more compelling. Now valuations have gone down some, but you’ve still got higher growth rates in many non-US economies. So growth rates are higher. At the portfolio, a process of internationalization started. That’s gone pretty far in the equities portfolio. We’re less broadly diversified geographically in private equity, real estate and some of the other asset classes. It’s a process that continues. Generally it’s on a region basis, not on a country specific basis. So it’s not really concentrated in any one country.

The Daily: Being in the heart of the Silicon Valley, is the endowment more tech heavy than comparable university endowments?

Powers: It certainly was in a good part of the 1990s as the venture capital portion of the portfolio was doing extremely well. Stanford benefited from its relationships with many of both the technology firms and the venture capitalists here in Silicon Valley. As McCaffery came on board as the tech bubble was bursting, a big push since then has been to create a more broadly diversified portfolio without giving up access to those great venture investors that have been important to Stanford returns over the years. I would say we’re not over concentrated in tech and tech-centric investing. What we do have is of extraordinarily high quality.

The Daily: With regards to the Stanford Challenge that has been announced, what’s the role that you will play in helping to meet the fundraising goals that were set?

Powers: Those goals are for money to be brought into the University. Some portion of that will come to the endowment. Other portions are targeted to construction spending and that sort of thing. The reason people give to endowments is they want to create perpetuities. They want to create something that has yield over time and not just on a one-time basis. So one of the things people may want to know is what’s the stewardship of the money or the donation that they are going to give? Is it going to be in hands that allows for their perpetual aspirations for that gift to be brought out? From time to time, we’re brought in as part of the development process to give people comfort that, in fact, the money that they gift will be well sheparded and well stewarded. We’re not the front lines of the money raising process, but to the extent that someone is curious about the way the endowment is managed, we are happy to contribute there.

The Daily: One thing that a lot of people talk about and that is controversial from a student’s perspective whenever the endowment comes up is the idea of socially responsible investing. In the 1980s, it was divestment in South Africa. A couple years ago there was the divestment in Sudan. How much does that play a role in the thinking and working here? That desire to have socially responsible investing?

Powers: We want to be very responsive to those issues where the University itself can come to consensus on an issue. Darfur was a great case in point where there was near unanimity at student, student government and Board of Trustees levels that this was not something we should be involved in. We’re happy to respond to those topics that receive broad based enough support to really develop a consensus view.

The Daily: Beyond those, is socially responsible investing more of a consideration here in this University-style endowment than in your private work or is it more of the same? Of course, ultimately your job is to produce returns.

Powers: My job is to produce returns. We have a large pool of capital to work with. We take the job of voting proxies where we have a stake in a company very seriously. We take our fiduciary role as owners of a public company seriously. I don’t see a really dramatic difference between here and where I worked previously.

The Daily: Has the strategy changed in terms of where you’re investing since you took over?

Powers: We’re continuing the process of internationalization, again, with some emphasis on catch up in some of the illiquid asset classes like private equity and real estate to where we got more quickly and easily in some of the liquid classes like public equities. So that’s a continuation. I’ve been spending a lot of time recently on process refinement and making sure that we’re really choosing the superior managers to invest with, and that’s more refining the craft as opposed to changing direction.

The Daily: How much of the investing is gut driven and how much of it is that gains come from a very mathematical allocation, diversification strategy?

Powers: We have a diversification model which we adhere to. Within that, we select managers. The selection of managers is a combination of analysis on a quantitative basis of prior results, standards of due diligence that include checking references and the ability to understand the drivers of investment returns. There’s always gut involved, but the goal is to be as quantitative as possible and then use common sense and instinct as an overlay.

The Daily: How much of diversification means money gets pooled out to managers outside of the SMC?

Powers: Almost everything. We basically practice a model of third-party investing. The vast majority of funds we invest are invested with third-party managers, overwhelmingly.

The Daily: You talked about the internationalization and catching up. Is the trade deficit something you worry about?

Powers: I spoke about higher economic growth rates and equivalent evaluations. We also see all sorts of long-term reasons to be somewhat skeptical of the prospects of the US economy. Although those aren’t unique insights at Stanford. Make sure you know that. It seems prudent to be somewhat diversified away from the risks inherent in the domestic economy, especially since most of the other sources of funding for University programs are themselves tied to the health of the domestic economy, whether its grants or donations. It just seems like a prudent way to balance the risks and the income streams of the University.

The Daily: What is your relationship with administration? How often do you meet? Who do you meet with?

Powers: Governance wise, SMC was founded in 1991. The structure that was created at that time was the SMC board, that itself answers to the Board of Trustees to provide standard governance oversight with respect to the way we’re doing the investing and running the business. I meet quarterly with my own board and obviously interact with them informally much more than that. On practically a weekly basis, I’m involved with administration meetings on campus with Livingston and Hennessy. And legal, accounting and executive. That about covers it.

The Daily: Since most of the investing is farmed out, what does your staff do here on a daily basis?

Powers: Stanford is really an attractive source of capital for investors. We are constantly meeting and vetting money managers with the idea to be finding the superior money managers with which to put Stanford capital. That’s a standard. We also have quite a complicated reporting structure. We need to track what we’ve got out there. We meet them. We decide who we’re excited about. Then we research them—research their investing strategies, research their background. And ultimately we decide whether to place capital. So there’s a very intensive due diligence process on managers. In addition, there’s a lot of activity around monitoring and understanding portfolio valuations, portfolio issues. We’ve got a complex, multibillion dollar portfolio that needs regular tending to make sure that we’re on top of what’s going on. When do we decide to replace a manager, replace a strategy? Ongoing, we’re evaluating the mix of investments. And, although we’re wholly a part of Stanford, we’re a business. We have IT, HR. We have all the normal functions of a business with the exception of sales because we have a preexisting client relationship.

The Daily: The endowment fund has been one of the fastest growing in academia and everywhere. It has been lauded by a lot of people. Coming in, did you and do you feel pressure to continue performing with that substantial return rate?

Powers: I certainly want and intend to continue performing at that level. The great news is that I can continue to reap the benefits of many of the great investments made by my predecessor and his predecessor. You don’t wake up every day with a cash balance and figure out what to do with it that day. You make measured choices over time. I feel lots of pressure over the long haul to continue to deliver great returns for Stanford. On a day-to-day basis, that turns into blocking and tackling.

The Daily: Looking at your day’s schedule, how much time do you spend looking at the markets on your own, independent of your managers, trying to get a sense of where the markets are going?

Powers: The great thing that Stanford has going for it, or any big, stable endowment, is patience. That’s one thing that differentiates. Its one of the reasons the endowments are attractive to investors as sources of capital. There’s almost nothing that happens on a day-to-day basis that’s going to cause us to react one way or another. We’re interested in much longer-term themes and in our ability to invest in support of those longer-term themes. Obviously we need to be up to speed on what’s happening in the economy and in the markets, but we’re not looking at a Bloomberg screen wondering what trade to place next. That’s not our business.

We’re probably not smarter than other people, but one of the luxuries of investing for a place like Stanford is that we have the institutional ability to be patient. That is a huge competitive advantage. It is one of the reasons that we’re able to do what we do repeatedly over a long period of time.

The Daily: Compared to other institutions that also have the ability to be patient, what accounts for Stanford’s above-average returns?

Powers: If you look at the returns of the 20 biggest endowments in the country, there’s a pretty high correlation between size of the endowment and success over time. The biggest, most prestigious universities are the most desired investors on the part of some of the best money managers out there. So there’s a little bit of the rich get richer. Other smaller endowments that may be equally patient but may not have either the size of staff to see as many opportunities as we have or the prestige of having institutional backing to be as attractive to the money manager. Size begets an ability to put a really good team on the field and too be really competitive at getting access to the good managers.

The Daily: Coming in, looking at your career, do you have some key axioms you look to as you invest…besides “buy low, sell high”?

Powers: I’ve never crystallized it. So I guess I have a bunch of thoughts about investing, but I haven’t crystallized it to maxims.

The Daily: If you had to sum it up in a brief way, what would you say?

Powers: If it seems like a bubble, it probably is. But that doesn’t tell you when it is going to pop. Like anybody else who runs an endowment, diversification will outperform brilliance over the long haul.

The Daily: Do you work long 20-hour days or does this patient style where you aren’t at the whims of the market allow you to work a more traditional work day?

Powers: We’re pretty busy right now because we’re doing some restaffing in the organization. We lost some people prior to my arrival. We didn’t come here to take a nap or to rest. We feel pretty busy.

The Daily: Given whatever expectations you might have had before you came here, how has it been different for you?

Powers: I knew it would feel good to be back at Stanford and associated with the University. There’s so much exciting stuff going on here in the first four months. Two Nobel prizes for the University. The launching of this really inspiring capital campaign. There’s just such a vibrancy to what’s going on at Stanford right now that I would say the Stanford affiliation piece of it, even though I had high expectations, has been better than I thought.

The Daily: There has been much written about the turnover at endowment funds around the country. University of Texas, Harvard, here, some other places. What do you attribute that to?

Powers: The biggest and best endowments are great places to come from as one builds one’s investing career. We’ve got to work hard to stay competitive from the compensation and work environment viewpoint. But at the same time we’ve got to recognize that some level of turnover at an endowment is probably a fact of life and just prepare to put in systems and processes so that we can deliver repeatable results even with some level of staff turnover. Even though, obviously, we want to minimize that staff turnover. Ten years ago, people at endowments went to work at other endowments. Now there’s a much more permeable membrane between the private sector and the not-for-profit sector. That’s made retention and stability harder. We can create a great place to work, create great opportunities and try to pay them competitively. We’ll always be able, because of the brand here, to attract great people. We just need to hang onto them long enough for Stanford and that person to benefit.