Back to school: Face to Face with John Powers
John Powers returns to Stanford University to lead the nation’s third-largest endowment fund
The high-profile position at Stanford, the third-largest university endowment in the United States, is one to which Mr. Powers had aspired since early 2000 when he learned that Michael McCaffery — a former colleague at now-defunct investment bank Robertson Stephens — became CEO of SMC.
"I went home that night and told my wife I knew what I wanted (for my career) at some point," said Mr. Powers, an alum of Stanford's Graduate School of Business.
Now that Mr. Powers has achieved his goal, the tasks before him are by no means small. He is in the process of leading SMC through an "unusual rebuilding period" of the endowment's investment staff, as well as taking a closer look at the portfolio and determining if changes need to be made.
P&I AudioCast: Click here to listen to web-exclusive highlights of P&I's interview with Mr. Powers.
How do you find returning to Stanford to run the endowment? (This fall) Stanford won two Nobel prizes, and both from faculty in the school of medicine. It's pretty exciting to be back at a university where that is happening, and where the impact of the endowment enables that to happen.
What changes do you expect with the endowment's investments? I inherited an endowment portfolio that's in very good shape, so there are no dramatic changes in direction that need be made in the near term, I think. We continue to be interested in building out the portfolio on a global basis, not only in the public equities arena, where we are pretty well internationally diversified already, but in private equity and real estate, where our globalization efforts have lagged a little bit.
Some investors are turning to more opportunistic real estate investments and foreign opportunities. What do think? We have little or no interest in pursuing the thin yields that are currently being offered in core real estate in the U.S., so I'd say I agree.
What other sources of alpha are you considering? We are relatively fully invested. I think the first thing we are doing is re-underwriting everything we've got. You might say our first place for alpha is archeology on our own portfolio.
Is there a timeframe in mind for reviewing the portfolio? We're continuing to look at new strategies, even as we're being introspective about the existing portfolio. We'll be finished with that by (mid-2007). And then after that it's an ongoing process of continuing to monitor and maintain our view on what we've got. But I'd expect it to be a six-month project from here to get through the ranks of existing managers, form informed (views), not just snap views, and decide where do we want to trim and replace, where do we want to stand pat and where do we want to double down.
How has the Amaranth implosion affected your view about hedge funds? Amaranth this year, Bayou last year, Wood River last year. There's nothing new about the Amaranth implosion, although the magnitude probably exceeded the magnitude of any hedge fund explosion heretofore. We think we have a pretty good selection process and monitoring process, but we're always going back in and saying, ‘Can we do it better? Are we sure we're comfortable with what we've got?' We're making sure we're comfortable with our processes and managers, but there's no overnight shift and certainly no lessening of our belief that a well-run hedge fund portfolio is a critical part of an endowment strategy.
Do you invest through hedge funds of funds? There's not a lot of reason for us — at north of $15 billion with the ability to build a staff with considerable expertise — to go through funds of funds. I think multistrategy is important; the illiquidity in hedge fund investing with lockups, even with quarterly or semiannual liquidity, means that if you attempt on a constant basis to do capital allocation and rebalancing, you're going to miss the mark. The markets move too fast and markets move faster than the liquidity constraints of the asset class allow you to respond. So multistrategy managers to whom we feel confident delegating the capital allocation decision are a really important part of what we do. They're not all of what we do in hedge fund land, but we see them as important to the ongoing process of rebalancing port to get in front of opportunities that are best.
What do you enjoy so far about your job? I'm quite enthusiastic about the team I'm working with here, although we've got some hiring still to do, and the opportunity to invest from the position of being a well-branded, stable, long-term source of capital like Stanford.
What key positions are you looking to fill? A managing director position in the absolute return area and another director-level person in the equities arena.
What are the challenges in retaining and attracting staff? The challenge is retaining, not attracting. We get lots of resumes. The attraction at the front end, partially, is a few years at Stanford make you pretty desirable to the outside world. So we have got to continue to make sure we're competitive pay-wise, and that's a moving target because 10 years ago the world of fund of funds barely existed. We're going through an unusual rebuilding period right now as the result of Mike's departure, with a couple team members (leaving), as well as a couple retirements, but I'm pretty confident of our ability to create a stable investing culture.
What's your outlook on venture capital? Stanford historically has a very tight and symbiotic relationship with the venture community, not just Stanford Management Co., but Stanford the whole university. If you look back over a 10- to 15-year period of time, venture has been enormously important as a driver of returns. It has been tough since 2000, and three things have happened. Exits and liquidity still are rare for venture-backed companies, capital is still pretty abundant, and the size of the endowment is such that the amount of money we can put to work with any one venture capitalist may not be significant enough to have an impact on the overall portfolio. So I'd say, in aggregate, it's less important than it has been at any time in the life of the Stanford endowment to date. That having been said, a few of our venture relationships have yielded huge returns for us and we're adamant about maintaining those quality relationships.
The endowment provides 18% of the university's operating budget. How is management of the portfolio affected by the need to generate those funds? We have to be a stable source of funds. One way we accomplish that is through a payout schedule that blends returns over years. We do a blended three-year, which gives the university some predictability of (spending). We pay out something between 4% and 5% of the size of the endowment every year to the university, and that's the way we think about our liquidity need and exposure as opposed to 18%. The 18% is a byproduct, not a mandate. We pay out that 4% to 5% and as it grows it hopefully passes through that 18% and continues to go upwards. We have to be cognizant of having a stable, well, diversified enough portfolio to be a predictable payer. If we had … an infinite time horizon rather than a series of 5% coupons to clip over time, we'd have a little bit more aggressive risk profile in the portfolio.
What publications do you read? I like the FT a lot. I love the eclectic coverage of The Economist, and I get through as much of the Sunday New York Times as I can.