Board Chair's Letter

The wisdom of the long horizon
From the Chair of the Board of Trustees


As this report goes to print, the global financial markets are undergoing a dramatic revaluation, and the
U.S. economy is officially in the midst of a recession. Although the markets have buffeted Stanford financially, we are well positioned to weather these turbulent times because of the long-term investment horizon that guides the management of Stanford’s endowment.

The University entered this troubled economic period in relatively strong financial condition. This is due in no small part to the investment acumen of the Stanford Management Company and the prudent payout policy that governs spending from the endowment, strengths that ensure that the Stanford endowment remains a source of stability for the University for generations to come.

A long-term focus explains why Stanford, like most universities, targets its endowment payout rate on the basis of long-term average returns after inflation. Furthermore, we stick to this payout policy even—perhaps especially—in years of above-average investment returns. The payout is calculated also taking into account recent past performance so as to “smooth” the impact of market fluctuations. This smoothing policy does not obviate the need for trimming budgets and finding ways to work more efficiently in a major downturn, but it does mitigate much of the impact of shorter-term market volatility on vital Stanford programs. Our long-term goal is to ensure that the purchasing power of the endowment does not diminish after accounting both for the payout and the inflation experienced by higher education institutions.

So how has Stanford’s endowment performed? After several years of double-digit returns, we saw a modest 6.2 percent gain on Stanford’s Merged Pool (MP) in the 12 months ending June 30, 2008, returns that were well above the 13.1 percent drop in the S&P 500 over the same period.


As the economic climate changed, those gains virtually disappeared by the end of our fiscal year in August, and the autumn took us into negative territory. However, the MP outperformed our benchmarks and the market as a whole over this period. More important, in a period that saw severe economic dislocations and essentially flat U.S. equity markets, our compounded 10-year MP return at the end of June stood at 14.2 percent, among the highest of any university.

In times like these, the wisdom of Stanford’s payout policy becomes clear. Despite capricious markets, we must be able to sustain our research enterprise and support our faculty and students—Stanford’s most valuable assets—in both good times and bad. Like a household exercising fiscal discipline when times are flush, Stanford adhered to a payout from the endowment that was below market returns for the past several years. This provides some shelter in riding out this latest storm. Nonetheless, the downturn in the economy and the impact that has had on our endowment will require us to make strategic adjustments. Our goal in doing so will be to preserve the excellence and momentum of the academic endeavor.

Universities are long-term institutions that look beyond political and economic cycles. We cannot predict the future, but we are determined to shape it. Our deepest thanks go to the more than 72,000 alumni, parents and friends who, sharing our vision, contributed to Stanford’s success last year and made an investment in the future of this remarkable university. Your gifts are more essential than ever in ensuring Stanford’s commitment to providing the best in education, today and tomorrow.

Leslie P. Hume
Chair, Stanford University Board of Trustees