Strategy + Execution + Governance = Alpha

He is the man Stanford University rely on to manage their assets. Twenty per cent of the University’s annual budget (USD 1.4 billion in 2021) comes from the more than USD 40 billion in endowment assets responsibly managed by Robert Wallace, CEO of the Stanford Management Company. Wallace faces the double challenge of meeting these expectations while ensuring that he can continue to do so in the future. He was particularly successful in the past fiscal year (ended 30 June 2021), with returns of more than 40 per cent. Yet even setting aside this exceptional year, the results of his efforts are clear, with a return of 14.8 per cent p.a. over five years compared with an average of 11.8 per cent across all US universities.

According to Wallace, the right strategy, execution and governance provide the building blocks for this success. Wallace used an anecdote from the 2008 financial crisis to illustrate what can happen when these building blocks are not in place. In December that year, the University of Chicago’s Board of Trustees forced its Office of Investments to sell half of the endowment’s entire equity portfolio – at a point when prices had already fallen considerably. Wallace cited this as a clear example that “when portfolio decisions alternate between euphoria and panic, that’s a sign of poor governance”. It was a very different story at Stanford during the coronavirus pandemic in 2020. Wallace, understandably, never thought that prices would recover as quickly as they have. Yet in keeping with Stanford’s counter-cyclical strategy, he used the drop in prices to make new investments in the equity markets, explaining that “we bought everything that had fallen by 30 per cent”. The aim of this exercise is to always return to the previously-defined asset allocation by constantly rebalancing the portfolio. As Wallace pointed out, it is “not a sensible investment strategy to expect the end of the world”. The reward for his discipline was a set of annual financial statements showing the exceptional returns already mentioned.

That leaves execution. Stanford work hard to ensure that they always invest in the top quartile, or better yet, the top ten per cent of the best funds. The science of investing meets the art of investing wherever these partners are found. This is no easy task, as Wallace emphasised with a quote from Thomas Edison: “Opportunity is missed by most people because it is dressed in overalls and looks like work.”

If all this reminds you of the Yale Model championed by long-time Yale University David Swensen, who passed away last summer, there is a good reason for that: Wallace was one of Swensen’s students, received support and encouragement from him and ultimately became one of his good friends. Perhaps it was this personal proximity that enabled him to transfer the Yale Model to Stanford so successfully, Something few people have managed to do. Or as Wallace put it in the words of US baseball idol Yogi Berra: “In theory, there is no difference between theory and practice. In practice, there is.”