Upin—formerly of the Stanford Management Company and Sequoia
Capital and now Chief Investment Officer at Menlo Park-based
Makena Capital Management—spoke with ai5000 in defense of the
much-maligned endowment model.
Eric Upin
Guiding an Endowment Vessel
To answer your question directly: The genesis of Makena is twofold, the first being an appreciation
of the endowment model, the second being that, while at Stanford, a number of outside entities
wanted access to the investment management of the University. The University turned the second
down as impractical. The endowment model, as we see it, is for very long-horizon pools of capital,
and must meet three objectives: support of current operations through payouts, maintaining
purchasing power for tomorrow’s generation, and growing the asset base. The first two goals are
often diametrically opposed to each other, which presents a challenge. This challenge is met with
certain targets in mind: a 5% payout, 3% to 4% inflation, and 2% to 3% growth per year. You need
a substantial amount of equity factor risk to achieve this—fixed income alone cannot meet this
objective. So, a global, multi-asset-class portfolio with a true focus on diversification is the goal:
If you have patience and tolerance for lower levels of liquidity, you can, historically, meet these
demands. Endowments did well because they identified talent in areas—venture capital, private
equity, hedge funds—that had barriers to investment and information, as well as a premium for
illiquidity. With liquid equities, you may not be able to beat the markets over a 20-year period;
in these relatively illiquid markets, with skill, one can—and endowments, historically, have. Even
considering 2008, the endowment model outperformed. Liquidity issues: yes, liquidity is a material
and incredibly important issue. Many were surprised at how quickly illiquidity crept in during 2008.
However, we view this as operator error more than a problem with the endowment model itself.
Portfolios got overly illiquid, and operators lost the ability to steer the ship. The endowment model
after 2008? We still believe it to be a valid model, but it’s like building a ship that must be in the
ocean for the next 100 years: you’d want it to be triple hulled, with the best navigation tools. What
happens when a sovereign fund throws $100 billion into this model? The challenge will be where
to put assets. When substantial amounts of capital flow in, it can change the landscape—and can
change returns for the worse—but the range of investment options also is growing by staggering
proportions. So, more capital, but more opportunities, and endowments, if we look at them as
ships, can never flee to harbor in rough seas; they must be able to navigate and predict conditions
ahead. Our view of conditions, then, is a defensive one. We expect the seas to be choppy, but the
endowment model is the right one to withstand them. ”
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