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Stanford endowment chief applies ballet discipline to investment

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Robert Wallace decided to pursue ballet after he saw the legendary Mikhail Baryshnikov perform at Washington’s Kennedy Center.

“I was 13 and the only boy surrounded by teenage girls,” Mr Wallace recalls of his early days in the dance studio. “I later told this story to David Swensen (endowment chief) at Yale, and he said, ‘That was your most important lesson in supply and demand.’”

Mr Wallace, who learned the ropes of endowment investing from Mr Swensen when he switched careers after 16 years in professional ballet, working with Baryshnikov himself, now holds one of the industry’s most prestigious jobs.

Five years into his tenure as chief investment professional of Stanford University’s $29bn endowment, one of the largest in the US, Mr Wallace has helped cement the “West Coast Ivy” into the highest echelon of institutional investment. 

The endowment regularly outperforms many Ivy League schools and landed in the top 5 per cent of US college and university endowments for its returns between 2015 and 2019, as tracked by Cambridge Associates. During the tumultuous markets of the 12 months ending June 30, when the median Cambridge Associates-tracked college endowment, gross of internal fees, returned just 1.6 per cent, Stanford earned an impressive 5.6 per cent, net of internal and external fees. 

Mr Wallace says what boosted performance and helped the portfolio recover pandemic-related losses was a disciplined adherence to either reducing or increasing allocations to asset classes, be it public equities or fixed income, whenever their share of the portfolio was straying too far off the policy target.

Mr Wallace inherited a portfolio with a large chunk of long-term investments when he arrived at Stanford. But he has taken a central role helping achieve a 29.3 per cent annual net internal rate of return from private equity fund investments made between 2015 and 2019. The return looks all the more impressive considering such funds often post weak or negative returns in their infancy.

“Every day . . . you’re making decisions that pay off five or 10 years later,” Mr Wallace says of his work at Stanford. “In some funny way, the day-to-day work is not that different than walking into a rehearsal studio at 10 in the morning, and spending the entire day trying to get a little bit better.”

Stanford Management Company

Established 1991

Assets under management $30.3bn

Employees 46

Headquarters Stanford, California

Ownership Stanford University

Since he started as chief of Stanford Management Company, the entity charged with investing the school’s assets, Mr Wallace, who is now 55, overhauled the portfolio, slashed its list of external fund managers and embedded ESG more firmly into the investment process. 

When he started, the investment office worked with roughly 300 external fund management firms. That has been whittled down to 175 and further cuts will be made in the coming years.

Mr Wallace’s overhaul was driven not just by a different preference of investment managers, but by an investment philosophy that sees overdiversification — investing with too many different fund managers — as an obstacle to driving superior returns. 

Stanford now pursues “fewer, more impactful investments”. That approach, he says, has allowed his team to build stronger relationships with its chosen fund managers.

Another change in Stanford’s investment approach that Mr Wallace shaped was the university’s new ethical investment framework, approved by the board in 2018. That approach puts ESG criteria at the centre of investment decision making.

ESG issues, Mr Wallace says, “change the risk and return potential for every company and every asset that we and our partners invest in . . . they’re central to our day-to-day work.” 

While the university’s board so far has shied away from divesting its endowment from fossil fuels altogether, Mr Wallace acknowledges investors need to consider the effect burning hydrocarbons have on climate change.

“Those externalities associated with global warming are not fully captured in the market price of the hydrocarbons themselves. If we didn’t account for that when we invest capital for the long run . . . we wouldn’t be very good investors.”

CV

Born 1965 Philadelphia

Total pay $4.4m (in 2018) 

Education 

2002 BA in economics from Yale University

Career 

2000-05 Yale Investment Office, starting as an intern and later transitioning to a senior associate role

2005-15 Chief executive and chief investment officer, Alta Advisers

2015-present CEO, Stanford Management Company

Despite these changes, he says he’s not finished remodelling the Stanford endowment. He has form overhauling portfolios.

In 2005, Alta Advisers, the London-based investment office for members of Swedish billionaire Hans Rausing’s family, hired him to rebuild their portfolio in the style of the “endowment model” — a diversified portfolio with a strong equity bias, including a sizeable chunk of investments in private equity, hedge funds and other alternatives. 

When he was tapped to be chief executive of Alta Advisers, Mr Wallace was a senior associate in Yale University’s investment office, working under the school’s longtime chief investment officer Mr Swensen, who holds a legendary status in the endowment industry.

Mr Wallace worked at Yale for five years, crossing paths with many of today’s top endowment professionals. Alumni of Yale’s investment office today sit at the helms of investment offices at the University of Pennsylvania, Princeton University and Massachusetts Institute of Technology. 

Mr Wallace joined Yale University’s investment office as an intern during his sophomore year, while pursuing a bachelors degree in economics at the school. Upon graduation, in his mid-30s, he was hired full-time. 

“They were extremely kind and courageous to give this old guy a chance as an intern,” he says of Mr Swensen and the endowment chief’s longtime right hand, Dean Takahashi, who retired from the role last year.

A large framed print of Yale’s mascot, a bulldog called Handsome Dan, still decorates Mr Wallace’s home office bookshelf, commemorating the investment office’s 2004 performance when it generated a 19.4 per cent net return.

“I carry it with me everywhere I go, every house,” Mr Wallace says of the print, laughing as he presents it via his computer camera.



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Andrew Yang; Facebook; WallStreet Bets and much more . . . 



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A carbon registry leaves polluters with nowhere left to hide

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The writer is the founder and executive chair of the Carbon Tracker Initiative, a think-tank

No one yet knows which countries will extract the last barrel of oil, therm of gas or seam of coal. But the jostling has started. Every nation has reasons to believe it has the “right” to continue fossil fuel extraction, leaving others to deal with the climate crisis.

In the Middle East, oil producers can argue that the cost of extraction is low. In Canada, they market their human rights record. Norwegians trumpet the low-carbon intensity of their operations. And in the US under Donald Trump, they touted the virtues of “freedom gas” and called exports of liquefied natural gas “molecules of freedom”.

The dilemma for governments is that if one country stops producing fossil fuels domestically, others will step in to take market share. And so the obligation to contain emissions set out in the Paris Agreement risks being undermined by special pleading.

In the UK, the furore over plans for a new coal mine in Cumbria the year that the country is hosting the UN’s climate summit is indicative of the contrary positions many countries hold. Facing one way the government says it is addressing climate change. But looking the other, it consents not just to continued extraction, but to support and subsidise the expansion of production.

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Where climate change meets business, markets and politics. Explore the FT’s coverage here 

To keep warming under the Paris Agreement limit of 1.5C, countries need to decrease production of oil, gas and coal by 6 per cent a year for the next decade. Worryingly, they are instead planning increases of 2 per cent annually, the UN says. On this course, by 2030 production will be too high to keep temperature rises below 1.5C. The climate maths just doesn’t work.

One of the problems in attempting to track fossil-fuel production is the lack of transparency by both governments and corporations over how much CO2 is embedded in reserves likely to be developed. This makes it difficult to determine how to use the last of the world’s “carbon budget” before temperature thresholds such as 1.5C are exceeded.

Governments need a tool that establishes the extent to which business as usual overshoots their “allowance” of carbon. There needs to be a corrective because the cost competitiveness of renewable energy, and the risk of stranded energy assets, has not stopped governments heavily subsidising fossil fuels. During the pandemic, stimulus dollars have been dumped into the fossil-fuel sector regardless of its steady financial decline, staggering mounds of debt and falling job count. 

This is why my initiative and Global Energy Monitor, a non-profit group, are developing a global registry of fossil fuels, a publicly available database of all reserves in the ground and in production. This will allow governments, investors, researchers and civil society organisations, including the public, to assess the amount of embedded CO2 in coal, oil and gas projects globally. It will be a standalone tool and can provide a model for a potential UN-hosted registry.

With it, producer nations will have nowhere left to hide. It will help counter the absence of mechanisms in the UN’s climate change convention to restrain national beggar-thy-neighbour expansion of fossil-fuel production.

No country, community or company can go it alone. But governments can draw from the lessons of nuclear non-proliferation. First, they must stop adding to the problem; exploration and expansion into new reserves must end. This must be accompanied by “global disarmament” — using up stockpiles and ceasing production. Finally, access to renewable energy and low-carbon solutions must be developed in comprehensive and equitable transition plans.

The choice is between phasing out fossil fuels and fast-tracking low-carbon solutions, or locking-in economic, health and climate catastrophe. A fossil-fuel registry will help governments and international organisations plan for the low-carbon world ahead.

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Hasty, imperfect ESG is not the path for business

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The writer is a global economist. Her book ‘How Boards Work’ will be published in May

Good environmental, social and governance practices take a company from financial shareholder maximisation to multiple stakeholder optimisation: society, community, employees. But if done poorly, not only does ESG miss its sustainability goals, it can make things worse and let down the very stakeholders it should help.

To be sure, the ESG agenda should be pursued with determination. But there are a number of reasons why it threatens to create bad outcomes. The agenda is putting companies on the defensive. From boardrooms, I have seen organisations worry about meeting the demands of environmental and social justice activists, leading to risk aversion in allocating capital. Yet innovation is the most important tool to address many of the challenges of climate change, inequality and social discord.

Pursued by $45tn of investments, using the broadest classification, ESG is weighed down by inconsistent, blurry metrics. Investors and lobbyists use different evaluation standards and goals, which focus on varied issues such as CO2 emissions and diversity. Metrics also depend on business models.

Without a clear, unified compass, companies that measure themselves against today’s standards risk seeming off base once a more consistent regulator-led direction emerges (for example, from worker audits, the COP26 summit and the Paris Club lender nations).

ESG is not without cost and the best hope for long-term success lies with business leaders’ ability to stay attuned to its impact and unintended consequences. For example, while the case for diversity is incontrovertible, efforts at inclusion should account for the possible casualties of positive discrimination.

Furthermore, despite ESG advocates setting a strong and singular direction for governance, organisations have to maintain their operations and value while managing assets and people in a world where cultural and ethical values are far from universal. While laudable, a heightened focus on ethics (such as human rights, environmental concerns, gender and racial parity, data privacy and worker advocacy) places additional stress on global companies.

It is often asked if advocates appreciate that ESG is largely viewed from the west’s narrow and wealthy economic perspective. To be truly sustainable, ESG demands global solutions to global problems. Proposals need to be scalable, exportable and palatable to emerging countries like India and China, or no effort will truly move the needle.

Much of the agenda is too rigid, requires aggressive timelines and lacks the spirit of innovation to achieve long-term societal progress. Stakeholders’ interests differ, so ESG solutions must be nuanced, balanced and trade off speed of implementation against the breadth and depth of change.

Business leaders are aware of the need for greater focus and prioritisation of ESG. We also understand that deadlines can provide important levers for senior managers to spur their organisations into action. After all, in the face of pressure for a solution to the global pandemic, vaccines were produced in months instead of the usual 10 years.

I live at the crossroads of these tensions every day. Raised in Africa, I have lived in energy poverty, and seen how it continues to impede living standards globally. As a board member of a global energy company, I have seen much investment in the energy transition. Yet from my role with a university endowment, I have also been under pressure to divest from energy corporations. 

Business leaders must solve ESG concerns in ways that do not set corporations on a path to failure in the long term. They must have the boldness to adopt a flexible, measured and experimental agenda for lasting change. In this sense, they must push back against the politically led narrative that wants imperfect ESG changes at any cost.



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