"Foundations" - A Q&A with Laurie Hoagland
May 01, 2007
"Foundations" is an occasional series of informal question-and-answer sessions with employees of The William and Flora Hewlett Foundation to let them explain their work. Laurance Hoagland, Jr.-"Laurie" to all who know him-is the chief investment officer of the Hewlett Foundation. Before joining the Foundation in January 2001, he was president and CEO of Stanford Management Company, Stanford University's now $20 billion investment arm. In addition to his work at the Foundation, he is chairman of the Investment Advisory Committee at the Howard Hughes Medical Institute and advisor to the investment committees at the California Institute of Technology, the David and Lucile Packard Foundation, and the Kamehameha Schools in Hawaii, among many other roles.
Under his leadership, the Hewlett Foundation's investment assets have grown to $8.3 billion. In 2006, his investment team's return of 20.7 percent was the greatest of the country's ten largest foundations and made the Hewlett Foundation the nation's fifth largest private foundation.
He graduated from Stanford University in economics in 1958; received a B.A. in philosophy, politics, and economics from Oxford University in 1960; and earned an M.B.A. from Harvard Business School in 1962.
Would you tell the story of how the Hewlett Foundation went from being a one-stock house to having its current diversified portfolio?
The principle of diversifying our investments was established early-in the 1980s, when a friend of Bill Hewlett's, Arjay Miller, the former dean of the Stanford Business School, was the driving force behind the investments here.
To invent a docudrama, I bet one day Arjay put his arm around Bill Hewlett and said, "You know, Bill, HP is a great company, but that doesn't mean that the stock always is a great stock." And Bill said, "I get it."
The decision was made to invest in alternative investments: private equity, real estate, and absolute return funds, which are mostly hedge funds. It worked pretty well. In 1994 the Foundation committed $3 million to $10 million in each of three venture capital investments. Two of them returned about a quarter of $1 billion in profits each, and the third somewhat less. The single biggest winner was eBay.
What did the Hewlett Foundation's investments look like when you arrived, and how did you change them?
When I came on board in January 2001, the investments were still a work in progress. We were a $3 billion foundation. Our endowment included $1 billion in harvested profits from those venture capital investments.
Then, the second week I was here, Bill Hewlett died. So suddenly we had another $4 billion in Hewlett-Packard and Agilent stock coming our way and were again about 60 percent invested in those stocks. So we developed a plan to gradually diversify over four years. And we did it in three. It was tough because that was the year the tech bubble burst, and we were watching value disappear before our eyes. When finished, HP and Agilent were about 5 percent of our portfolio. And we decided to keep that to remind us of how we got to this dance.
Can you tell us how the investment team goes about its work?
Our team has two jobs. We don't make individual investment decisions and manage investments in-house. Our skills really are in developing investment policies and identifying the best outside managers for those investments.
Today, the targets for alternative investments-private equity, real estate, and absolute return hedge funds-are 50 percent of the portfolio, up from the 20 percent target set back when we started with them. We're not quite there yet. But that part of the portfolio is much larger and more diversified than before. When we commit to private equity or a private real estate fund we do it with a great deal of care because typically it's a seven- to ten-year commitment.
Setting the asset allocation policy has a huge impact over time, but we probably spend 5 to 10 percent of our time on it. The rest is spent picking the right outside investment managers and then working with them.
Last year the Hewlett Foundation's assets grew more than those of the nation's largest foundations. What was the key to our success?
During the last two years our alternative investments have been the stars. The fact that we have a heavy weighting in those areas really helped. And our managers in those areas did better than is typical for those investments.
To make informed investment decisions I imagine you need to read widely. Can you tell us about the reading habits that inform your decisions?
In investment, you can never read enough, you can never learn enough, you can never know enough. Almost any kind of information can be relevant to picking investments. I read the New York Times, the Wall Street Journal, and the Financial Times every day. And I read the Economist pretty thoroughly. I shouldn't admit this but I've been a subscriber to the Economist for forty-eight years.
And we get a significant flow of information over the Internet. We get a weekly summary from the Eurasia Group, which has people around the world and sends out daily and weekly updates on geopolitical and economic developments. And we get a daily one from Bridgewater, our currency manager. There are others.
I'd like to think we benefit from the other boards I sit on. I hope I bring helpful information and opinions to them, and it's useful to me to hear how a lot of smart people are dealing with their investment problems. And of course there's always the benefit of the Hewlett name. We can call up brilliant economists at Stanford and invite them in for a chat.
And what do you think about the current debate about social screens for foundation investments? Are there investments you wouldn't make because of social considerations even if they promised a good return?
That's a whole conversation in itself. The short story is that the Hewlett Board has asked us to recommend what approach we should take. We hope to make our recommendations in June.
Social investing is a huge area with all kinds of approaches. There are proxy votes, positive screens, negative screens, double bottom-line approaches that consider the impact on society of an investment, and on and on.
And there are all kinds of causes you can try to reinforce or discourage, like the old sin stocks-alcohol, tobacco, and gambling. Then there are defense products and all those that affect the environment. There's no way any one fund could further all our goals, so you need a logical way to pick approaches that support the work that the Foundation does. So any social investment actions we take are likely to be ones that advance key priorities of our grants teams.
Right now we don't have formal screens, but there are some kinds of investments that we just steer away from. Those are rare occasions. We'll see what bubbles up from discussion of policy.
What are the prospects for the American markets in the next year or so, and where to you see the biggest opportunities globally?
We are not comfortable making big bets on where markets are going. The chances we'll be right, if we're good, are about 55 or 60 percent of the time. And that means we'll be wrong 40 or 45 percent of the time. So we don't make big bets on our opinion about a single market variable.
The exception to that is when you think things are getting totally crazy. When I was at Stanford in 2000 we sold every dot.com stock we could get our hands on. As of March 2000 you would have said, "Laurie, you idiot, everything you sold has gone up." A year later-thank God we sold. That was an example of a situation that was so extreme that you can make a big bet and be confident that you'll eventually be proven right.
Most of my personal investments are in long-term holdings and index funds. And that's despite the fact that I was a stock picker for twenty-one years and compiled a record for picking winners that was among the best. I don't try to pick stocks unless I'm doing it full time.