University Endowment Sued for Under performing the S&P 500 | Hacker News Reader

University Endowment Sued for Under performing the S&P 500

institutionalinvestor.com

51 pointskamaraju72 comments

Beating the S&P on a return basis is totally irrelevant. Almost any diversified portfolio will have a lower absolute return than the S&P and a higher risk-adjusted return. If a school's endowment had the same return and volatility of the S&P 500, that would be quite disturbing.

An endowment should be diversified across asset classes (metals, real estate, equities, bonds) and strategies (PE, hedge funds, VC, etc) and have a moderate but stable return stream.

A core component is usually the S&P 500, with the rest invested in assets and strategies that have low correlation to the market.

We don't know the volatility of the endowment, so maybe it is just shitty, but having a lower return than the S&P is to be expected. And if it did match the S&P, that would indicate to me that perhaps too much risk is being assumed.

Non finance people make this mistake all the time, thinking that return is something anyone cares about. Return is synthetic, in that any positive return can be trivially leveraged up to whatever number you desire. Because of this, what matters is the Sharpe ratio, because it gives you a blueprint of sorts: it tells you how your volatility and return will scale with leverage.

>If a school's endowment had the same return and volatility of the S&P 500, that would be quite disturbing.

Why? I understand why this is the case for smaller investors like individuals, but for a school endowment isn't the sheer size of the endowment and the theoretically near infinite investment time horizon part of the risk management? Some years or even some decades it will be down, but they aren't investing with the intent to spend any sizable portion of that money anytime soon.

Maybe for somewhere like Harvard that has an absolutely ludicrously sized endowment, but a more normal university can't really afford to absorb losses like that.

They need to withdraw from the endowment every year to pay expenses. If the stock market plunged and then they locked in losses by selling to pay expenses, they would run a real risk of having long term losses.

I’m on the investment committee of the board of a small school with a $300M endowment, and every year 4% is budgeted to be withdrawn to go towards school expenses.

I am new, but I find it silly they pursue this very active management, diversified across tons of different (managed) funds. I feel like they should be putting everything in whatever has the highest long term return (they have access to sequoia funds and those have consistently beat the market, yet only 1-2% goes to them), regardless of illiquidity, since their time horizon is infinite. And use borrowing to handle yearly distributions.

But due to the management structure (40+ board members, 8 on the investment committee, a team of 6 professionals who manage the money), this sort of strategy would never be considered “prudent” enough to make it through all the approvals needed.

Even most Ivey League endowments haven't beaten a 60/40 portfolio over the last ten years (the S&P 500 has been on a tear):

* https://www.markovprocesses.com/blog/ivy-league-endowments-f...

A 2018 study:

> Dahiya and Yermack found that the performance of the typical endowment fund [in 2009-2016] was so poor that it would have earned substantially higher returns if its trustees had followed a simplistic investment strategy of holding 100% Treasury bonds and taken no equity market risk whatsoever.

* https://www.etf.com/sections/index-investor-corner/swedroe-w...

Study:

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3291117

Harvey Mudd? 300M at a small college is actually a quite large endowment, and HMC is tiny even by small college standards.

The institution I work with has less than 100M and is on the larger side of small. If we had 300M and a faculty/facilities layout built for ~700 instead of ~3000 then life would be completely different.

I agree with you in general -- both that the active management is dumb and also the most probable reason small colleges pursue this strategy. But HMC can probably afford investment strategies that most others cannot.

Yeah, but it seems like any sort of “permanent fund” where the timeline is infinite should be doing really aggressive, long-term, illiquid stuff, right? Investing like a 22 year old. And then any liquidity needs you need for annual distributions you handle via loans.

I feel like I could make an investment product where I pay you 4% of whatever you invest, per year, forever... but you can never get your original investment back. It seems like this would be a product all endowments/permanent funds would use. And then I just put it all in the s+p 500. I guess I’d need to be the government for endowments to trust me forever though.

Paying 4% of an initial investment would over time become a relatively worthless amount of money due to inflation. You could get about that return by just buying a ETF or mutual fund that focuses on dividends without having to give up the value of your principal (which would also grow over time).

Corporate debt often looks like what you're describing. The principle is rarely called and the loan can be extended virtually forever (unless the bank decides you're too risky).

There are certainly other ways a school could run its endowment, sure. In fact, the way things are usually done is perhaps far from optimal.

But you don't want to that guy who gets fired because you did some crazy stuff. These institutions are perversely risk adverse, and the investment through consensus model makes it hard to do anything different.

> I feel like I could make an investment product where I pay you 4% of whatever you invest, per year, forever...

It seems that you have heard about the "four percent rule", but probably have not needed to actually look up the details. It is from something called the Trinity study (also see Bengen and recent Wade Pfau) and there are important details about it:

> The 4% refers to the portion of the portfolio withdrawn during the first year; it is assumed that the portion withdrawn in subsequent years will increase with the consumer price index* (CPI) to keep pace with the cost of living.

* https://en.wikipedia.org/wiki/Trinity_study

* https://en.wikipedia.org/wiki/William_Bengen

Further it is/was focused only on thirty-year retirement time horizons, not the infinite-horizons of perpetual institutions. It is probably not even appropriate for the 'retire early' (FIRE) movement that is somewhat popular in recent years:

* https://www.pwlcapital.com/the-4-rule-for-retirement-the-tri...

* https://www.youtube.com/watch?v=3BScK-QyWIo

The whole point of an endowment is that it is supposed to be an ongoing investment and the percentage withdrawn every year is minimal. Over a long enough time line does "locking in losses" mean anything when averaged out with all the gains? You can look at the best and worst rolling averages for various investments here[1]. The worst 20 year span for the S&P 500 is better than the worst 20 year window for bonds.

https://www.thebalance.com/rolling-index-returns-4061795

Depends on whether you measure the profit and loss on a first in-first out basis, which is the norm, or not. If you measure it as FIFO then it's very unlikely that you are locking in any losses and are just cashing out earlier gains.

Cash flow.

Endowments are used to fund operating expenses.

At all but the richest institutions, you need to think of the endowment more like the retirement fund of a retiree.

You can't just not pay your faculty / demand 50% more tuition / defer fixing a roof leak for a few months just because you were down in Q2, even if you expect to be back up in Q1 of the next year.

If you expect to have the money at a future date and you can secure a low interest rate, it makes much more sense to fund operating expenses with debt than lowering future returns. Certainly for the past decade a large institutional investor with significant assets like a university would have no issue securing an extremely low interest rate.

Sure. Two things:

1. Almost all colleges and universities use debt to finance capital projects.

2. At least some endowment distribution is tied to restricted gifts.

Thank you. The fund manager's comments suggesting that the index funds are unnecessarily risky make sense now.

The original article kind of made it sound like the fund invested in stocks and still managed to underperform the stock market. If you draw that assumption, it makes this sound like an open-and-shut case of negligence.

> An endowment should be diversified across asset classes (metals, real estate, equities, bonds) and strategies (PE, hedge funds, VC, etc) and have a moderate but stable return stream.

Over the last ten years, all the fancy-pants portfolios that Ivey League endowments used have generally under-performed a 60/40 portfolio:

* https://www.markovprocesses.com/blog/ivy-league-endowments-f...

* https://www.institutionalinvestor.com/article/b1hlc1hjfsbwfq...

Dartmouth has matched, Yale has beaten such a portfolio by 0.6%, and Princeton beaten by 1.1%.

We've had over 15 years of SPIVA keeping track of active management performance, and over such a time period most active managers can't beat market returns:

* https://www.ifa.com/articles/despite_brief_reprieve_2018_spi...

And if you're not one of the top schools:

> Dahiya and Yermack found that the performance of the typical endowment fund [from 2009-2016] was so poor that it would have earned substantially higher returns if its trustees had followed a simplistic investment strategy of holding 100% Treasury bonds and taken no equity market risk whatsoever.

* https://www.etf.com/sections/index-investor-corner/swedroe-w...

Dahiya and Yermack:

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3291117

This is from a sample of more than 29,000 endowment funds drawn from U.S. Internal Revenue Service filings. Of course they do note:

> Our performance results must be viewed in the context of the unusual market behavior during our 2009-2017 sample period […].

The paper was updated in March 2020.

> > Dahiya and Yermack found that the performance of the typical endowment fund [from 2009-2016] was so poor that it would have earned substantially higher returns if its trustees had followed a simplistic investment strategy of holding 100% Treasury bonds and taken no equity market risk whatsoever.

As a non-expert this intrigued me so I found an online calculator for that period (https://dqydj.com/treasury-return-calculator/) and was confused when it showed an annualized return of 1.72%.[1]. But then I read the actual paper where they make it clear their "simplistic strategy" is investing in a "CRSP 10-Year U.S. Treasury Bond Index". (See page 10 of PDF at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3291117)

Digging further, as explained on this bond index calculator, https://portfoliocharts.com/bond-index-calculator/, a bond index fund uses mechanical rules, similar to an equities index fund, for buying and selling bonds, making money on changes in the market price, which can be greater or lesser than the nominal coupon return. IOW, such an index isn't simply buying and holding onto treasuries.

If you download the spreadsheet from the above link (the calculator is a spreadsheet) you'll see that YoY swings are huge, ranging from -4.5% in 2009 to 17.5% in 2011 for 10-year treasury index.[2] Those very good years are why a treasury bond index can achieve such amazing returns over longer periods--greater than 2x the nominal + reinvestment return, without using derivatives for leverage.

Now, I initially assumed the YoY bond index returns would be negatively correlated with equity returns. That's the point, right? But that doesn't seem to be the case; rather, it looks like a mixed bag. Here's the YoY returns of the example treasury bond index as compared to the S&P 500 (from https://ycharts.com/indicators/sp_500_total_return_annual):

         bond  | equity
  -----------------------
  2009 | -4.5% | 26.46%
  2010 |  9.6% | 15.06%
  2011 | 17.5% |  2.11%
  2012 |  4.8% | 16.00%
  2013 | -6.9% | 32.39%
  2014 | 10.3% | 13.69%
  2015 |  1.8% |  1.38%
  2016 |  1.6% | 11.96%
  2017 |  3.2% | 21.83%

On their face the years 2010, 2014, 2015, and possibly 2012 don't look negatively correlated. Maybe they are for some technical reasons, but it makes me skeptical about the degree to which such a bond index fund hedges equity risk.

As a total layman in this domain but with some experience pouring through these sorts of academic research notes, what this tells me is that the Dahiya and Yermack paper is interesting but hides some significant assumptions and, presumably, some pretty deep theoretical disputes within the academic and investor communities.

[1] 1.72% is for January 2009 to January 2017. For June 2009 to June 2017 the return shown is 2.75%. That suggests we should be a little skeptical about the effects of the starting and stopping points of any analysis.

[2] AFAICT, actual CSRP models and data are proprietary. The calculator and historical returns are based on that author's own model. (EDIT: Table A3, page 62 of the Dahiya and Yermack paper give the benchmark returns. I'm just eyeballing them, but the 10-year treasury figures seem to match up well with the returns from the portfoliocharts.com spreadsheet.)

Ben Carlson covered this last year:

> Most investors assume you want to own negatively correlated investments that move in opposite directions. But what you really want is assets that have a positive expected return profile with correlations that change over time depending on the market environment.

* https://awealthofcommonsense.com/2019/07/26793/

The equity-bond correlations have see-sawed between +0.6 and -0.6 over the decades:

> Since 1945, the S&P 500 has been down in 16 out of 74 years, with an average loss of -11.7%. In those down years, 5-year treasuries were positive 15 out of 16 times, with an average gain of 6.2%. The last time stocks and bonds were down in the same year was 1969, when the S&P fell more than 8% while 5-year treasuries were down less than 1%.

* Ibid.

* https://awealthofcommonsense.com/2016/08/do-stocks-diversify...

And more generally on correlation:

* https://awealthofcommonsense.com/2014/04/lesson-portfolio-co...

People have won Nobel Prizes (1952) and earned PhDs studying this topic:

* https://en.wikipedia.org/wiki/Modern_portfolio_theory

For most people, most of the time, the best thing one can do is put away a little every month:

* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...

With some portion going to bonds, rebalancing semi-regularly:

* https://www.forbes.com/sites/investor/2010/12/17/the-lost-de...

Isn't sharpe invariant to leverage? If I lever up a position 2x my return doubles as does the volatility (StdDev) of the position. Metrics like alpha are better able to tease out if a portfolio is simply levered to a market factor.

You can’t calculate sharpe for a portfolio that includes private investments (PE or VC). Even if you trust the marks - big if - the returns are reported quarterly or at best monthly, and the marks are often unchanged creating a fake effect of a “zero vol” investment

Sharpe is mostly considered invariant to leverage, but it's not strictly true. Volatility drag starts to eat more and more into your returns as you lever up.

> Non finance people make this mistake all the time, thinking that return is something anyone cares about.

No, return is the whole point of investing. If it wasn’t something anyone cared about, you’d be better off holding a stack of federal reserve notes instead and spending some on your favorite desert because no one cares about the return including the people suing the university endowment. Finance people have such a funny way of using theoretical calculations to confuse themselves out of profits.

The reason for investing is to produce the highest returns within a predefined period of time.

Over 30 years, an endowment that makes 2% higher returns than another endowment will have roughly TWICE as much money as them. That 2% is huge!

You don’t need to be a Katherine Wood to do this. One way to consistently outperform is to pick high performance stocks and avoid (or short/buy puts on) low performance stocks. Try for a moment picking which of these are the better to invest in? Amazon Vs. EBay, SalesForce vs. Oracle, NVidia or AMD vs Intel, Tesla vs Toyota, IBM vs any modern tech company. As a stock picker, you only need to be right 51% of the time to beat the market so if you got 3/5 of the above right, congrats you might be smarter than a university endowment manager. You don’t need to read a 10K or take a finance exam to know that Amazon is going to crush EBay, Salesforce is going to skip along past Oracle, Tesla is going to blow past Toyota, and IBM is going to underperform against any tech index. It’s been that way in the past and barring an act of God or congress, it’s going to continue being that way. Again, you only need to be right 51% of the time to beat an index.

Maybe you don’t have a tech background. Maybe you have a medical background and can pick biotechs. Or maybe you have a grandson or granddaughter. They should be able to pick 2 out of 3 of these out easily: Snapchat vs Instagram (Facebook), Chipotle vs McDonald’s, Netflix Vs. Redbox. Have I made my point yet that making a high return isn’t as complex as finance people want non-finance people to think it is?

Okay but what if your stock picking stills suck? Or after 5 years of stockpicking, you lose your edge but still want to keep your cozy job. What can you do? If you know how to wield options, you can create a synthetic position on a commonly traded index like SPY(S&P500) or QQQ(NASDAQ 100). Hopefully you picked QQQ instead because it has more tech companies and Tesla while SPY has more COVID-impacted companies and will have to purchase Tesla soon. That would’ve earned you a full 32 basis points (32%) more and will continue in the near term to earn you more —- but maybe you didn’t pick it. You can create a synthetic position on your favorite index benchmark with 2year ITM LEAPs by selling a put and buying a call at the same strike. Doing this only deploys 15% of your capital while having the same effect as deploying 100% of your capital on that index. This means you can use all that extra cash sloshing around in your account to buy something that is highly liquid, is low risk, and appreciates or pays a dividend. Bond ETFs such as the ones by Vanguard fit the bill here nicely. And boom, you’re out performing the benchmark by 1%, 2%, or 3%, depending on the bond duration. Also you can sell your usefulness to the university by letting them know that their portfolio has a lower volatility than the index due to the bonds going up if the stock index options go down which steadies the ship.

Some of these large asset managers are awful. Last time I was looking at the people managing California Public Employee Retirement System fund, and it was making abysmal moves all over the place. I felt sorry for the people with their savings there.

There's worse: https://edmontonjournal.com/news/local-news/aimco-risk-strat...

CalPers had returns of 4.7%, 6.7%, 8.6%, and 11.2% for the past 4 fiscal years. This is better than a 60/40 portfolio, which doesnt seem unreasonably conservative for a pension fund to me. Of course in hindsight you can see how they could have done better, but they certainly could have done worse.

From the article, it appears that the suit hinges on a claim that “The CU Foundation has underperformed the S&P 500 fund by approximately 5.49 percent per year from 2010 to 2019.”

Does anybody have experience here? Is this an actual case? It seems kind of easy to cherry-pick historical dates that some investing body could have allocated resources some other way.

It's worth noting that he does have skin in the game: he's donated $5M to the foundation over the years, but isn't that kind of the risk you take by giving your money over to someone to manage? That they might make choices that you might not?

Not a lawyer, but I doubt it's a case. Endowments have much longer investment horizons and typically lower risk appetite that wouldn't typically have an investment policy tilted towards 100% equities. They likely have a fair amount of investment in fixed income, which is always going to under-perform equities in the long run.

That said, ~5.5% below the market every year is a pretty shitty result, at least worth putting someone's feet to the fire over.

Attempting to bring the suit is likely itself just a smear tactic, to apply pressure to fire someone.

He is a former chairman of the fund, so it's definitely meant as a slight. https://businessden.com/2020/07/19/former-chairman-donor-sue...

> Endowments have much longer investment horizons and typically lower risk appetite that wouldn't typically have an investment policy tilted towards 100% equities.

That does make some sense, but actually endowments typically invest quite a bit in in riskier asset classes. From https://caia.org/aiar/access/article-1160:

> The average US endowment fund held roughly 70 per cent in traditional asset classes (public and private equity, bonds and cash) with the remaining 30 per cent invested in alternative assets.

Alternative asset classes basically means "anything other than stocks and bonds", and includes stuff like derivitives, commodities, PE deals, venture capital, etc. And CU's investment in alternative asset classes is called out explicitly in the complaint.

So I don't read this as a complaint that CU is playing too safe, it's that they made too many risky bets, and lost.

I'm not sure that makes the law suit any more viable, but "the endowment gambled away my donation" is a much more sympathetic complaint than "the endowment sunk my donation into bonds instead of gambling it like I'd hoped"!

The alternative assets are less risky, because they have less market exposure, and when uncorrelated (or less correlated) return streams are mixed together, the volatility of the portfolio is reduced.

It's very common that a shitty investment with high volatility and low returns can actually improve the risk adjusted returns of a portfolio. Like gold, for example.

Also, hedge funds are significantly less risky than holding the S&P 500, since most funds have less than 100% net long exposure. And market neutral funds have 0% net long exposure.

That's what the marketing department says. The actual returns paint a rather different picture.

> The alternative assets are less risky, because they have less market exposure

If you're including PE in there, you are way off base. According to the assumptions in BlackRock's Aladin platform, global buyout has an equity beta of something like 1.6.

I mean, that's just one, old, moderate sized fund. I couldn't tell what PE's total beta exposure is, but I would unsurprised if the variance between different funds is very, very, large.

Moreover, beta doesn't capture the whole picture. By any chance do you know what the funds correlation to the broader equity market is?

That is their assumption for global buyout as an asset class. You can grab their allocation assumptions at [1]. There is a "Download data" button on the page with the assumptions for a variety of base currencies.

You can also back out a ballpark beta from the MM theorems and what we know about company leverage post LBO. See [2] foot note 6.

[1] https://blackrock.com/institutions/en-us/insights/charts/cap...

[2] https://www.aqr.com/Insights/Research/White-Papers/Demystify...

Thanks, I thought you were talking about the global buyout fund. Will check it out. AQR and Blackrock do really great stuff

A 2014 Vanguard research paper:

> Two important observations emerge from the figure. First, large endowments have clearly generated strong excess returns, but the majority of their success occurred during the early and mid-2000s. Second, as small and medium endowments ramped up their allocations to alternative investments over the ten years through June 2013 and as more investor money has flowed into alternative categories such as hedge funds, positive excess returns have not been forthcoming. Unfortunately, small and medium endowments did not participate in the early success of alternative investments realized by their larger counterparts, and recently—after years of increasing their exposure to alternatives—they have trailed the return of the 60% stock/40% bond benchmark by larger gaps than at any point in the full 20-year period.

* https://www.vanguardcanada.ca/documents/assessing-endowment-...

There seems to have been a few 'golden years' for alternative assets at the time of publication.

Curious to know how the years 2014-2020 have treated them. A more recent 2018 study:

* https://www.etf.com/sections/index-investor-corner/swedroe-w...

We don't know what is their risk profile.

The goal should never be to beat the market, but to beat the market relative to risk exposure.

I don’t doubt though that a lot of money is wasted on fees and salaries can be preserved via passive investing.

Picking the previous decade in a market that has mostly simply gone up is hardly cherry picking. The problem with choosing simple funds such as the plaintiff's example of the Vanguard S&P 500 Index Fund is that selection of such leaves little room to offer political benefits to "being on the endowment committee". The rebuttal by the current endowment board that they have too much money to risk it in one asset class is trivially overcome by a grossly simple percentage of bond allocation - but such simple investment approaches don't keep dozens of active managers engaged.

It isn't possible for bond markets to collapse at the same time as stocks?

It happened during Coronavirus, but historically bonds have been counter cyclical. Some are worried that the paradigm has changed, and that bonds are no longer uncorrelated.

If this is true, it has large and significant ramifications on optimal portfolio construction.

> Some are worried that the paradigm has changed, and that bonds are no longer uncorrelated."

I argue that this is what has changed:

"Treasuries have also benefitted from the wider adoption of non-cash collateral since the crisis. Just over $1.8 trillion in cash was posted as collateral against loans and other transactions in 2008, with $1.3 trillion coming in the form of securities and other instruments, according to data provider IHS Markit. A decade later, those positions have inverted, with non-cash collateral balances standing at $1.6 trillion, compared with $870 billion for cash."[0]

and

“If an institution wishes to use [Treasury] assets for financing, to gain yield through lending them out or to meet their HQLA requirements, putting the securities into triparty is the most efficient way to achieve those goals”[0]

Since treasuries (and bonds in general through collateral transformation, emphisis on "non-cash collateral" above meaning not just treasuries) are being used to finance more risk asset purchases.

[0] https://www.bnymellon.com/us/en/what-we-do/markets/aerial-vi...

> It happened during Coronavirus

I don't know about that:

> The Nasdaq 100 ETF (QQQ) is up an astonishing 25.5% this year during a pandemic and that’s including a 29% peak-to-trough drawdown. But the long-term treasury ETF (TLT) is up 27.3%.

* https://awealthofcommonsense.com/2020/08/why-would-anyone-ow...

Though the article goes on to say the primary reason for owns bonds are:

* Bonds hedge stock market volatility.

* Bonds can be used to rebalance.

* Bonds can be used for spending purposes.

* Bonds protect against deflation.

See also his 2018 Q4 article (when the S&P 500 was in the middle of its 20% correction):

* https://awealthofcommonsense.com/2018/10/the-case-for-bonds/

If you're comparing relative returns, you need an accurate benchmark. Otherwise it's comparing apples to oranges.

Would you compare returns of a cash portfolio against the S&P500? That would be ridiculous.

I don't know the weights of this portfolio, however the article states "CU’s diversified portfolio" so I'd imagine it's more than the S&P.

> abysmal investment performance, which could have been significantly improved by simply investing in broad market U.S. equity index funds and not being over weighted in actively managed investment and ‘alternative investments,’

Everything's easier in hindsight.

This is not a question of the investment managers, but of the board of trustees of the fund. The investment managers simply execute the board's wishes, hopefully with some useful back-and-forth on how best set and do this. How the investment managers can be assessed against the goal set to them by the board. How wise the board's strategy is, is a separate question.

This seems more a request of the board to only invest in the S&P500, and to do so passively. For a large fund, in my opinion, this is folly - and this is without going into an active/passive discussion: Over the long term larger companies simply don't survive all that well. Growth and change comes from newer or reborn companies, see: FAANG, and this is equally true outside of internet companies. To stay passive in the S&P ignoring smaller companies seems short-sighted, and a university endowment should look longer, decades out.

Looking longer comes to investment strategy, which is essentially at a minimum matching future liabilities against assets. For this I'd suggest a composite of Russell 3000 instead of S&P500, an MSCI Global Index (this is complex - Anglo markets have a high level of market capitalisation vs. GDP, but in non-Anglo markets, take Germany, China) funds are mainly not raised via equity, and listed companies have a huge skew not representing the economy... or even something radically different. Something including forests at least.

I could go on but feel this could turn into a ramble. The above should be enough.

This guy sounds like an idiot. He's picking the last ten years and comparing it to the S&P? The foundation is probably more risk-averse and would probably lose less in a bear market than the S&P.

What's his theory of even having standing in the first place?

Who knows. He's a large donor, but donors have trouble suing institutions over conditional gifts. So even if he made a gift that was conditional on beating the S&P, which would be a rather extraordinary string to attach to a gift, odds are stacked against him.

Guess: he knows he doesn't have a winning case but wants to raise hell. If the fund moves to more passive management then he won either way.

He's given them money, and wants it used prudently:

> He has donated about $5 million to his alma mater and received various honors and officials designations from the university, including the chairmanship of its investment committee in the 1990s.

This story has a bit more detail: https://businessden.com/2020/07/19/former-chairman-donor-sue...

His personal basis for standing is unclear even from the more detailed article, but part of it is claims for class action standing by a group of recent students on behalf of all students of the last decade years.

He makes a good point about paying tens in millions in fees to outside investment managers. Their fees are never worth it. I would imagine the entire investment management team could be a group of 5 people with investment experience who decide how to allocate the money into different Vanguard funds. Returns would be the same, maybe higher when you take out the 1-2% that management is taking out and putting into their own pockets.

Why pay five salaries when you could follow Nevada's state pension fund management strategy and have one guy whose job description is almost entirely telling people he's not interested in making changes?

https://www.fnlondon.com/articles/nevada-pension-fund-manage...

I'm struggling to understand why a university needs an endowment at all. Every year the universities accumulate more wealth and more parasitic non-academic staff, while simultaneously raising fees and delivering less value to students (degrees no longer guarantee jobs and student loans eat an increasing share of the graduates' earnings).

Maybe it is time to confiscate these endowments and use them to liquidate student loan debts.

"Need" is a bit ill-defined; but when you're looking at endowments it's worth remembering that a lot of them are earmarked. For example, a donor might give $5M to establish a research chair; the $5M goes into the university's endowment fund but the income it earns is allocated for funding the position in question. Similarly, large amounts of money are earmarked for student financial aid.

Some of the endowment proceeds go into general revenues, to be sure; but confiscating endowments wholesale would have consequences which would probably surprise you.

I never understood it before, but I’m on the board of a small private college, and I finally understand that actually to balance the budget each year they need the revenue from tuition, annual gifts, AND a 4-5% distribution from their endowment.

To be competitive, a school has to maximize their revenue, and that includes all sources. Then they have to spend it all each year.

Interesting. Do you have any insight as to why college expenses are so high, and continuing to skyrocket?

Tuition at private colleges in the US is typically around $50,000-60,000 a year, exclusive of room and board. This seems absurd to me. And yet apparently it's not even enough to cover expenses.

Where is the money going?

After medicine, education is the most labor intensive industry. Both are very high for the same reason. Whereas in most industries improving technology allows the same number of people to be more productive, or the same amount of productivity to be achieved with fewer people, in med/ed people are specifically paying to keep the labor efficiency as low as possible.

When people pay extra to go to a school with a student-faculty ratio of 12 instead of 15, the labor cost is going up by about 20% (you need both more faculty and more support staff for those faculty). Does a 20% reduction in the number of people in a classroom allow the teacher to produce a 20% better education in the remaining students? Probably not. Especially for large intro lectures where there is little meaningful interaction between an individual student and the faculty and the lectures are generally recorded already (even pre-covid), you could easily distribute the costs over thousands of students instead of dozens without lowering quality.

While the value of small class sizes would be critically evaluated if people were paying for them on the spot and out of pocket, subsidized debt financing allows for the price to grow quickly - a person with no money who can take out a 100k student loan can now afford to go to a 25k school, and the person who could afford that 25k school can now afford to go to a 50k school, and suddenly the person with no money needs 200k to get the same education. The same happens with medicine and real estate and any other market where conventional wisdom is that you should get as much as you can afford and what you can afford is not limited by the amount of money you actually have.

Once people stop viewing class size or tuition price as useful proxies for education quality, the rapid tuition price inflation will stop and the labor costs will go down dramatically.

It’s a grift. Tuition goes up. The fraction of expenditure related to pedagogy goes down. And the university pays no taxes on its investment income.

There is an entrenched bureaucracy whose role is nothing more than self-perpetuation.

I don’t want the government micromanaging universities, but to retain tax-free status and subsidized student financial aid I don’t think it’s unreasonable that a certain percentage of budget go towards, you know, teaching students.

If they made any guarantees about profit that would be breaking securities laws, so what case could he have?

To act in the best interest of the university as a fiduciary. What kinds of evidence would be damaging to the foundation that could be dug up via the discovery phase of a lawsuit? Lots of dinners among foundation execs and the investment company, cozy emails, lack of attention to returns or fees would be the type of evidence that would probably result in some interesting articles or maybe even a change in leadership or strategy (which seems to be his ultimate goal).

Can anyone from outside the US chime in on whether the equivalent situation can happen in their country?

I don't understand how the plaintiff has a case here as there are no damages.

It seems he’s seeking class-action status and looking to define the class as all students who have attended the school in the last decade. It sounds like he’s alleging that because endowment returns were “too low” and because active management fees paid to third party investment advisers were “too high” the students have been harmed in the form of higher tuition.

Does the donor have some right that his donations be used as advertised? Could a donor sue because a charity squandered the money by spending it hookers and blow? Does poor investment stewardship resulting in the charity having 20% less money damage the donor differently from wasting 20% of the money? I’m not a lawyer, but morally I think the university is in the clear as long as their waste or arguably poor stewardship was reasonable. Did they knowingly make bad choices (especially if some kind of personal benefit/self-dealing was involved) or through an honest effort come to a different conclusion than the donor preferred?

Subjectively, I get the impression that the lawsuit is performative and the donor is trying to pressure the endowment to engage in a more modern textbook passive investment strategy. I don’t blame him - I feel the wealth management industry acts as a parasite in many cases. This case sounds like a common arrangement for a university endowment, though, so I feel it would be hard to defeat with a lawsuit. But I bet the suit gets the university a bit of a break on those fees.

Hey, I currently go to CU! Weird to click this and see a picture of our library.

All-in VTSAX is a tried and true strategy

Are you the same guy from Reddit?

Ha, I know exactly who you're talking about.

I've seen this strategy around the web on reddit and bogleheads and I appreciate the sentiment, but 2020 has made me more aware of risk than ever before.

I feel like the past decade has given investors a false sense of confidence about their stomach for risk. Especially young investors who enter the market AFTER 2008. On top of that, the extremely risky options available on platforms like robinhood make investing in 100% stocks look like a risk-averse choice.

Sure, if you're 22 100% VTSAX is reasonable. But I feel like this approach is too common given the risk involved. Staying the course with an asset allocation you can stomach is more important than potential for gains

I think the only way the US government let’s asset prices drop is if a new superpower shows up with a more in demand currency. Until then, they will do whatever it takes to keep VTSAX and real estate prices going up and to the right. The USD will probably lose value.

If you assume the above is true like me, then 100% equities for any funds not needed for 5 years is appropriate.

If you’re a university endowment you’re forever a 22 year old. You never need the money, your timeline is infinite, and you can easily borrow the 4-5% a year you distribute to your operating expenses if you have nothing liquid or there’s been a recent large market drop.

This cannot be a case... this arrogant rich twat is suing someone for not making enough money.

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