Tellus C-SocPhil releases new report on endowments and the financial crisis
C-SocPhil report documents social costs and systemic risks of the Endowment Model of Investing.
View the report here: http://www.tellus.org/publications/files/endowmentcrisis.pdf
BOSTON — A new report, released by the Center for Social Philanthropy at Tellus Institute, demonstrates the consequences of colleges and universities placing an increasing share of their endowments into high-risk investments, including derivatives, hedge funds, private equity, commodities and other “real assets.”
During and after the recent financial meltdown, the influential “Endowment Model of Investing,” pioneered by Harvard and Yale universities and widely emulated by other endowments and institutional investors, destroyed tens of billions in endowed wealth at colleges and universities, up to 30 percent of endowment value at some of the wealthiest schools.
It also contributed to the magnification of systemic risk in what economists and policymakers have called the “shadow banking system,” a weakly regulated, highly fragile global constellation of institutions deploying capital outside of the regulated banking system in ways that have magnified systemic risks in the capital markets.
The hardship caused by these measures has rippled out in the form of lasting job losses, stalled construction projects, and local business downturns in college communities that used to be secure havens of employment and economic resilience.
“While much attention is rightly being paid to the role of for-profit financial institutions in provoking the recent financial crisis in the weakly regulated shadow banking system, the role of nonprofit institutional investors in heightening risk in the capital markets requires much closer scrutiny as well,” said Dr. Joshua Humphreys, the lead author of the report and Senior Associate and Director of the Center for Social Philanthropy at Tellus Institute in Boston. “The data we analyze in the report make clear that the Endowment Model of Investing is broken and needs to be greatly overhauled. Endowments need to become much more resilient to market volatility, and colleges should reclaim their historical role as nonprofit stewards of sustainability, both in their investments and in their local economies.”
The report examines six privately endowed New England colleges and universities—Boston College, Boston University, Brandeis University, Dartmouth College, Harvard University and the Massachusetts Institute of Technology—as case studies for exploring deeper connections between educational endowments and their impact on our institutions, our communities, and our economy. Even after the crisis, these six schools control nearly $40 billion in endowment assets, more than 12 percent of the roughly $310 billion held in college and university endowments nationwide at the end of FY 2009. They are among the largest employers in their communities in the Boston metropolitan region and the Upper Valley of western New Hampshire and eastern Vermont.
The report raises questions of weak oversight regarding how the high-risk, high-return Endowment Model is being implemented at the schools in this study. It documents the rise of highly compensated, Wall-Street-style chief investment officers as powerful figures on college campuses. It questions colleges’ disproportionate reliance on trustees and investment committee members drawn from the business and finance sector—including the very sectors most involved in the recent economic meltdown. It also spotlights potential conflicts of interest that could arise when the investment firms of trustees from the finance industry provide investment management services to the very colleges on whose boards they serve. The report also calls for greater transparency in endowment management, especially given the substantial public subsidies colleges and universities receive in the form of property-tax breaks, tax-deductible endowment gifts, tax-exempt investment income, and low-interest, tax-exempt bonds.
The report points out that in addition to layoffs and reductions in force on campus, the sudden postponement of planned construction projects due to short-term endowment losses, most notably Harvard‘s ambitious Allston Initiative, translates into lost jobs, broken promises, and diminished opportunities for community economic development. Based solely on potential earnings from the anticipated jobs that fail to materialize from the Allston delays, the report conservatively estimates that more than $860 million in expected economic activity will be lost over the next three years.Longer delays will deepen community economic losses. The report notes that proposals to cut back educational programs and to close institutions such as the Rose Art Museum at Brandeis University have weakened community cultural development in less readily quantifiable, but no less important ways.
View the report here: http://www.tellus.org/publications/files/endowmentcrisis.pdf
Media contact: Joshua Humphreys, jh@socialphilanthropy.org or (617)575-9660.
