At an estimated $31 billion, Harvard University’s investment fund — the largest in the nation — is valued higher than the Gross Domestic Product of Paraguay, Bolivia or Jordan. That’s a lot of skin in the stock market — which is why watchful higher-ed reporters should keep an eye on how university foundations are investing, and how the value of their portfolios is fluctuating.
George Washington University’s The Hatchet reported last week that the Washington, D.C., college spent $25 million more from its endowment fund than it earned in 2011, attributed to an anemic 2.4 percent growth in the value of its investments. While it’s not unusual, or necessarily alarming, for spending from an endowment fund to outpace investment growth, the long-term hazard of such a strategy — if it becomes a habit — should be obvious to anyone who’s ever overdrawn a checking account.
How much a college foundation earns, spends and retains is easily discerned from each foundation’s IRS Form 990, a public document that any nonprofit — including university foundations at both public and private colleges — must make available on request. Knowing that the information will eventually become public anyway, many colleges will voluntarily release information even ahead of the annual IRS filing schedule (the filing schedule varies with the budgetary year of the institution, but many are filed in August for the preceding calendar year).
If the institution will not readily turn over the 990 form when asked — and under the law, it should — then the form may be accessible through a search on the Guidestar website, a repository of information about nonprofits that can be browsed by creating a free account in minutes.
Financial reports can be notoriously headache-inducing to read, but understanding the basic ebb-and-flow of endowment funds is really no more complex than reading an ordinary bank statement: What is the amount of investment income? How does that compare against the prior 12 months? Same with the value of the remaining balance — what is it now, and what was it 12 months ago?
Scrutiny of foundation investments, however, needn’t stop there.
- Look at the distribution of the portfolio, and see how it compares against national benchmarks and trends. One helpful resource, the National Association of College and University Business Officers, compiles national statistical snapshots of (among many other trends) the composition and performance of endowment funds. Any investment fund worth hundreds of millions (or even billions) of dollars should be balanced as a hedge against risk, with some bonds (“fixed income”), real estate and other investments to offset volatile stock-market holdings. Look for any investments beyond stocks and bonds that may be especially risk-prone, such as limited partnerships — these often (though not always) are thinly capitalized startups backed only by the goodwill of a few initial investors.
- Sometimes the nature of individual investments — in certain sectors, certain types of financial instruments, or even certain companies — is itself newsworthy. Just this week, students at Harvard overwhelmingly voted in a non-binding referendum to urge their university to divest holdings in oil companies and other producers of fossil fuels. In generations past, such campaigns have succeeded in putting pressure on universities to take the lead in voting with their dollars against sweatshop labor and against apartheid in South Africa.
- Find out what money management firms the foundation uses. What fees is the foundation paying for investment management services — and is there an incentive for the broker to build the portfolio, or is the incentive to just churn lots and lots of transactions? And are there (perhaps suspiciously close) connections or overlaps between the investment brokerage and the foundation board that chooses the brokerage? At a public institution, those answers should be discernable through a public-records request. At a private university, where open-records laws don’t apply, some information can be gleaned from the 990 form, which includes the identity of the foundation’s highest-paid contractors; an investment advisory firm may very well be among them. If the foundation is making only a 1 percent or 2 percent return on investments, find out if that figure is the net — after expenses — amount. It probably isn’t. Which means that, when the investment firm’s fees are included, the foundation probably lost money investing. And if that becomes a habit, it’s reasonable to ask whether the university would be better off sticking with that brokerage — or just burying its $30 billion in a (really big) coffee can in the backyard.