Rebutting the endowment critics:

The “hoarding” hoax, “excessive” private-equity fees and other confusions

Victor Fleischer, a law professor at the University of San Diego, expressed outrage this summer that Harvard, Yale, and other well-endowed schools have been “hoarding” their tax-exempt endowment cash, mostly, he alleges, at the expense of students.

He and others in his camp argue that Congress should override the judgement of university leaders and compel them to spend at least 8 percent of their endowment funds every year (instead of the current average of about 4.5 percent).

Had congress adopted this plan in 1990, these critics calculate that the Yale endowment would be two fifths the size it is now, $10 billion versus today’s $24 billion. 

But “sky-high tuition increases” would supposedly stop.

Are we missing something here?

Endowment capital is a perpetual source of support for present and future generations of students and faculty and, it takes a long time to accumulate.

Cambridge, the wealthiest university in Europe, took 800 years to amass an endowment of $8.1 billion.  Harvard’s $36.4 billion took 377 years to accrue.  Upstart Stanford University grew its endowment to $21.4 billion in “just” 130 years.  And that “hoarded” wealth drove performance; American universities dominate the rankings of global higher education.

Denuding a university’s long-term legacy to placate current stake-holders may be politically appealing, but is it financially and morally responsible?

Most schools don’t think so. 

In any case, we doubt that congressional committees in Washington could strike that balance better than the independent boards of private institutions.

“Excessive” Private Equity Fees and Easy Pickings

The critics have another complaint.  Mr. Fleischer estimates that Yale spent $480 million on private equity fees last year, but contributed just $170 million to tuition assistance.

Author (and Yale alumnus) Malcolm Gladwell has been tweeting furiously on this topic.  He thinks too-big Ivy endowments are “obscene,” and says he would rather write checks directly to their private equity managers than to his alma mater.

Their outrage seems genuine, but this argument is unsound.

The $480 million figure was never part of the school’s operating budget and private equity managers are not jostling with needy students for the available funds.

If the school’s return on private equity net of fees is better than returns from other asset classes (and at Yale, it usually is), then the investment return is expanding the whole pie, providing more money for all purposes, not less.

In the ten years ending 2014 Yale earned an annual 18 percent on private equity after those fees were deducted, while their domestic stocks returned only 12 percent on the same basis.  Allocating away from private equity and its fees would have left Yale with less money for tuition assistance, not more.

Managing investments and allocating assets are widely recognized skills and, like all skills, they are not evenly distributed.  The endowment critics apparently believe that an average long-term return – 8 to 10 percent in their world – is readily available to anyone who wants it, but the real world may not cooperate.

Over the last 200 years stocks have returned an average of 6.5 percent to 7 percent per year after inflation according to Professor Jeremy Siegel at the Wharton School of the University of Pennsylvania.  Looking ahead, however, he foresees average real equity returns dropping to the 5 to 6.5 percent range, significantly less than what the anti-endowment lobby assumes is free for the picking.

From 1982 to 2002, New York University, a big school with Wall Street just a short cab-ride away, grew its endowment from $300 million into $1.2 billion, a four-fold increase.  But in the same period Yale’s rocketed from $700 million to $10.5 billion, a 15-fold increase, fueled by superior returns from their stable of investment managers.

With mounting demands for current spending, and future returns uncertain, generous donors and skilled investment managers are more critically needed than ever.

Voluntary supporters including alumni, foundations, corporations, and religious groups have helped our higher-education system to grow at an unparalleled rate while achieving remarkable diversity and unquestioned world leadership.

Other critics besides Mr. Fleischer are also offended by universities that have “too much money,” and they all have plans to supersede the university leadership, spend it “properly” on projects they favor, and shrink endowments to a more seemly size.  And they will be glad to enlist the federal government to enforce their preferences through alterations in the tax code.

Universities began in medieval Europe as autonomous, self-governing communities of teachers and students.  The independence of private universities, once lost, may be hard to retrieve.  Being left alone to manage gifts from their private, voluntary supporters under their own governance, for their own various purposes, would seem to us a minimum component of such independence.

In 2014, “charitable donations to colleges reached an all-time high of nearly $38 billion”, according to the Council for Aid to Education.

Channeling private wealth to public purposes, instead of relying solely on the state as in Europe, has been an American success story.  Before we unleash Congress on this “problem” we should be sure we aren’t trying to fix what isn’t broken.

*A version of this commentary appeared in the Yale Daily News, October, 28, 2015


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