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University Endowment Sued for Under performing the S&P 500

51 points by kamaraju 6y ago

edgefield0 6y ago
I don't understand how the plaintiff has a case here as there are no damages.
- elliekelly 6y ago
  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.
- shajznnckfke 6y ago
  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.
alexanderdou 6y ago
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?
- solaxun 6y ago
  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.
  - mlthoughts2018 6y ago
    Attempting to bring the suit is likely itself just a smear tactic, to apply pressure to fire someone.
    - sct202 6y ago
      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-sues-cu-foundation-over-investment-returns/ https://businessden.com/2020/07/19/former-chairman-donor-sue...
  - Lazare 6y ago
    > 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 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"!
tonetheman 6y ago
This cannot be a case... this arrogant rich twat is suing someone for not making enough money.
ALL_IN_VTSAX 6y ago
All-in VTSAX is a tried and true strategy
- huy-nguyen 6y ago
  Are you the same guy from Reddit?
  - tomlor 6y ago
    Ha, I know exactly who you're talking about.
- mbbennis 6y ago
  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
  - lotsofpulp 6y ago
    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.
  - zhoujianfu 6y ago
    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.
xxpor 6y ago
What's his theory of even having standing in the first place?
- throwawaygh 6y ago
  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.
- throw0101a 6y ago
  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.
- dragonwriter 6y ago
  This story has a bit more detail: https://businessden.com/2020/07/19/former-chairman-donor-sues-cu-foundation-over-investment-returns/ 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.
DevKoala 6y ago
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.
- deleted 6y ago
  [deleted]
- aaaxyz 6y ago
  There's worse: https://edmontonjournal.com/news/local-news/aimco-risk-strategy-partly-to-blame-for-nearly-2b-drop-in-value-of-heritage-trust-fund-report-says https://edmontonjournal.com/news/local-news/aimco-risk-strat...
- ac29 6y ago
  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.
menzoic 6y ago
If they made any guarantees about profit that would be breaking securities laws, so what case could he have?
- bklyn11201 6y ago
  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).
smabie 6y ago
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.
- slg 6y ago
  >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.
  - TheCoelacanth 6y ago
    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.
    - 6y ago
tunesmith 6y ago
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.
thex10 6y ago
Can anyone from outside the US chime in on whether the equivalent situation can happen in their country?
bluedevil2k 6y ago
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.
- ThrustVectoring 6y ago
  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-manager-does-nothing-all-day-20161020 https://www.fnlondon.com/articles/nevada-pension-fund-manage...
gnu8 6y ago
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.
- gcb0 6y ago
  Professors are actually diminishing. Tenure is down 60% last decade. And most professors must bring millions to their dept to join the "chair" club. I guess this return is needed because, i don't know, Think about the little administrators?
- cperciva 6y ago
  "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.
- zhoujianfu 6y ago
  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.
  - impendia 6y ago
    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?
Jaxkr 6y ago
Hey, I currently go to CU! Weird to click this and see a picture of our library.

51 points by kamaraju 6y ago

edgefield0 6y ago

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

elliekelly 6y ago
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.
shajznnckfke 6y ago
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.

alexanderdou 6y ago

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?

solaxun 6y ago
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.
- mlthoughts2018 6y ago
  Attempting to bring the suit is likely itself just a smear tactic, to apply pressure to fire someone.
  - sct202 6y ago
    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-sues-cu-foundation-over-investment-returns/ https://businessden.com/2020/07/19/former-chairman-donor-sue...
- Lazare 6y ago
  > 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 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"!

tonetheman 6y ago

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

ALL_IN_VTSAX 6y ago

All-in VTSAX is a tried and true strategy

huy-nguyen 6y ago
Are you the same guy from Reddit?
- tomlor 6y ago
  Ha, I know exactly who you're talking about.
mbbennis 6y ago
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
- lotsofpulp 6y ago
  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.
- zhoujianfu 6y ago
  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.

xxpor 6y ago

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

throwawaygh 6y ago
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.
throw0101a 6y ago
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.
dragonwriter 6y ago
This story has a bit more detail: https://businessden.com/2020/07/19/former-chairman-donor-sues-cu-foundation-over-investment-returns/ 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.

DevKoala 6y ago

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.

deleted 6y ago
[deleted]
aaaxyz 6y ago
There's worse: https://edmontonjournal.com/news/local-news/aimco-risk-strategy-partly-to-blame-for-nearly-2b-drop-in-value-of-heritage-trust-fund-report-says https://edmontonjournal.com/news/local-news/aimco-risk-strat...
ac29 6y ago
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.

menzoic 6y ago

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

bklyn11201 6y ago
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).

smabie 6y ago

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.

slg 6y ago
>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.
- TheCoelacanth 6y ago
  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.
  - 6y ago

tunesmith 6y ago

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.

thex10 6y ago

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

bluedevil2k 6y ago

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.

ThrustVectoring 6y ago
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-manager-does-nothing-all-day-20161020 https://www.fnlondon.com/articles/nevada-pension-fund-manage...

gnu8 6y ago

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.

gcb0 6y ago
Professors are actually diminishing. Tenure is down 60% last decade. And most professors must bring millions to their dept to join the "chair" club. I guess this return is needed because, i don't know, Think about the little administrators?
cperciva 6y ago
"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.
zhoujianfu 6y ago
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.
- impendia 6y ago
  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?

Jaxkr 6y ago

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