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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 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"!
  - smabie 6y ago
    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.
    - wbl 6y ago
      That's what the marketing department says. The actual returns paint a rather different picture.
    - rmrfstar 6y ago
      > 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.
      - smabie 6y ago
        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?
        rmrfstar 6y ago
        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/capital-market-assumptions https://blackrock.com/institutions/en-us/insights/charts/cap... [2] https://www.aqr.com/Insights/Research/White-Papers/Demystifying-Illiquid-Assets-Expected-Returns-for-Private-Equity https://www.aqr.com/Insights/Research/White-Papers/Demystify...
- timavr 6y ago
  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.
thrill 6y ago
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.
- birken 6y ago
  It isn't possible for bond markets to collapse at the same time as stocks?
  - smabie 6y ago
    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.
    - cinquemb 6y ago
      > 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-view-magazine/the-meteoric-rise-of-treasuries.jsp https://www.bnymellon.com/us/en/what-we-do/markets/aerial-vi...
zhte415 6y ago
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.

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"!
- smabie 6y ago
  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.
  - wbl 6y ago
    That's what the marketing department says. The actual returns paint a rather different picture.
  - rmrfstar 6y ago
    > 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.
    - smabie 6y ago
      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?
      - rmrfstar 6y ago
        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/capital-market-assumptions https://blackrock.com/institutions/en-us/insights/charts/cap... [2] https://www.aqr.com/Insights/Research/White-Papers/Demystifying-Illiquid-Assets-Expected-Returns-for-Private-Equity https://www.aqr.com/Insights/Research/White-Papers/Demystify...
timavr 6y ago
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.

thrill 6y ago

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.

birken 6y ago
It isn't possible for bond markets to collapse at the same time as stocks?
- smabie 6y ago
  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.
  - cinquemb 6y ago
    > 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-view-magazine/the-meteoric-rise-of-treasuries.jsp https://www.bnymellon.com/us/en/what-we-do/markets/aerial-vi...

zhte415 6y ago

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.