Challenging Orthodoxies: Fiduciary Politics

Monday, November 7th, 2016

scale

“The Trustees of endowed institutions are the guardians of the future against the claims of the present.”  – James Tobin, Yale

Running an endowment is very contextual. It depends on the nature of the institution, its history, its ambitions, its financial resources, and social context. Yale is not Penn, Wake Forest is not Duke, and Villanova is not Georgetown – thankfully on the last one, as a Villanova Wildcat alumni, I would hate to share the National title.

I have learned that schools not only compete on the court or field, they compete for students, for faculty, for rankings, and even endowment returns. In the endowment game, schools are mistakenly treated equally despite having their own unique challenges, missions, and objectives.

This competition is exacerbated by NACUBO rankings and the media, who exalt and rank the year’s “best” returns. These rankings are delivered with no consideration for the risk that was taken in order to deliver such returns, no acknowledgement of what the annual spend supports, the volatility a particular school can bear, or the unique tools a university or foundation may have at its disposal. The measure of return on the endowment should not be considered as a series of one year returns. Endowment returns should be viewed through a long-term, generational lens that’s focus has been sharpened through the critical inclusion of risk and mission.  Our mission at Verger is to “Invest in the lives of students, patients, and patrons”.  Notice it is not “…achieve an 8% return”. Yes, we still strive to generate the best possible risk-adjusted return by squeezing out what is available in the market, but our focus goes beyond the number. Our focus is on what return translates into for our clients, such as scholarships, research, and innovation.

Another valuable lesson I have learned at Wake Forest is that everything an endowment does is measured into perpetuity; it’s a extraordinary concept and a critical facet of the CIO role at any endowment. Funding a new building or scholarships, making an investment in the lives of others, or creating a policy with tangible impact, it’s a unique lens through which we must view investing.

It’s also an incredible privilege to manage a university endowment which is an enlightening, rewarding, and often envied process that keeps everything in perspective.  This is especially true in today’s environment, where students are feeling marginalized, fragile, and unprotected from rejection, failure, and even opposing views or disturbing ideas.

The endowments at major universities have rightfully, in my opinion, shouldered some of the blame. Elite private education is expensive and many endowments haven’t grown as they should have, while others have grown so large that they have become a target for political theater. While this disparity could be due in part to investment performance and fundraising activities, more often it is bad governance, lack of transparency, or taking too much or too little risk.  Other contributing factors might include spending in the wrong areas or on the wrong students, not prioritizing the endowment by fully understanding capital in/out flows but also the infrastructure, the investment team, and the cultivation and education of the boards that manages these significant and important pools of capital.

In 2013, Wake Forest was painfully honest with itself, looking deep into what were her own strengths, challenges, capabilities, and what risks she could tolerate.  Driven by the answers to those questions, Verger Capital was created as an endeavor that was ambitious, yet attainable and scalable.

After two years of lower returns with highly ranked schools defined by market dominance and history of loyal customers, many universities find themselves deluding themselves into complacency and a false sense of invincibility. The Fed has protected some endowments post-crisis; however, in this challenging environment, others’ delusions may start to become exposed, as Warren Buffet once said, “It’s only when the tide goes out that you learn who has been swimming naked.”