There is some deep water in David F. Swensen’s Pioneering Portfolio Management: An Unconventional Approach To Institutional Investment, Fully Revised and Updated, but why buy a book like this if you expect easy wading through the whole thing. He is the Chief Investment Officer for Yale University. I did a good bit of floating in the deepest parts, and found scattered dry, high ground by the end of it. This is an account of an outlier because the Yale resources and expertise are beyond all but a few privileged institutions. Only the biggest community foundations such as Pittsburgh Foundation and Cleveland Foundation could try the investments Yale does in alternative asset classes, plus community foundations operate under a different set of rules.
Because we are not they, or they are not us, should not dampen our interest in how they get things done. You can skip the tactics and keep the insight. I especially liked the thoughtful presentation of contrarianism in the investment process and asset allocation.
An example cited on page 26 puts Yale, the Clarion County school districts, and Clarion County Community Foundation all facing the same intractable problem of educational inflation. “Yale’s oldest surviving endowment fund dedicated to the support of teaching, the Timothy Dwight Professorship Fund established in 1822, entered the university’s books at an historical cost basis slightly in excess of $27,000. Because price levels rose nearly twenty-seven fold in the intervening 185 years, a 2007 distribution from an endowment of $27,000 pales in comparison to an 1822 distribution from the same size fund. While during the Dwight Professorship’s existence, the fund grew more than eighteen times to nearly $500,000, the current value falls short of the inflation-adjusted target by nearly one-third.”
While we worry about investing to cover the 2.5 to 3 percent inflation in the general economy, plus provide 4 percent income for scholarships and hopefully put a little away to grow the endowment, we should be aware that the Higher Education Price Index is eating away an additional 1.4 percent of purchasing power from the endowment. That is a total of 9 to 10 percent growth needed every year just to stay even.
The school district, regardless of how they organize or invest, can not run that kind of race. They have education to take care of and this is a problem that drains attention and energy from education without solution. Scholarship funds left in the care of the district will eventually lose economic value leaving only honor to bestow.
If the community foundation becomes the administrator of the district’s endowments the situation improves. The income increases and the risk of misappropriation of the funds during a crisis is eliminated. Public access to all the records is routine. The problem however remains because the community foundation can not duplicate the investment success of Yale. It can not cover national inflation, higher education inflation, administrative fees, scholarship grants, and endowment growth. On average, decade after decade, the endowment will lose purchasing power.
A comparison of the twentieth century record of the Carnegie Institution, Harvard, and Yale illustrates the problem and solution. Swensen writes on page 42 that, “Carnegie established the Institution in 1902 with a $10 million gift, increased the endowment by a further $2 million in 1907, and added $10 million in 1911. Carnegie’s $22 million endowment nearly equaled Harvard’s 1910 fund balance of $23 million and vastly exceeded Yale’s $12 million.”
But what a difference a century can make. By 2006 Carnegie had swollen to $750 million well ahead of the $490 million to match inflation. But what of smaller Yale and big boy Harvard? Yale stood at $18.0 billion and Harvard at $29.2 billion. Swensen’s conclusion and our insight is, “While differences in investment and spending policies no doubt explain some of the gap, the absence of gift inflows constitutes the fundamental reason for Carnegie’s failure to keep pace with Yale and Harvard.”
So we can not duplicate the Yale Plan but we can create a Yale-O Plan to do for Clarion County districts what the Yale Plan has done for that institution. We form a three member partnership of CCCF, the district, and the district’s alumni/parents organizations. Each partner does what it does best. The district educates. The community foundation administers the endowment. The alumni/parents preach the gospel of giving and bequests. The district and the alumni/parents pick the winners. We learn to move in step and leave no one in the district uninformed or unaffected by the Yale-O Plan. Whatever the degree of success it will be more than would have been achieved by acting separately.
Thank you, Yale. I always thought at some point you would come in handy. Charles Marlin