Harvard Alumni Call for New Investment Strategy

Harvard’s class of 1969 has gone from pacifists to passive-ists, as a group of 11 members from the class are calling on the Harvard Management Company (HMC) to focus more on passive investing, and less on hedge funds.

The group has sent a letter to incoming Harvard University President Lawrence Bacow criticizing HMC’s investment strategy, claiming it is costing the endowment billions of dollars. Instead of relying on hedge funds, the alumni said the university should move half of its $37.1 billion endowment into lower-cost funds tracking the S&P 500.

“We propose a radical new endowment strategy [that will put] the whole management of the endowment on a new basis that would better reflect the values of a great university,” the alumni wrote in the letter, according to The Harvard Crimson.

Among the alumni who signed the letter are attorneys, journalists, historians, an artist, a clergyman, and two professors. One of professors is Paula Caplan, who is an associate at Harvard’s Dubois Research Institute.

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The alumni argues that the endowment would have grown faster if it had been invested in the S&P 500 rather than hedge funds, and said that if the endowment had been 100% invested in the S&P, its asset value would be nearly two and half times bigger at more than $90 billion.

“If half the endowment … had been in the S&P 500 index, where it would have cost literally nothing to manage,” said the letter, “then Harvard would have saved half the payments to Harvard Management, amounting to $68.8 million—enough to pay a $43 million tax bill with a good deal more to spare.”

Under the new Tax Cuts and Jobs Act of 2017, there is a 1.4% excise tax on the net investment income of private colleges and universities with an endowment greater than $500,000 per student. Harvard’s administrators estimated that the tax would have cost the university $43 million if it had applied to fiscal year 2017.

HMC announced in the fall of 2017 that it would revamp its investment strategy after it earned a disappointing 8.1% last year, which lagged behind other universities as well as its benchmarks. New HMC CEO Narv Narvekar said in the university’s 2017 financial report it

had largely exited internal management of public markets assets. He said that while internal management tends to mean lower fees and expenses, “today’s market landscape makes it ever more difficult to attract and retain top portfolio managers.”

This is not the first time the class of 1969 has been critical of HMC. In 2009, members also sent a letter to then-President Drew Faust in which they argued that the endowment managers were being paid too much.

Tags: Endowments, Harvard, Harvard Management Company, Investment Strategy, passive investing

How should Montana fix its the $700 million per year problem that two of its public pensions are estimated to cost the state? One representative has some suggestions.

In an opinion piece with the Independent Record, Rep. Tom Burnett recommended the state’s Teachers’ Retirement System (TRS) and Public Employees’ Retirement System (PERS) —which cover about 90% of employees entitled to receive pension benefits—compare their funding to other items that receive money from the state’s budget, such as the $189 million the state university system gets every year.

Another way Burnett considered getting the $700 million was through property tax, which he deduced would come out to $1,687 per household per year.

“Money to cover unfunded pension obligations will have to come from somewhere. Employees can be asked to put in more during their working years, but taxpayers will still bear the brunt of the burden, through higher taxes and/or reduced services,” Burnett wrote. “For taxpayers, the prospect of getting fewer educational or public safety services in order to support pensioners is distressing.”

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Rather than keep the 7.75% rate of return for its investments, Burnett wrote that most economists recommend the rate be between 4.5% and 5%, something much smaller for funds to set their sights on.

Burnett got the $700 million figure from a legislative fiscal analyst, who ran a computer model of the TRS assuming 4.5% rate of return, then doubled it after determining that the PERS is about the same size as the teachers’ fund.

“Montana’s public pensions aren’t sustainable, as too little money is being put aside to fund, over the long haul, the pensions contractually due to the employees,” wrote Burnett. “I believe many public employees understandably worry that the pension benefits they’ve been promised will be hard to collect; some have privately told me so.”

Montana has 11 retirement plans for public employees, nine of them being defined benefit (PERS, Judges’ Retirement System, Highway Patrol Officers’ Retirement System, Sheriffs’ Retirement System, Game Wardens’ and Peace Officers’ Retirement System, Municipal Police Officers’ Retirement System, Firefighters’ Unified Retirement System, Volunteer Firefighters’ Compensation Act), and while Burnett admitted that the pensions are “a splendid deal” for state retirees, he pointed out the issue that they are not sustainable due to employees not providing enough contributions during their working years and the pension systems masking their weaknesses “by assuming a highly optimistic annual rate of return.”

According to Bloomberg, the state was 71.2% funded in 2016, down 3.3% from the year prior.

“Public pension finance is an expensive, hence discouraging, topic. It’s also unavoidable, so we need serious attention paid to the stark choices that loom,” wrote Burnett.

Tags: Defined benefit (db) pension plans, Montana, Pension, Tom Burnett