Endowment

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Columbia's endowment is an approximately $9 billion portfolio of equities, commodities, fixed-income instruments, and cash equivalents. It is not a "slush fund" for spending, as it is mean primarily to serve as a long-term investment vehicle. On the other hand, it's not just a pile of money that serves no purpose but to grow each year either. It is managed by the Columbia Investment Management Company.

Contents

Size

Columbia's endowment at the end of fiscal year 2014 came in at $9.2 billion. This ranks it the 11th largest university endowment in the United States (including the University of Texas and Texas A&M "systems" as single endowments each). Among its Ivy League peers, it used to rank behind only the obscenely rich Harvard, Princeton and Yale, but fell behind Penn in 2014 (probably because of the costs involving Manhattanville).[1] Unlike many of its peers, especially Harvard and Yale, Columbia's endowment has recovered and surpassed its pre-Great Recession value of $7.147 billion, while Harvard and Yale remain 15-17% short of their values on June 30, 2008.

Relative to Peers

As you can see, while Columbia has a sizable endowment in absolute terms, and one significantly larger than a number of its peers (e.g. Brown, Dartmouth), when considered on a per enrolled student basis, its clear that the Ivy League breaks down into three tiers - the implausibly rich (Harvard, Princeton, and Yale); Dartmouth; and then the 'poor' ivies (Columbia, Cornell, Brown, and Penn). This is an important context to keep in mind when measuring Columbia's efforts against the competition.

Institution 2012 Endowment
(billion USD)
2012 Endowment per student
(hundreds of thousands USD)
Harvard $30.435 $1,445
Princeton $16.954 $2,098
Yale $19.345 $1,624
Columbia $7.654 $265
Cornell $4.947 $221
Penn $6.755 $273
Brown $2.460 $291
Dartmouth $3.486 $567
Stanford $17.036 $935
MIT $10.150 $907
Duke $5.555 $381
Amherst $1.641 $903
Williams $1.799 $854
Swarthmore $1.499 $970

Structure

As of 2004, Columbia's endowment was diversified among approximately 4,000 equity and commodity securities, and unknown fixed-income positions.

Spending rule

With various conditions, the Trustees aim to spend approximately 5% of the endowment per year to fund the university budget. Indeed, approximately $200-$300 million of the university's $2 billion budget comes from endowment spending. This is not just a round number, but actually a legal requirement for a non-profit which maintains significant investments to keep its non-profit status.

Performance

Columbia's endowment has performed well for its approximately 20 years of existence (prior to the sale of Rockefeller Center in 1985, Columbia's endowment in securites and investments was insignificant). It has averaged an approximately 16.5% compound annual growth rate (CAGR), which outpaces the S&P 500 index by a respectable margin, and is on par with other alternative investment concerns. It should be noted, however, that Columbia's endowment is exempt from both corporate and capital gains taxes, and does not face unpredictable principal volatility, as the the 5% spending rule is more or less fixed.

Socially Responsible Investing

Columbia's investments are subject to review by the Advisory Committee on Socially Responsible Investing (ACSRI), which does what its name implies. ACSRI, composed of students, faculty, and administrators, makes only recommendations; the Trustees make the final decision in all cases.

ACSRI did not yet exist when Columbia made its most famous divestment, from apartheid South Africa in the 1980s, after an extended political battle and the occupation of Hamilton Hall by pro-divestment students. ACSRI recommended divestment from Sudan in 2005, and this was carried through by the Trustees.

Presently, the Columbia Coalition Against the War (CCAW) is spearheading an effort to have Columbia divest from companies that presently materially support or benefit from the war in Iraq. CCAW is targeting three companies in which Columbia is presently invested to the tune of around $1.5 million each: Raytheon, General Dynamics, and Lockheed Martin. CCAW's 12-page formal proposal notes:

Divestment by Columbia alone would not be sufficient to change corporate behavior, but it would be an immensely powerful symbolic act and, if imitated, might help provide a significant financial incentive for change. Moreover, Columbia has an ethical obligation to avoid complicity in the ongoing brutality associated with the occupation in Iraq.

Two members of CCAW wrote an op-ed for the Spectator entitled "Columbia Has a Responsibility to Divest".

Such divestment will not have any financial effect. For example, take Boeing, which has a market capitalization of $76 billion as of 1Q 2007. If Columbia's endowment even remotely mirrors the SEC's definition of a "diversified investment company", then it can have no more than 5% of total assets in a single company. If 5% were completely invested in Boeing (unlikely, since, as mentioned, Columbia's portfolio contains over 4,000 different investments), then that would still represent approximately 0.395% of Boeing's market value. Columbia's holdings for the three companies in question are as follows (closing prices as of 19 September 2007): 0.0055% of Raytheon, 0.0045% of General Dynamics, and 0.0036% of Lockheed Martin.

Moreover, it is highly debatable as to the depth of influence of an "immensely powerful symbolic act" as well as the plausibility that such an act would be imitated. It is widely accepted that most investment managers and institutional investors seek to maximize their net present value. Even if a enormous group of investors decided to divest their holdings, it would merely artificially and temporarily depress asset prices, making the lower valuation of the companies in question far more attractive to other investors as the fundamentals of the company such as their business model would not have changed. This is also attractive to the companies in question because low valuations would allow them to buy back their own stock at a discount and by extension, increase their return on equity (ROE).

The only way to actually make divestment effective in the sense of financially crippling the company's ability to manufacture, market, and service arms is to somehow force every holder of stock connected with companies involved in supplying coalition forces in Iraq with war materiel to sell their holdings, which is impossible and absurd because, to begin with, for there to be a successful sale, there must be buyer for every seller.

Finally, where activists do exist in the institutional financial management world, they usually concern themselves with issues of corporate governance and business decisions, such as executive compensation or the long-term financial benefit of a risky project. Very few corporate activists bother pursuing divestment policies purely on a socially responsible line of thought.

Hedge fund?

It is debatable on whether Columbia's endowment is actually a hedge fund in disguise (as Harvard's clearly is). However, it is known that they employ the services of a prime broker.

The majority of Columbia's endowment is invested in (admitted, external) hedge funds. Less than $1 billion is invested in publicly traded stocks picked directly by Columbia's office of finance.

This is hardly an ideal arrangement because hedge funds and other alternative investments usually charge a "2-and-20" expense ratio. That is, 20% of any gains in a given year, and 2% of principal, regardless of whether the fund makes a gain or books a loss. Therefore, by investing predominantly in hedge funds instead of formulating its own investment strategies, Columbia's endowment is surrendering a significant percentage of potential gains each year in management fees.

Nor is Columbia's endowment size inappropriate for a hedge fund. Most hedge funds are run under the $10 billion mark. Nor can Columbia plausibly claim that it does not have a sizable pool of financially savvy associates to draw from. A possible explanation as to why Columbia chose not to create its own hedge fund strategy and instead surrender at least 2% of principal and 20% of gains each year is because of a desire to avoid the backlash that endowment manager Jack Meyer at Harvard created when it was revealed that Harvard paid him $35 million one year. Such a salary, while high, is hardly exorbitant by hedge fund standards, which is probably why Meyer left shortly thereafter to start his own hedge fund (where he gets paid in excess of $100 million per year). The fact that the Harvard endowment's compound annual growth rate outpaced Columbia by at least 2-3% per year was apparently not considered.

Fund of funds

An alternative to this view is to see Columbia's endowment as analogous to a fund of funds, a type of hedge fund specializing in investments in other hedge funds. Though the compounded management fees described in the previous paragraphs motivate criticism of this type of investment vehicle, they are not necessarily worse performing. Funds of funds, through careful evaluation of asset managers in their portfolio, can deliver high absolute returns with greater diversification and potentially much less variance. They do this at a much lower cost than would be required for a single hedge fund to invest as broadly. The typical mid-size equities fund, for example, invests in far fewer than 4,000 securities at any given time.

While Columbia certainly has the resources to manage a hedge fund using its pool of financially savvy alumni, the university is apparently taking a more conservative investment approach. Though the best model for the institution is open to debate, one should be wary of judging any investment philosophy solely on the basis of past performance.

External links

References

  1. For some historical context, see Roger Geiger's "To Advance Knowledge: The Growth of American Research Universities, 1900 - 1940", which includes comparative endowment data for Columbia any its peers from 1899-1939 on pg. 276 et. seq.
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