Education is the best investment, so why do universities invest elsewhere?
June 16, 2022
Chief Investment Officer at BluOr Bank
“An investment in education always pays the highest returns.” – Benjamin Franklin
In 1636 the Great and General Court of the Massachu¬setts Bay Colony appropriated 400 pounds towards founding an institution to "advance learning and perpetuate it to posterity: dreading to leave an illiterate ministry to the churches, when our present ministers shall lie in the dust".
A couple of years later, one such minister – Puritan pastor John Harvard – donated half of his monetary estate of 779 pounds to the school (worth 150 000 USD today). He also donated his scholar’s library of 400 volumes. In 1639 the school was renamed Harvard College in honour of his generous donations.
The Puritans were strong believers in education. It was important to them that their children be able to read the bible and to interpret it by use of their own intellect rather than be solely reliant of the words the clergy or the elite.
Today Harvard is synonymous with educational excellence and prestige. It may or may not be the very best university in the world, but one thing is certain: it is the wealthiest.
According to their most recent annual report, Harvard’s endowment was worth 53.2 billion USD (as of June 30th, 2021). Endowments serve a very important role for not for profit organizations. They traditionally consist of donations by benefactors that are invested to generate income streams to support the operations of the organization or institution while usually endeavouring to maintain the invested principal intact.
Last year Harvard’s endowment distributed $2 billion to the university - over a third of its operational budget. To put these figures into context, Latvia’s GDP was 32.9 billion euro in 2021 (34 billion USD), and the government spent 823 million euro (855 million USD) on education last year.
However, whereas the Latvian government has several funding priorities apart from education, such as healthcare, defense, and social services, Harvard has one stated goal: to advance learning.
Harvard’s endowment report is fairly opaque and brief, but does provide the following breakdown of asset classes and performance during the given period (June 30th 2020 – June 30th 2021):
Taking a look at their public equity filings (13F as of December 31, 2021), their three largest public equity holdings are Alphabet Class ‘A’ shares (ticker symbol: GOOGL US), Royalty Pharma Class ‘A’ shares (RPRX US), and Meta Platforms Class ‘A’ shares (FB US).
No information is readily available about their private equity and hedge fund holdings.
However, their ‘natural resources’ allocation is most likely still managed by an independent investment management firm named Solum Partners which was spun out of the Harvard Management Company (HMC) – the manager of Harvard’s endowment.
Solum Partners split off from HMC in 2020 after a string of poor results and a recalibration of HMC’s investment strategy.
Investments are said to include avocado, olive oil, apple, blueberry, and soybean production assets, as well as stakes in avocado distribution company Westfalia and US extra virgin olive oil company California Olive Ranch.
Previously, HMC had also invested over $1 billion USD in farmland – half of which was in Brazil.
Over the past thirty years of so many institutional investors have sought to diversify away from publically traded securities into non-correlated investment assets, and Harvard has evidently done the same.
However, given Harvard’s elated stature as an educator of future leaders, how can in possibly make sense to invest avocados rather than providing opportunities for more students? (Harvard’s enrolment actually fell last year)
Harvard has the largest university endowment in the world, but according to the National Association of College and University Business Officers the total amount of university endowments in North America was around 840 billion USD at the end of 2021. That is a lot of money sitting in the hands of universities. Yes, these endowment provide income streams to fund operations, but the vast majority is not actually being invested in education.
On the other hand, students are more in debt than ever before. According to data provided by the US Fed, student loans now total around 1.7 trillion USD, just over twice the amount sitting in endowments. In 1970, the average American student graduated with $1000 in student loans, now the average is over $31,000. This is a large amount of money, especially for a young adult with several important future financial considerations. Massive student loan debt delays the ability of young people to buy houses, start businesses or to start investing for themselves. Institutional money in the hands of hedge funds and private equity has a far smaller societal and economic impact than if that same money would be in the hands of a young generation armed with the education and energy to begin contributing and investing in themselves, and in so doing, their society.
As a professional money manager I should be last in line to criticize endowments that invest money to generate a return that serves a positive purpose. However, my respect for the societal purpose served by education eclipses any devotion I have to the opportunities afforded by capital markets. Education is a foundational pillar of any prosperous, progressive and just society, and capital markets cannot function effectively without an educated society that supports commerce and rule of law.
So why are universities not investing more of the funds entrusted to their endowments to educate more students? There is no question that there is a strong dynamic of elitism and competition at play. Surely Harvard loves having the largest endowment. Huge bragging rights. And you know all of the top universities compare their annual returns. But if you are as good as you think you are at your main job – educating - then why are you investing the money entrusted for this aim elsewhere?
Why invest in a venture capital fund, when you can invest in educating more future entrepreneurs? Especially since financially successful people tend to donate money to the institutions that provided them the opportunity to excel.
As elite universities continue to try to cater to the very few, it is worth considering the wisdom of legendary investment banker Ace Greenberg.
Greenberg ran the investment bank Bear Stears during its glory days before the Great Financial Crisis. He once said: “If somebody with an MBA applies for a job, we will not hold against them, but we are really looking for people with PSD degrees. (Poor, smart and a deep desire to get rich.)”
We might not yet have a university in Latvia that has a billion dollar endowment, or that ranks with Harvard or Stanford in international educational rankings, but we must continue to provide opportunities to bright, motivated students and talented academics. Progressive societies that grow in prosperity are built by affording opportunity, not restricting it. Smart money knows this. Let Harvard bet on blueberries and hedge funds. Let us bet on ourselves instead.
The Latvian version of this article originally appeared in the June 2022 issue of Forbes Latvia.
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